Startups have to be acutely capital conscious because, the very nature of the business is fraught with uncertainties of cash flow and returns.
At the seed stage a lot needs to be done, like building a product, testing the market, and gaining the critical initial traction.
With so many uncertainties and demands on finances,it is rare for a founder of a startup to make the same kind of money they can get if working for an already established company. They have to settle for a fractional equivalent of their market value in terms of salary for their startup to flourish. Plus, scaling up of a startup is usually dependent on outside investments to take them into the next round.
So, many a times, the VC’s call the shots in deciding how many bank notes the founders can take home. Most importantly, how much salary a CEO draws defines the attitude of its founder and the future of the company.
For startups to survive in the long run, their spends needs to be frugal. In the new investor climate in 2017, investors are acutely wary of where they will put their money. Spending sprees of the past year by startups awash with large amounts of money due to high valuations, have taught some bitter lessons. There were very few long term gains and a lot of self serving.
As new age entrepreneurs are more or less fresh off the block with limited work histories, investors are increasingly taking the help of consultancies like Deloitte, KPMG, Kroll and more to evaluate founders qualitative risks.
As a result, recently an international venture fund backed out of investing in a company when they found the promoter to be living a lavish lifestyle disproportionate to the health of his startup.
VC’s fear such promoters will syphon off money or indulge in some financial irregularity. Anirudh Suri, founding partner at India Internet Fund, an early stage investor confirms they watch entrepreneurs for months as, “A lot of people are there just because of the money”.
Putting a cap on the CEO’s salary makes the possibility stronger, of a startup succeeding. If the company is VC funded the CEO’s have to decide the amount of equity they are willing to part with. It’s a fact that the size of the pay package is inversely proportional to the amount of controlling stake the CEO can hold in his company.
For any committed founder, it is critical to achieving an undiluted say in how the company is run to achieve its mission. True entrepreneurs are aware of this.
As per a report by Compass, around 66% founders in Silicon Valley take very low salaries(below USD 50,000 per year), 74% in London, and an amazing 92% in India. It is very important for founders to offset their personal growth with a share in equities, as it seals their fate and personal success through the growth of the company.
Another way to align themselves with the future of the company is for founders to set salary as a percentage of revenues indicating a high level of confidence and optimism in their venture.
Founders need all the help they can get to grow a startup. There’s only so much work, and hours one can put in a week at work. To achieve the right mix of talent in a company and for support while a CEO does more important tasks, hiring the right people with the correct skill sets is important. Keeping a founders personal salary low puts enough aside to allow either a co-founder or highly qualified specialists to develop the business.
As a founder it also important to send the right message across to your team. So, when you take just enough salary to not worry about how the home is being run, the dedication and do or die attitude is bound to win respect from the team members. They will stand by the organisation, even with lower than average salaries a lot of times sharing the founder’s passion for the job.
Funding startups are all about backing the promoters. All eyes are on the captain of the ship to steer it through the rough waters of the business world. For a founder, drawing a limited salary with equity and perks tied up with the growth of the company is a fair and judicious way of running a startup. In the eyes of the world, it is a sort of guarantee that the founder will stay focused and-and will not abandon the ship – come what may.