Which Startup Salary Is Right For You: Zero or $300,000 per year?

cash money bag debt public domainNot a day goes by without someone haranguing CEOs for being paid too much, and in some cases, I’m sure the critics have a point. It’s a bitter pill to swallow when you read about a CEO exiting a firm with a golden parachute after sagging profits and perhaps a few rounds of layoffs.

But it’s important to remember that those contracts – which suddenly seem totally unfair – were usually written at a time when the CEO was being recruited and the board had to make the offer attractive.

I suspect few of us are worried about having to someday handle the bad publicity that comes with a golden parachute, but the question of a founder’s or small business owner’s salary is a very practical matter and some guidelines would be helpful. So let’s outline a few scenarios and offer a rule-of-thumb or two.

Zero pay. Many times founders will get their companies going as a side project. They hold onto their day jobs and do the best they can, working evenings and weekends to get their company started. Another zero-pay situation is when founders live off savings and credit cards to get their business rolling; this is a personal “burn rate.”

Upside: Taking no pay during the formative months creates a truly a “lean” startup. Living off savings and credit cards will help prove your commitment to angel investors.

Downside: If you’re working a 9-5 job, it not only steals time from your startup, it steals focus, which your company desperately needs. You may be the only one with the talent and vision to push the project ahead. And if there is family involved, the pressures can prove fatal.

Basic salary. This option would be to take a salary equivalent to what you were making before you founded your startup or a figure that is roughly equivalent to your basic living expenses.

Upside: This removes some worries for you and your family. It allows you to focus on your business and not have to divide your time or priorities. You can supervise your team better and they know that they can depend on your direction and availability. It can bring a degree of normalcy to the crazy world of startups.

Downside: You may not be able to afford to pay yourself the kind of salary you were earning before you started your own business. It could push your startup’s burn rate into dangerous territory. If you make things too cushy on yourself and don’t have any skin in the game personally, investors may balk at your commitment.

$100,000 to $200,000. If you’re the CEO of a startup during the first round of serious funding (Series A) this is the general range you can expect for your salary. Famed Silicon Valley investor Peter Thiel has taught a startup class at Stanford University and he asserts that no startup CEO should be paid more than $150,000 per year. He says:

A categorical rule of thumb that Founders Fund has developed is that no CEO should be paid more than $150k per year. Experience has shown that there is great predictive power in a venture-backed CEO’s salary: the lower it is, the better the company tends to do.

In fact, Thiel will not invest in startups where the CEO is making more than $150,000 per year. He contends that CEOs are demonstrating that they believe their equity will be worth more in the long run and they will work to make that happen. A fat-and-sassy CEO with a $300,000/year salary is not motivated to pivot or make other mid-course corrections.

I skipped the “downside and upside” for my last entry here, but I think I explained the logic for this general salary level for a Series A startup.

So where are you in this continuum from building your company in the evening and on weekends to pitching investors for as much as $5 million to fund your startup? That will help you peg where your salary should be.

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