If you have raised venture capital, you must compensate yourself
Forgive me, but this post will probably be a bit of a rant.
I had a call with a founder I advise this morning. He’s there to raise money and he got a term sheet from an investor (yay!), but the investor suggested that the founder and his co-founder shouldn’t get a salary. The investor argued that the founders were “working for equity” and that his investment should not go to the founding team.
That, ladies and gentlemen, is pure rubbish. Now, if this was an isolated incident, I might consider it a clueless investor. However, as the fundraising climate changes, I hear more and more investors suggesting things like “to extend your track, you should raise from us, but not pay yourself”.
This is literally why you fundraise
The goal of fundraising is to move faster and reduce the risk of your business in stages. At the pre-seed stage, there are many risks because many things are unknown: will the product work? Can you find customers? Will they pay for the product? And so on.
However, there is another risk to the business: when starting a startup, founders cannot afford to lose focus. I should have a big red button on my desk that makes a Voice of God scream “FOCUS!” to the founders of startups that I advise. This is the #1 challenge for most startups.
It makes sense: opportunities are everywhere and entrepreneurs are, well, enterprising. It makes sense that they are tempted to keep their options as open as possible for as long as possible.
But do you know what is one of the biggest distractions? Not being able to pay your mortgage, rent, car payment, or Huel’s next expedition. As a founder, it is your duty to focus on building the startup so that it succeeds as quickly as possible.
As an investor in these startups, he is your duty to help the startup reach this point as soon as possible. Telling founders not to take a salary is wonderfully counterproductive on so many levels.
A caveat: this does not mean that founders have to pay themselves well above market rates. That said, it’s also not helpful if you’re an experienced developer and you get calls from Facebook recruiters offering you a salary of $250,000. On a good day, it’s easy to say no, but guess what? The life of an entrepreneur is hard and there will be many bad days. Some of these days, throwing in the towel and taking the paycheck can seem very tempting.
Pay yourself what you need and do enough so you can easily say, “Well, I could make more on Facebook, but I’m working on something I believe in here.” In other words: if your market rate is $250,000 a year and you can make your finances work by paying yourself $150,000, then pay yourself that much and set milestones that will bring your salary closer. your market rate. If those milestones are tied to income or other financial goals, great.
Try this for size: “I am raising $3 million right now, and once funding closes, I will pay myself $130,000. Once we hit ARR $300,000 three months in a row, I will will pay me a bonus of $30,000 and raise my salary to $150,000 a year Once we reach $1 million ARR three months in a row, I will pay myself a bonus of $50,000 and raise my salary to 250 000 dollars per year.
Here are four more reasons why you should tell that investor to roll up their term sheet as tightly as possible and file it deep in the filing cabinet that doesn’t see sunlight.
You don’t work for equity – you give up equity
Investors who try to tell you that you work for equity are a bit rude.
Yes, as a founder you have the advantage of investing in the company. But when you founded the company, you and your co-founders, by definition, owned 100%. This percentage of ownership usually goes in one direction as your business scales. When you raise funds, you issue more shares and you dilute yourself.
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