How to pay yourself as a startup founder | Startup Finance Basics w/ Kruze's Scott Orn | E1860

0:00All right, everybody. Welcome to this week in startups. This is our startups basics series. Why do we do this? Well, because I get asked the same questions over and over and over again by founders. And what I like to do is have an expert, a partner of ours, who knows how to do things at a high level, answer the questions with me. and then when a founder asked me this question like hey how much should i pay myself as a founder of a startup company i can literally take a link to this very podcast and 99 of their questions and issues are answered and i only have to deal with like one in a hundred follow-ups my partner in crime is scott orne he is a cfa and cruz coo cruz is an amazing uh accounting firm that we use about half of our startups use it it's very popular here in the bay area and if you want to listen to all these past basic episodes we do them with wilsonson city my law firm as well uh this week in startups.com slash basics you'll see all the basics episodes uh but welcome back to the program my good friend scott thanks jason thanks for having me all right we get this question all the time yeah how much should i pay myself okay i've raised a 1.5 million dollar seed round I was making$300 ,000 when I was at Apple.

1:21Now I'm a founder. I got six people on my team. They're all getting paid 10k a month on average. Some are lower, some are higher. So I'm burning with these. I don't know, let's say I have six people on my team. I'm burning 60 ,000 a month. I'm burning 720k a year just on their salaries. Not much left over for me and servers, accountants, lawyers, marketing, whatever. So how much do I pay myself? Can I just pay myself what I got paid at My last job, I know that the answer to this is it depends, but people want us, Scott, to give a more granular answer. So let's take it depends and throw it right in the garbage and let's get into details.

1:59I gave you a scenario, 1.5 million persons coming out of a great job there. What are their investors going to feel comfortable with and how would you even go about this process? Yeah. Well, the bad news is, well, let's start with the good news. The good news is you've embarked on this life-changing adventure to start a company and hopefully change the world. The bad news is you're not going to make anything close to what you're making an Apple, or you shouldn't make what you were making at Apple and salary. But guess what? Your upside is like amazing. And you get to go to work every day, loving what you do and working with investors like you and amazing other entrepreneurs.

2:34So that's the trade-off you're making. I would say in that scenario you painted, that would be like a seed stage company, they're going to be somewhere around 120 to 140. And that's, that's a super, that's a pretty tight range. Really we've done cruise has a ton of data on this stuff and we can get into the data a little bit later, but the average founder makes about 140 to 145. But as you, that, that average founder number is a blend of a lot of seed companies, A's, B's, and C's. And as you start raising more money as a founder, you can start paying yourself more, right? Like the dilution, the amount of capital you're raising for how much ownership you're trading off is going to be a lot less.

3:17And also investors know that A, you have something that's working, right? And that you're managing a lot more people and the demands of the job change instead of being like, most seed stage CEOs are doers. You're a doer, right? Maybe you're Maybe you're coding in your halftime. Yeah, you're doing something besides just running the company. And as your job changes, you move up this chart. And also, as you raise more money, you move up this chart. And you're going to be able to pay yourself a lot more. All right. So here it is. We have a great chart that Cruz put together from 2018 all the way to 2023.

3:52The median startup CEO salary has gone from$125 to$145. this is pretty uh accurate in my experience um and that's the median so it basically means you're going to get a 10k draw every month and ballpark so there are exceptions here the exceptions could be uh you know you have three co-founders okay and this is where the co-founders can't all be idea people you really hopefully have as you were alluding to a builder team and we as an investment firm we have a category uh in our 13 reasons to invest in a company and one of the most important uh qualities we look for in a seed stage company pre-seed company series a company is builder founders why builder founders they don't just take 145k and you have three of them burning 500 000 a year um one of them is a developer one's the growth hacker and one's the designer one's the head of sales one is the head of growth one is the cto hopefully they're actually doing work at the company and therefore you can see if you had room for six other salaries at 10k each well maybe these three co-founders maybe they fill two of those six roles right and so you really have six worker bees one ceo founder but two of the six worker bees are co-founders yeah i totally agree in that apple executive example or apple person do not start a startup if you are afraid of actually doing the work of actually building like that is a recipe for disaster so you're right like everyone i mean i remember when vanessa and i were first starting at cruise we were sales accounting vanessa was also doing tax and i was running operations right we had three jobs each and probably more if i can really think about it so you're just but this is this is the whole thing like it's so much fun it's such an adventure it's hard as heck but when you get things working it's really, really rewarding.

