Founder Compensation

Big Red Car here in the ATX — bit chilly today, gray and forebooding. Dum de dum dum, y’all! Like a scary movie soundtrack.

So The Boss gets talking to four of his brilliant CEO clients, all founders of their companies. Out of the cradle but not quite threatening the NYSE just yet. Still successful enterprises and persons.

The topic is the compensation of founders during those fragile days when the company is running primarily on the nutritional value of Ramen noodles, Mountain Dew and  coffee.

What had triggered the discussion was a combination of a VC who had given one of them a hard time about compensation derived from new funding and valuing the contribution of the founders in the early days of the enterprise. We are talking about founder compensation.

Reality

Reality is a very mean bitch or bastard. The Big Red Car is mindful of being a gender generous insulter these days. Tad of enlightenment.

Eating a few meals a week is a reality. Founders have to be able to exist slightly above starvation levels. Come on, people have to eat, sleep in a safe place and be able to pay their Obamacare premiums.

Founders need to have a personal budget and at every discussion of finances they have to test the reality of it all by asking themselves: “How am I going to fund my own existence?”

There is nothing wrong with a bit of privatization or some self induced hard times — when the payoff is equity in the enterprise. This is also why serial entrepreneurs who may have made a trip to the pay window are so investable, they can pay their bills while waiting for the next big thing to materialize.

Suffering for the sake of weaving a tale and legend of suffering? Silly.

Venture capitalists — funders of all stripes — who are not similarly concerned have injected into an already hard hand of cards another reason why failure will come calling. You own all the problems of the folks who are operating on your money.

Again — the challenges of living are real. Reality, adult behavior, requires a risk assessment of how your jockeys are going to stay on their steeds. Know and act upon this.

Value

The other part of the discussion is an appreciation of the value — perhaps even thinking of it as a “receivable” — that efforts of a founder and a founding team have injected into the company before there was a reliable source of funding.

If you have worked for two years on your startup and you are an accomplished software engineer, your annual value is likely $125,000 per year grossed up 30% for payroll taxes and benefits. Do the math.

A couple of years of such labor creates a phantom receivable of approximately $325,000 — solely on the basis of wages foregone. Throw in another couple of team members and you have injected and invested substantial personal effort. This is not an unfair approximation of the founder’s investment should the discussion turn to pre-money value justification.

This is not a discussion to be had with Aunt Tilley who is investing in a Friends & Family round. It is not an unfair point of order to invoke with a hard hearted and stingy seed funder.

On more than one occasion, The Boss has seen this conversational gambit get traction with a thoughtful VC. There are thoughtful VCs who are capable of bespoke thinking. Be positive.

Most importantly, the founder needs to know how much skin he has in the game in order to ensure this is something he wants to do and at that price.

Birds do it, VCs do it

Know this — most VCs are being compensated at “2 & 20”.

They get a 2% management fee with which to keep their BMWs in good working order, air out beach houses and to keep their children’s private school tuitions paid. Wives dripping in jewels, etc. [Sorry, y’all, cheap shots at VCs are part of the banter of the business. Most VCs are solid though sometimes clueless to the suffering of founder folk. They should get paid and why not? The VCs with just a touch of gray in their hair are the best.]

They also get 20% of the winnings often with no attribution against their losers.

I share this with you only to say that the VCs are dealing with the reality of their situation and founders should be doing the same thing. Get yours.

How?

How does a founder get compensated? She asks for it.

Have child care costs? Ask for them to be part of the equation which determines your compensation.

The Boss has literally seen a great investment ruined because a VC would not turn a sympathetic ear to a founder who had huge childcare expenses. It was a woman VC! The VC had a few degrees from Stanford but no husband and no children — a condition which may continue for a long time given her temperament.

Fairness and reality

This is a fair consideration and The Boss has seen a number of VCs and founders avoid huge future problems by dealing with it up front. The VCs are enhancing their probability of success by being pragmatic and fair.

Word of caution to founders — your VCs will not suddenly become more accommodating as the relationship matures. If anything, they will become more demanding. Get it done up front. If it cannot be done up front, know this — it will not heal itself.

Deal with it in Employment Agreements. What? You don’t have an Employment Agreement? Huh?

Oh, founder dude, you are going to make the Big Red Car cry. Please get an Employment Agreement.

Don’t worry, the Big Red Car has you covered. Go here and get it done.

The CEO Employment Agreement, everything you wanted to know and were afraid to ask.

Please go there and read it.

Here is some music to work by for y’all. Put it on and ponder your existence.

So, dear hearts, be real and get fed. You deserve it. You earned it. Get some founder compensation.

But, hey, what the Hell do I really know anyway? I’m just a Big Red Car. Be good to yourself today. You deserve it. Put an egg on those Ramen noodles.