Founder Compensation Options

The startup is built around the founding members, their drive, and their devotion to bringing their business to life. It’s about turning the intangible into liquid assets. And maybe even more important, the founders determine how this happens. Everything from the values that serve as the bedrock to the company’s culture begins with them. 

Startups are shaped differently, but there is a common thread built around the founding members and the investors. When new circumstances present themselves, a company will pivot. Choosing wisely can fuel more growth, whereas the opposite can shatter a company’s momentum. 

Does success beg the need for a pivot? If you’re the founder of a seed-funded startup, how much of that money should you take for you to live off of? The decision for how much  founders should pay themselves and their employees is critical to the future success of the company. 

Cash Flow

In intentionally simple terms, cash flow is the money coming in and out of a business. If more is coming in than going out, then that’s a positive flow. If it’s the opposite, then you’re looking at a negative cash flow. 

Entrepreneurs and startup companies have to have a clear understanding of how much money they have? Yes, this is basic but commonly overlooked or misunderstood. If you used venture capital to finance your company, how long will that last if you have a negative cash flow? This is also referred to as a burn rate.

Company Worth & Your Need

Your company’s worth can be formally determined by a 409A valuation, which is an appraisal of a private company’s stock in preparation for issuing shares to employees. In place of such an appraisal (which can be expensive), a simple analysis of who has made offers for your company and how much the offers were may be adequate. If you have just gone through your first round of funding, how much did you raise? 

If you successfully raised $500,000, the hard part is deciding what to do with it. Many entrepreneurs feel rich once the money comes in the door without understanding that it needs to last for much longer than anticipated.  This is where understanding your burn rate is critical. The money you raise plus your anticipated revenue minus your burn rate over time will tell you how long your “runway” is and what your priorities should be for expenditures.  And while raising money from investors is a great way to start a business, it is no way to run a business over the longer term.  Money from investors should always be used to increase the revenues of the company so that your talent can focus on growing the business instead of pitching investors (which is an exhausting job).

Equity

Rather than salary, most people that choose to work for startups are more interested in equity or ownership in the company.  Remember when Instagram sold to Facebook for one billion dollars, but it only had 13 employees at the time.  Many employees have this dream in mind.  

For these employees, you may want to consider time-based vesting. You don’t want your senior engineer to cash out immediately after a merger or an Initial Public Offering (IPO). Key employees would accrue stock based on their time with the company. There are many ways to structure employee stock plans. Consult competent legal counsel, of course.

Neve Webb 

At Neve Webb, we have extensive experience working alongside startups and seeing the unique challenges they face. If you have further questions regarding your startup or are ready to meet with legal counsel, contact Neve Webb to schedule a consultation.

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