5:51So just don't do it for the, no one's going to do this for the salary rewards. There's also something I like to bring up, which is there's a mental health component to this, which is sometimes people take this and go the wrong way. They over-index to pay themselves too little. And I think that's super dangerous, not only for just their own mental health, but also for the fate of the company, because you often see those people getting burned out faster because they start like having stress in their personal life because they have a hard time paying the rent right or their wife or husband is like what do you not only are you gone all the time but we don't have enough money to like buy the groceries or go out to dinner this is why being thoughtful before you start a company if you say i want to be an entrepreneur and you're in a partnership you got a spouse or significant other uh it's a san francisco so you can figure out whichever configuration in your poly cube or whatever it is how many miles you've got to feed but in your uh domestic life you really want to have stability because your entrepreneur career will be filled with chaos and instability so how do you do that well if you're thinking i'm going to start a company next year here we are it's the fourth quarter of 2023 you said you know what i'm working on the prototype with two of my friends i'm an apple executive i'm getting paid 300 000 in a year, man, boom, I have tons of cash coming in, we get to go skiing in Tahoe, we got all these expenses, whatever it is.

7:19Well, now you have to start thinking about, hey, what is reasonable for my personal burn rate? Yep. So this is what founders need to do. You're looking at your personal burn rate, you're looking at your professional, your company's burn rate. And both of these things should be dialed in perfectly. What I like to do early in my career was, and you probably see this a lot, Scott. Every time I had a new company I was starting, I was still working at the company I had sold the last one to. And I had permission. So there's some legal issues here. You can go to start up basics about this one with the legal.

7:51But I had salary and I was plotting my next move, plotting my next company, getting things set up. And then I also looked at my personal burn and said, hey, let's get all these credit cards paid off. Let's make sure my rent and I know my expenses. I don't have credit card debt. I paid off my student loans. I set myself up for success. So if I was only taking a 10K draw and my previous burn rate was 18K a month, I got that personal burn rate down to 12K. So it was only 2K different. I built up my savings to 40K. And I knew I could get through 20 months of this journey. And I had my partner's buy-in.

8:29Hey, I know that, you know, let's say your spouse or your significant other is a doctor. They're making a certain amount of money. and you say, hey, listen, I'm just not going to be here for every kid's event because I'm on the road. So you may have to go to some kid's event on your own. And hey, instead of going skiing in Vail, we're going to do something a little more abridged for the next two years just to keep the burn. But we'll still have a great time. And so you have to be thoughtful about it. Some people I've seen folks have side hustles while they're doing their startup. Scott, I'm sure you've seen this as well.

9:01And then I'll hand it off to you for other strategies. I've just seen people who were, you know, doing a development project on the weekends, or, you know, they had a 10 hour,$300 an hour consulting gig that was unbelievably profitable for them. And it just was a way for them before they got funded to transition into entrepreneurship. Yeah. And that's, I think if that works for you, that's great. I would just be careful with the side hustle because there's, there's something in entrepreneurship called procrastination. And sometimes it's very easy to not, you know, when you're starting, especially like that seed stage company you're describing, you gotta, you gotta walk through some walls when you're building that company.

9:38And it's very easy to let yourself be distracted on the weekends or just, just not be like 100 % in. So just be really, really careful with that. Your concept of a personal runway is brilliant. I actually never thought about that. I'd love to steal that if that's okay with you. But like we always focus on how much cash is in the bank, what's your monthly burn. That's how many months of cash you have when you do that math. Doing that personally and not stressing out your spouse is actually really, really smart. The other little thing I like to remind founders about is determining your salary and then getting it okayed by the venture capitalists is super important.

10:19And again, the venture capitalists tend to know, like they want you to be hungry and scrappy, but they don't want you to be desperate and make decisions because you're so poor. So run it by them. And I think a best practice is always to get it approved by the board. Like that avoids any kind of weirdness. It avoids the six months later when they're second guessing you because they think they might think you're paying yourself too much just be super open and honest with your board it takes five minutes to have a board resolution approving your salary every year i highly recommend that it costs you nothing to do you're above board and this is an interested party transaction your salary your equity now when you're a founder your equity is determined your your investors know it there's a cap table this a vesting schedule.

11:07But just like you wouldn't give yourself additional equity without the board doing it, that would be a conflicted transaction. You want the board to handle that you want to stay out of it. And they have comps, you know, like a investment firm like ours, we've done 350 investments, we can look at the last, you know, 100 people who raised 1.5 million in their seed round and have six employees and tell you, hey, our partner cruise has this chart, here's the chart, here's what your salary should be. Now the salaries can get a little bit bigger, as you get to series a and series b especially since series a's and series b's uh have been getting larger and larger in silicon valley so i'll pull up the second chart that cruise has uh provided us with here and in blue you see that steady line of 145k hey in red series a happens now you're up about 175 not bad right and not too shabby and hey you get the series b now you get that quarter million dollar salary public ceos uh or public founders mid-sized companies are getting a half million a million in compensation.

