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

Episode Date: December 7, 2023

Jason chats with Scott Orn about founder salaries, discussing the trade-offs of starting a company, the importance of board-approved salaries, and equity. They also address gender disparities in founder salaries, managing personal expenses, and investor expectations. * (0:00) Scott Orn joins to discuss founder salaries (2:25) Trade-offs of starting a company and how salaries increase with funding (4:41) Role of builder founders and dangers of underpaying oneself (8:05) Transitioning into entrepreneurship and managing side hustles (10:03) Importance of board-approved founder salaries and discussing equity (13:05) Gender disparities in founder salaries and efforts to close the gap (15:52) Managing personal expenses and company accounts (17:05) Leading by example and salary distribution within a company (20:26) Investor expectations and high-value employees earning more than founders * Check out Kruze: ⁠https://kruzeconsulting.com⁠ Follow Scott: https://twitter.com/scottorn * Follow Jason: X: https://twitter.com/jason Instagram: https://www.instagram.com/jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis * Great 2023 interviews: Steve Huffman, Brian Chesky, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland * Check out Jason’s suite of newsletters: https://substack.com/@calacanis * Follow TWiST: Substack: https://twistartups.substack.com Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin * Subscribe to the Founder University Podcast: https://www.founder.university/podcast

All 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 asks 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

100 follow-ups. My partner in crime is Scott Orne. He is a CFA and Cruz COO. Cruz is an amazing 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. This week in Startups.com slash basics. You'll see all the basics episodes. 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. How much should I pay myself? Okay,

I've raised a $1.5 million seed round. I was making $300,000 when I was at Apple. Now 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. I 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 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. So that's the tradeoff 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 a pretty tight range, really. We've done, Cruz 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. And also investors know that A, you have something that's working, right? and that you're going to be managing a lot more people

and the demands of the job change. Instead of being like, most seed stage CEOs are doers, you're doer, maybe you're coding and you're half time. 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.

the median startup CEO salary has gone from 125 to 145. This is pretty accurate in my experience. 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, 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 in our 13 reasons to invest in a company. And one of the most important 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. 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-factors, yeah? I totally agree. And 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 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. So just don't do it for the, you're not, no one's going to do this for the salary rewards. Right. 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, they over indexed 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 having stress in their personal life because they have a hard time paying the rent. Or their wife or husband is like, not only are you gone all the time, but we don't have enough money to 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. It's a San Francisco, so you can figure out whichever configuration in your polycube or whatever it is. How many miles you've got to feed you? But in your 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. And 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 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. Well, now you have to start thinking about, hey, what is reasonable for my personal burn rate? 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 out basics about this one with illegal.

Well, Sincini. But 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. Hey, I know that, you know, let's say your spouse or your significant other as 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 kids event on your own. And hey, instead of going skiing in VAL, we're going to do something a little more abridged for the next two years just to keep burn. But we'll still have a great time, right? 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. And then I'll hand it off to you for other strategies. I've just seen people who were 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've got to, you've got to walk through some walls when you're building that company. And it's very easy to let yourself be distracted on the weekends or 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 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. And 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 avoid. 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 investors know it. There's a cap table. There's a vest. schedule. But 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 an 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 Cruz 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 have been getting larger and larger

against Silicon Valley. So I'll pull up the second chart that Cruz has 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 a million dollar salary. Public CEOs or public founders, mid-sized companies, they're getting a half million, a million in compensation. So 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. It's 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 couldn't say, I mean, 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 going to 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. And so they're going to pay you 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 is a little strange that female founders were getting paid 15K less, so about 10% less. Is that what you found in your study?

in startups? Exactly. And I know it is depressing and thank you for highlighting this. I mean, 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? So the salaries of, is that because of childcare? Do you have a, do you hear any feedback on it? Honestly,

we've talked to some of the women founders and I think there's two things. The first one is, on average 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 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? Exactly right. Like two years from now,

we'll probably see these getting, we think they're getting closer and closer every year. We try to celebrate that in the press release. for this. It 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 help the companies. Yes. To help the team. Wow. They were selfless. Yeah, exactly. They were more selfish. 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 they're marauding male counterpart. said, you know what, I'm going to get mine and I'm going to lay off the four people. That's exactly it. And we've anecdotally verified that. It's strange. You know, it's, well, you know, the strange part might be the line with the men who aren't cutting their salaries during COVID is what I would say.

You know what? There's a lot to unpack here. You and I are not psychiatrists or psychologists, but we are individuals who look at data. and the data is here and the data is what it is. So to the women who did the right thing here and try to save their two members, I applaud you. But the salary gap should close.

And I think this is, 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. So yeah, just close the gap. 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. 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? Absolutely. 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 years. There's someone who does something crazy with the company's other 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 BS out of it, all the risk out of it. The board knows that. And there's no. there's no incentive to abuse the system. Yeah, and we have a very simple solution for this. We use 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 SaaS piece of software or whatever 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 Parker Conrad at Rippling approves every expense over $50 still, which may be a little excessive, but I kind of respected it because everyone in the company

knows. He's very successful. Yeah, everyone knows that you can't abuse the system. And 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. 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 spelt, and I watched 100 people walk around it, including some people who 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, mopping up. And 10 people from my staff and the audience.

Oh, my God, what are you doing, J-Cal? And I said, I'm effing doing what somebody else should have done. 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? I spill a cup of coffee. I can 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 want to be thoughtful about it, right? And it's leading by example, too. You know?

Yes. 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.

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. 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, I was doing like that dollar a year thing. They reprimanded me. I think I had to pay like a thought. It had to pay me something more because it was wrong.

But you can make that decision later in life. And 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. Yeah. Also, if I may, yeah, please. Oftentimes founders are not the highest, paid person at the company, almost, almost by a rule. So if you're the founder, you're probably trying to hire a hotshot engineer or a hot shot salesperson. 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 of the company

personally. You 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, who was one of my mentors and a great operating person for me for many decades, three decades, he was like, how is that? like, okay, so when they hit a million, like, they've already made this amount of money, so we should have like the 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 5% up to a million, you want it to be 7% when they break a million. And then when they break 1.25, we'll make it 8. When they make it 1.5, we'll make it 9. And it'll be even better because 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. Yeah, I get 40% everybody else costs 60, whatever. So okay, fine, sure, whatever. So you got to look at the big picture. And sometimes when you're young,

it's hard to see the big picture. in Silicon Valley, the tradition is, I would say the founders right in the middle of the pack. 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.

But for this episode, we did salaries. Yeah. Founder salaries is enough, Scott. If you want to have Scott on your team, cruiseconsulting.com slash twist. Scott, that's my guy. anytime something's completely messed up, I say, Scott, I got a problem. And he says, yes, tell me, Jake Allen. I say, okay, great, now it's your problem.

Scott says, yes, sir. Yes, chef. And you fix the problems because accounting is a nightmare sometimes. Get it right from the beginning. Use my friends. Scott and Cruise Consulting.com 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've 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 in startups.com slash basics.

Thank you, Jason.