Many startup founders foresee the acquisition of venture capital funding as the pinnacle of success. By that point, you’ve demonstrated that your business is investable, with the potential to grow rapidly and provide significant returns to shareholders. But founders who think getting the nod from a VC firm is their ticket to a hefty bonus and luxury living may be in for a shock. Most founders pay themselves a modest salary for their executive position and face extensive pressure to extrapolate the promising early stages into a lucrative exit.
Venture Capital Firms Encourage Modest Salaries
VC firms want a return on their investment, so they support executive packages that promote business success. While some founders might assume that equates to a large salary, evidence shows smaller paychecks result in a thriving business. Business Insider reported in 2014 that notable investor Peter Thiel, co-founder of PayPal, will not invest in any company that pays its CEO more than $150,000 annually. If he were to reduce all of his due diligence to one question, it would be to ask what his prospective business partners pay their chief executive. Anything above $150,000, and he would refuse to invest.
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Not All Co-Founders Are Created Equal
Business Insider spoke with Foundry venture capitalist Brad Feld, who said salary ranges between $100,000 and $250,000, plus bonus money of $0 to $100,000 and equity ranging from less than 1 percent to 20 percent. The founder CEO and CTOs are on the upper end of equity and salary, followed by other co-founders and non-founder equity holders.
Most Entrepreneurs Take Little Salary From Their Business
According to a 2014 piece in Inc., startup CEOs generally take a $50,000 salary — if any — from their company, and that number jumps to $100,000 after the receipt of outside investment. A Compass global survey of 11,000 startups that same year surprisingly uncovered similar numbers. Seventy-five percent of founders make less than $75,000 in Silicon Valley, where cost of living is particularly steep. Globally, 73 percent of startups paid its CEO $50,000 or less. The survey did not distinguish between companies that had secured outside investment and those that were self-funded.
Investment Amount and Stage Are Important
Not all startups are created equal, and the amount a founding executive expects to draw from the company depends on its investment stage and the amount of money raised. A salary draw after modest seed funding will differ significantly from $5 million in a Series A investment round. Even in the latter stage, according to Business Insider, it may top out at about $200,000, depending on the company board.
Ways to Benefit From Business Success in the Early Stages
Founders who have worked tirelessly to build a startup into an investable enterprise might want to get some luxury items, like a new car. While the collective wisdom on Quora seems to reject the notion of going crazy after getting VC investment, venture capitalist Yuval Ariav said it’s possible to sell equity shares on a secondary market. He advises focusing more on building the company to the point that you receive a significant return through an initial public offering (IPO), buyout or merger. Although it’s technically possible to sell shares, investors may hesitate to buy because of the early stage. In addition, divesting of the asset does not shed a positive light on the company. Noam Kaiser, also a venture capitalist, reminded readers that a funding round “is a commitment, not an ending.”
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