How much should start-up founders get as initial salary?

Thank you, Mark Richards, Sand Hill Partners, SmartFastStartup.com, for the advice in this guest-post:

Cofounders are a special case for compensation. 2 principles have helped Mark a lot with this issue:

“For a cofounder, the startup gig is an equity deal, not a play for a market-rate salary. A co-founder vesting in a double digit percentage of the common stock (initially) is holding a rare lottery ticket that could change his or her life. Future employees will not receive such a deal.
Co-founders of a company starting up need to be focused on work without stressing about necessities or calls from creditors. What I do is consider each co-founder individually and find a minimum figure they can get by on. The individual amounts vary, but it usually turns out that everyone feels equally stretched, with skin in the game, and hungry for success. It works as long as everyone feels the equity allocations are fair and everyone is working hard. It’s probably also true that good cofounders don’t have time to spend money anyway.

For example, a CEO co-founder and a lead developer co-founder will both have below market salaries and nice chunks of equity. However if the CEO is sharing an apartment while the lead engineer has a mortgage and family, the CEO may actually take less salary (but be vesting in more equity. Equity is primarily based on role, not necessarily to compensate for less salary.)

And trust me, the person with the mortgage may get more salary, but will probably feel the poorest of all.Hopefully in 18-36 months the company is showing strong growth and revenues, and the co-founders can start looking at salary increases.”

I will conclude my own thoughts on vesting among light start-up principals:

Vest Over Time: Set a time period to do this, common being 24 months, with monthly or quarterly vesting. On a specific date (usually hire date or first of the month) the persons stock vests in a particular percentage.

Vest Based on Performance: If you base the vesting on milestones, functionality achieved, revenue levels reached, etc., you avoid lawsuits (or provide a modicum of protection for yourself and your baby, the enterprise, should you be sued) by being very careful to define milestones in enough detail to leave no room for misinterpreting concrete deliverables that are to be met. Draft terms and discrete achievements to leave no room for dispute: number of customers/paid users/members, revenue generated, stable (monthly) revenue, server traffic achieved and without frequent meltdowns, etc.

About Saul Fleischman

Founder of emerging social media tool sites. Bootstrapping innovation with lean startup development teams. I do project management, user experience, PR, marketing and community development.

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Mark Richards

Saul – Thanks for the guest post opportunity. One additional point worth adding about vesting is to use a 1 year cliff in the vesting schedule. A 1 year cliff means no stock is officially vested until the 1 year anniversary of the employee’s hire date. But on the day of their 1 year anniversary, the employee vests a full year’s worth of stock. From that point on, they vest month-to-month (which is the typical increment Silicon Valley.) And as always, this should apply to everyone including cofounders.

A 1 yr cliff prevents the company from issuing stock to employees who don’t stick around long enough to deliver real value. It’s fair, and it can prevent needless drama.
- Saul Fleischman
  
  Thanks for adding, Mark. A good suggestion for only rewarding those who stay with a startup – at the very least, one year. I like that.