Let’s talk about founder compensation
After 5 years, almost 100% of founder CEOs are compensated LESS than a replacement would be on a go-forward basis.
When long-time founders get together behind closed doors, inevitably the talk of compensation comes up. It is the most taboo thing to discuss and yet CEOs can’t help talking about it with their fellow founders. More than half of the founders I have invested in have asked for advice about ongoing compensation.
Traditionally, this conversation is happening in exclusive enclaves of dense tech founder communities. The aim of this piece is to democratize the discussion and suggest a few frameworks for best thinking about founder compensation.
Why “go-forward compensation” is important
There is a big difference between total-ownership and go-forward compensation. After the initial founder equity grant is vested (usually after 5 years), founders still need to be compensated on a go-forward basis.
Not all people agree with this. Some of the highest performing founder CEOs (like Warren Buffett and Jeff Bezos) received little or no incremental compensation. So reasonable people will disagree with how important go-forward compensation is. But the vast majority of founders have and need some sort of go-forward compensation to keep them motivated and as a scorecard to let them know they are needed.
We should caveat this entire discussion: this is an extremely high-class problem. Many of these founders are multimillionaires (at least on paper) and not really on anyone’s list of people that are under-compensated.
After 5 years, almost 100% of founder CEOs are compensated LESS than a replacement would be on a go-forward basis.
If the Founder CEO was hit by a bus, the replacement CEO would have a significantly higher go-forward compensation than the original founder. This is the opposite of a venture capitalist -- if the founder CEO of a VC firm (or PE firm or hedge fund) got hit by a bus, their replacement would have a lower go-forward compensation.
Given a founder’s already-large stake in the company, and given their commitment to the company, most boards feel they do not need to give founders commensurate compensation. And I think it makes sense that the go-forward comp of a Founder CEO should be less than an outside CEO … the main question is: how much less?
My unscientific survey of Founder CEOs that have been with their company for over 5 years shows they are getting about 25% of the go-forward compensation (blended with cash+stock) that a theoretical replacement would get. 25% seems far from fair.
A more fair go-forward comp would be about 80% of what an outsider replacement would make. It is still not 100% (which makes sense for historical reasons), but it comes much closer to filling that gap. But almost NO venture-backed boards compensate their Founder CEOs anywhere close to 80% of market rate.
Of course, this assumes the current Founder CEO is actually the best CEO for the company. If the person is not really the best CEO, then it also makes sense they have lower comp. But if they are really not the best CEO, why isn’t the board having a conversation about upleveling the CEO slot?
Understand what you are optimizing for
The first step is to understand what you are optimizing for. Is it more salary, better equity, or the ability to hire a nanny because you just had a kid?
Some founders need cash (many founders are deeply in debt) and might actually just want to do a secondary. Nowadays, most VCs are very favorable toward secondaries and can point you to the best resources.
Second-time founders might not need cash (for instance, I take a $0 salary at SafeGraph) and might be looking for more long-term equity value.
Once you know what you are optimizing for, then you can have a good discussion with your board.
Go on a board listening tour
If you are a founder of a fast-growing company (and I’ve recently counseled dozens in this situation), the next step is asking your board members what their philosophy is around go-forward founder compensation.
Gather everyone’s opinions. You will find that three venture capitalists will have three very different opinions about your go-forward comp. Getting those opinions out in the open is the way these discussions get moving.
How to talk about compensation with your board
Having a difficult conversation with your board (or anyone you admire) is really, really hard. It is especially hard when your entire life and self-worth (literally and figuratively) is wrapped up in your company. The number one reason these Founder compensation conversations don’t happen is that the founder is not willing to bring them up.
You want to have a very constructive conversation because you are still going to have to work with your board members for a very long time. And your ultimate goal is to make the company’s shares super valuable … and a protracted discussion will not help you.
Understand that you have limited leverage
A typical company employee can just leave if they do not feel they are fairly compensated. Founder CEOs cannot leave … they do not have that option. All the board members know that … which is typically why Founder CEOs make significantly less (on a go-forward basis) than CEOs hired from the outside.
While the press accents the few Founder CEOs that self-deal, most successful Founder CEOs will always sacrifice themselves for the good of the company. One example that few people know about: it is very common for Founder CEOs to revest much of their vested shares upon an acquisition.
The best time to have a conversation about compensation is during a fund-raise
Assuming you have a competitive process, you should ask every VC that is at the term-sheet stage what their philosophy on go-forward founder compensation is.
Many VCs in a competitive environment will be more likely to see all sides of nuanced compensation discussions and have an ability to align interests. VCs themselves were often founders and they likely had their own experience complaining about compensation.
Compensation can get creative to align all interests
When it comes to additional stock compensation to founders, VCs get worried … and the worry is reasonable. Let’s say a fully-vested Founder CEO just raised a Series C at a $300M valuation and now wants more compensation. Well, the new investors are going to be worried about more dilution BEFORE they have seen any significant appreciation on their investment.
So get creative.
Some founders create structured equity that only pays out after the company’s stock appreciates significantly. Other CEOs have out-of-the-money options (Elon Musk is famous for this). Both structures can align long-term interests. For compliance & tax reasons, this type of more-structured compensation can get really complicated. But it is worth taking the time to get right to align long-term interests.
There are often many creative ways that the founder can align their interests with all the shareholders.
Founder compensation discussion does not need need to be taboo
Founders rarely ask for raises. And VC board members rarely offer one. Both parties can do a better job of making sure founders have the right long-term incentives.
As an investor, I always have the conversation about go-forward founder compensation (especially if it is under the 80% of replacement level which it usually is starting in year five). Negotiating a more equitable compensation can take time (VC board members are often BIG personalities) but I’ve never seen a case where it was not ultimately successful.
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special thanks to Jeff Lu and Meredith Pitkoff for their help and edits to this article.
Great article.
Couple of points, which are implicit though not explicit in your article.
A founder may not want higher cash comp.
A founder with say $25,000,000 (market value) in equity might well prefer to see company stock go up by 5% ($1,250,000) than get an incremental $250,000 in cash.
5% appreciation is reasonable, because in addition to the incremental retained earnings of $250,000, not demanding the $250,000 would likely instill investor confidence, not just due to better cashflow, but appearance of higher fiduciary standards.
Taken to an extreme of obviously below market founder comp, some of the benefits might wear thin. As below market comp amounts to knowingly overstate true organic income of the business.