Aditya Kothadiya's Blog

Targeted Audience: Entrepreneurs

For young and not much experienced founders, this would be a
critical question – how much we should remunerate to our co-founders and
ourselves. Especially in the Bay Area, if you have around 4-5 years of experience,
then it is most likely that you will be earning a six-figure salary. And if you
are carrying an entrepreneurial passion, then it is most likely that you will
jump into your startup venture after 4-5 years of experience. So when you
decide to switch to your startup activity for full time, you must be already
earning a six-figure salary.

Now the question is, how much salary you define to yourself
when you are working for your own startup? Do you take the same six-figure
salary of your previous employer or you settle down for small amount, which
serves your basic minimum requirements? 

We young founders assume that it is obvious that we will get
the similar six-figure salary, as we are CEO and CTO of our company. Its hard
to digest the fact that even after being a CEO and CTO, we may have to take probably
the lowest salary in the company. 

I interacted with few successful entrepreneurs and advisors,
and they guided me on this front quite brilliantly. 

1. Account other factors: Your previous salary and your current position in your startup are not the only measures to define your salary. You need to take care of other pre-requisites such as your financial needs (student loans or car loans), cash situation of your startup (self-funded or external investment), culture you want to establish in your startup (frugal and practical or luxurious and stylish) and few more.
2. Think deferring your payment: If the cash situation is tight in your company, irrespective of it is self-funded or externally funded, in early days you might consider deferring the payment of founders. One of our advisors mentioned that when he started his first company, he and his co-founder did not draw a single penny for the first six months and they deferred their payment for that period. They wanted to first focus on hiring good people to develop their product.
   1. One thing, which is required in this scenario, is you have a supportive family and there is no financial responsibility on your shoulder from your family.
   2. If you are ready to defer your payment and take a risk, and your co-founder is not, then you may offset this difference by equity share and stock option benefits.
   3. You can keep the deferment period flexible, like till you get the first customer commitment or so.
3. Be ready to take the risk: When we are seeking external funding, one of the major expenses we show to
   investors is – compensation. We tend to take close to six-figure salary for founders and want to play a safe bet. My mentor gave me best insight on this – its like we are acting as an employee of our company and not as a founder. We are not willing to take that risk and want to make sure that at least we get our salary irrespective of company becomes successful or not. And if we, founders, are not willing to take that much risk in our company, then how could an investor would take a risk by investing in our company.
4. Understand the power of equity: We need to understand the potential of wealth creation through the equity ownership. Equity and stock options should motivate your co-founders and employees such that they take personal interest in your business. And for that interest, they put maximum hardwork to achieve success for them and for you. 

Well, I may be wrong in this approach, but when I was
calculating our salary structure, I understood the paradigms of each of co-founders.
For me, I knew that I am responsible for my family financial requirements so I
cannot defer the payment. So I came up with a figure which includes – basic
minimum annual expense requirements plus very little positive margin but no
savings margin. And that’s how I decided my salary. And it is quite below than the
salaries my peer colleagues are earning in big companies. But it’s “being the
founder of my own company” vs “being employee of someone else’s company” that
is making the difference much more positive on my side. 

If you are a founder of a company, would you please discuss
how did you decide the salary for you and your co-founders? Some generic rules
will be very helpful for other entrepreneurial readers to know the art behind
this tricky process.