12:05So as a small company like a series B, you're far from being publicly traded, but you're still getting$250 ,000, not chump change is a very nice lifestyle. And so there's hope here that you can, if you hit the milestones, your investors are more than happy to increase your compensation. That's the basic message here. Yeah, I totally agree. I mean, there's some there is something with the more resources you have, the better you are at fundraising, you're going to be able to pay yourself more. And again, you're also gonna be scaling the team, you're going to have different kinds of responsibilities, they're going to need you to be more of an executive.

12:38And so they're going to pay for that. Now, here's something that could be a little bit depressing. I'm reticent to even pick up the chart. But turns out we still live in a world where gender can, you know, impact compensation, found this a little strange that female founders were getting paid 15k less so about 10 less is that what you found in your studies in startups exactly and i know it is depressing and thank you for highlighting this i mean we vanessa cruz is the cruz ceo and founder and we really want to publicize this stuff because we think it's important and you also see that huge dip during covid which was super depressing what is that about wait so the the salaries of yeah is that because of child care or do you have a i think it's like honestly we've talked to some of the women founders and i think there's two things the first one is on average and in our client base we have tons of women founders but a lot of them skew seed series a so there's less money being raised if you just look at that right there's there's still this a lot more still this pipeline issue right right and my theory on that is more women are starting companies now and more women are getting funded now so it is a pipeline like legacy it's a lagging indicator right it's exactly right like we two years from now we'll probably see these getting i we think they're getting closer and closer every year we try to celebrate that in the press release for this feels like it yeah but the other thing is i honestly i think a lot of women are just like i hate the stereotype but literally more conscientious than some men like not everyone but like i think women cut their salaries to be to benefit the rest of the team yes to help the team wow they were selfless yeah exactly they were more selfless they probably said if i cut my salary because it looks like the salaries got cut from 140 to 100k they probably said hey there's four people i don't have to lay off or maybe their marauding male counterparts said you know what i'm gonna get mine and i'm gonna lay off the four people that's exactly it and we've we've anecdotally verified that it's it's um strange you know it's it's well you know the strange part might be the line with the men who aren't cutting their salaries during covet is you know what i there's there's a lot to unpack here you and i are not psychiatrists or psychologists but we are uh individuals who look at data and the data's year and the data is what it is so to the women who did the right thing here and try to save their team members i applaud you um but the salary gap should close and um i think this is uh you know great that we have this data here if you're a female founder of a seed stage company your male counterparts are getting 145 you're probably asking for 130 on average uh so yeah just close the gap and don't and don't feel bad about it like if you raise 1.5 million and you cost 10 of that for the next year that's okay no you know it should just don't pay yourself three four five hundred yeah exactly that's where things get a little weird um and don't pay this is i just want to bring this up this is like an edge case but you and i have seen this do not lower your salary and then pay personal expenses out of the company's account this is incredibly bad optics it's also against tax regulations, correct?

15:58Absolutely. That would be a perk. And that's taxable if you do that. And the optics part is even worse because then no one can trust you. And we've had to notify, like every couple of years, there's someone who does something crazy with a company credit card and we have to notify the board. And it's super depressing. And so just do not do that. I actually recommend that founders should have someone else approve their expense reports. because like that way it takes all the the bs out of it all the risk out of it the board knows that and there's no there's no incentive to to to abuse the system yeah and we have a very simple solution for this we use like um these credit cards that you pop up cards per person and then i have a very simple system all of those cards go into slack rooms we just use like zapier or whatever to pump in each transaction so in real time scott i see these transactions come into a slack i look at them once in a while as a ceo i don't have all the time in the world to look at every sas piece of software or you know whatever uh ad spend or something or people buying lunch but i do look at it and sometimes i'll just go in as a ceo i'll see something and i'll say what is this and then the person whose card it is or another person says oh that is a consultant we pay to do this logo and i say you paid a logo consultant 500 when you could have used chat gpt or dolly or whatever and they're like yes because it's this much better and we actually gave them a dolly mock-up and they made it better and i said okay great great explanation thank you we can all go back to work and then i have little controls in place if it's over 500 i want to know about it if it's under 500 just go for it and don't bother me that's for me you know at my age and my size company where i feel comfortable someone told me that uh parker conrad at rippling approves every expense over 50 still which which may be a little excessive but i kind of respected it because everyone in the company knows everyone's very successful yeah everyone knows that you can't abuse the system and it it also you know tone is important so you know if people know you're checking on these things and people know that you're thoughtful about it i i the example i give people is you know at a conference if i see something's wrong i go fix it and people get very uncomfortable on my team we'll be at one of our conferences i kid you not one time there was a cup of coffee spilt and i watched a hundred people walk around it including some people work for me oh my god and i lost my mind and i just went over i got a bunch of seafold napkins i got on my knees in my suit and i'm on the ground mobbing up and 10 people from my staff and the audience oh my god what are you doing jcal and i said i'm effing doing what somebody else should have done yeah there's a spilled cup of coffee here anybody on the team should have seen that and said yes chef i got it who's above cleaning up a spilled cup of coffee yeah i spill a cup of coffee i clean it up who am i the president of france what am i the king of spain i can clean up a cup of coffee it's not a big deal and that's i think what parker is doing there by saying hey if it's over 50 bucks let me know and you just you want to be thoughtful about it right it's leading by example too you know i mean that is like you know going back to that apple person starting their company if you're not willing to lead by example and do the dirty work you're not going to go anywhere it's just too hard all right so they have it folks i think we covered everything founders should get paid what the way investors look at it is we want to pay you enough let's just be candid here keep you hungry keep the dog in the fight we don't want you to be living some too cushy of a lifestyle but we also don't want you to be distracted and stressed out about your personal balance sheet your personal burn rate because then you can't focus so it's about balance namaste different and by the way you could always take with my companies i was taking like a 3k draw than a 5k draw why because i'd already made some money and i was going long for the price of the equity i owned 80 of my company i was more than happy to be the lowest paid person i was getting paid less than anybody at a couple of my companies for a long time and in fact i've taken zero salary at a lot of companies like my current my venture firm i take zero salary i literally get paid i think i have to pay myself some minimum in order to get health care i don't know what it is but i think i was getting paid i was doing like that dollar a year thing they reprimanded me i think I had to pay like a, they had to pay me something more because it was wrong, but you can make that decision later in life.

20:17And I think those are also good decisions. But if you do that and you have two co-founders and you take no salary, then you're entitled to a little more equity. Also, if I may, oftentimes founders are not the highest paid person at the company, almost by a rule. So if you're the founder, you're probably trying to hire a hotshot engineer or a hotshot salesperson. Yes. Oftentimes those people will want more cash because that's how they're wired, but they will add so much value to your company. So like almost, I would actually expect you not to be the highest paid person in the company personally.

20:52You want your salespeople to knock it out of the park and you want to write an uncomfortably large check to them every year. Yes. And have everybody in the company go, wait a second, that person's getting paid double the next highest person. And it's like, yeah, because they're responsible for 50 of the revenue yes and if anybody else would like to be responsible for 50 of the revenue we'll write them the same goddamn check because the equity value of the company is going up and to the right so don't get petty about that and i learned this because elliot um who was one of my mentors and a great operating person for me for many decades three decades he was like i was like okay so when they hit a million like they've already made this amount of money so we should have like the uh commission on that next million be less and he said nope more i said wait a second these guys are getting paid a fortune he says yes and when they hit that million if they were getting paid five percent up to a million you want it to be seven percent when they break a million and then when they break 1.25 we'll make it eight when they make it 1.5 we'll make it nine and it'll be even better because they'll they'll just how they're wired as you perfectly said scott they're wired to want that so that was an unlock for me because then the person said by the way our cost of goods sold are 50 so 50 plus their 8 58 where do you think the other 42 is going i was like to me and they're like bingo okay sounds good to me uh yeah i get 40 everybody else costs 60 whatever so okay fine sure whatever uh so you gotta look at the big picture And sometimes when you're young, it's hard to see the big picture.

22:28In Silicon Valley, the tradition is, I would say the founder is right in the middle of the pack. Yeah. You've got 10 employees, you're probably number five. Yeah. You're not number one, two, or three. I mean, the other thing is we now have offshoring. So we should maybe think about doing an episode of cost cutting and really cost management. Yeah. But for this episode, we did salaries. Yeah. Founder salaries is enough, Scott. If you want to have Scott on your team cruise consulting comm slash twist Scott, that's my guy anytime Something's completely messed up. I say Scott. I got a problem and he says yes.

23:02Tell me Jake Allen I say, okay great. Now it's your problem. Scott says yes, sir Yes, chef and if you fix the problems because accounting is a nightmare sometimes Get it right from the beginning use my friends Scott and cruise consulting comm slash twist he's a mechanic he's my fixer when i've got accounting problem i call my fixer my fixer scott he can be your guy but you got to set it up right from the beginning that's easiest set it up right from the beginning all right we'll see you all next time this week at startups.com slash basics thank you jason