How Startup Founders Should Discuss Their Compensation with VCs

Here at Kruze Consulting we are advisors to hundreds of VC-backed startups that have raised billions in venture funding. One of the most common questions we get asked by CEOs and founders is: “Hey, what should I get paid - and how do I talk to my investors about it?”

The reason they ask us here at Kruze is because we are a third-party advisor – it’s a lot less intimidating to ask us than to ask the VC who just gave them millions of dollars. However, it is important for founders to be able to communicate with VCs on how much they need to get paid. So we’ve put together some tips on how to clearly communicate with your investors, so you can understand how much money you can expect to make in compensation.

Read to the end to find out three extra tips on how to have the most productive conversation you can with your VC about founder compensation!

Transparency is Key

First of all, a key thing to remember when discussing compensation with your VCs and investors is that transparency is really critical. You want to make it incredibly clear what you expect to make. You don’t want to surprise your VCs with how much you’re making. You don’t want them to attend a board meeting and see that there is less cash in the company because you’ve paid yourself a lot. You want to be really transparent because founders should make a fair and reasonable amount of money.

There is a common myth that all VCs want founders to work for next to nothing. This might be true in the very earliest stages of a startup, when a company may have only raised a few hundred thousand dollars. But after you’ve raised a legitimate amount of money, it’s time to get paid closer to market – at least closer to market of what startup CEOs make.

When founders and CEOs of startups don’t pay themselves enough, it can cause a lot of stress. It can put strain on relationships and it can cause founders to make poor decisions. When you’re a startup CEO, you don’t want to have to drive Ubers on the weekend to pay your rent. You want to be able to work on your startup and stay focused on your startup’s success over the weekend instead.

Align Personal and Company Interests

Another fundamental thing founders should do is try to align their personal interests, of financial stability and fair compensation, with the company’s interests of growth and success at a reasonable expense level. 

When these elements fall out of balance in either direction you’ve got a recipe for disaster. Therefore, we really encourage founders to either use guides and benchmarks or tie their compensation to reasonable levels of compensation based on what other similar companies at their stage have raised.

How to Discuss Founder Compensation with VCs

All right, let’s get into the meat of the conversation: how to discuss founder compensation with VCs.

Have Reasonable Expectations

First, as a founder, you should have reasonable expectations. In order to shape those expectations, you need to triangulate in on the cash compensation you believe you deserve. There are different people you can ask and different things you can do to find this out:

  1. Kruze Consulting publishes an annual CEO Salary Report. On that page, you’ll find a Startup CEO Salary Calculator. You can use this report to get a ballpark idea of what startup CEOs are currently earning (we update it annually), and use the calculator to get an estimate of what you should be paid.
  2. You can ask similar stage CEOs for advice in terms of what they get paid.
  3. You can ask your accountant.
  4. You can ask your lawyer.

Once you have that figure, you need to communicate that expectation to your investors.

One of the best and easiest ways to get the ball rolling with this is to use a financial model or projections. For example, let’s say you’re raising capital and it’s your first time raising a real amount of money. You’re about to be able to pay yourself a real salary for the first time. At this point you should include your salary expectations as a line in that financial model. This is a brilliant way to be transparent and to put the number out there during due diligence.

If you have already raised money from your VCs, and you’re in the budgeting process and it’s time to get paid, then you should create a budget and share that with them. Sharing a model in the data room or via email is a particularly good method because it’s a way of documenting the fact that you are being transparent and that you’re providing these expectations ahead of time.

Have A Conversation

Now that you’ve shared these expectations in a financial model or projections, the next step is to communicate it properly. You need to make it clear that the data is there. Therefore, you should set up a call to discuss the projections or the budget with the VCs.

It’s a pretty important step to have an actual live conversation. Your aim is to make it easy for the investor to have a dialogue with you. The call doesn’t just have to be about your compensation. If you’re getting a budget approved, it could also be used to let them ask questions about the goals, the spend, and the burn in the budget as well.

However, you should make sure that when you share the agenda regarding topics you want that call to go over, you include your founder salary expectations as a line item. This is to make sure you have an opportunity to discuss it.

How To Approach Unusual Expectations

There may be some founders who have ‘unusual’ salary expectations for a number of reasons, such as: 

●        A founder looking to be reimbursed for prior expenses out of the new funding.

●        A founder who, during the very early stages of the startup, prior to raising money, may have put in $20,000 from their personal credit card to get some work done or pay for equipment.

●        A founder who wants to dramatically increase their pay.

●        A founder looking to get paid back for wages that weren’t paid prior to the fundraise.

If any of these scenarios apply to you, and you have an unusual expectation for salary or compensation, you have to be even more transparent. Share these figures in writing, via email, and verbally. VCs hate to be surprised about this type of thing, so set yourself up for success by being very explicit; type out exactly what happened and how much you’re expecting to get.

Discuss Your Financial Impact on the Company’s Burn Rate

In order to be able to talk to your investors completely transparently, you need to be ready to discuss your salary’s financial impact on the company’s cash out date and burn rate, particularly if there may be changes in the company’s burn or cash out date based solely on your salary changes.

VCs are always interested in what their funds are going to be used for and how long their funds are going to last. Therefore, you are going to want to show that your proposed salary isn’t going to severely impact the company’s growth, cash out date, or use of funds.

How To Approach Multiple VCs

If you have multiple VCs, you may need to run through this exercise several times and have multiple conversations. Smaller investors may not want to have a conversation with you if they’re not on the board but, in this situation, you’re going to have to judge who you need to speak to and who you don’t.

We suggest still sharing your financial projections with your salary in it to the smaller investors and, if in doubt, always over-communicate.

Three Extra Tips 

Here are three extra tips on discussing founder compensation with your VCs and investors:

  1. Prepare to negotiate. Some venture capitalists are notorious for wanting to negotiate everything. If you’ve got a VC like that, make sure you’re prepared for it. In general, VCs are experienced negotiators. They’re likely to have their own points of view on what is reasonable. Therefore, it might be helpful to outline your strategy ahead of time. You could even do a mock session with a third-party advisor like your accountant.

  2. Document everything. As we’ve touched on previously, make sure you document everything. Document all of the communications and agreements related to your compensation. You want to be very transparent and having everything in writing will help you deal with any disputes and avoid any misunderstandings that might come later.

  3. Timing is really important. The timing of the discussion matters. If you’re asking for an increase, it might be more appropriate to do that after the company has achieved a particular milestone, if it’s performing particularly well, or if you’re close to closing a fundraising round. If you need more compensation because there’s a life event, like a new baby, like bring it up in context to help set the stage. Instead of just asking for more money, explain why you need it.

Utilize the Tools We Offer at Kruze

We recommend that you look at Kruze Consulting’s CEO Salary Report and Calculator as we keep that updated and it’s a handy tool. The Calculator helps you estimate reasonable compensation for founders and CEOs based on the stage of the business, the industry, and how much money the company’s raised. 

If you have any other questions on VC communication, valuations, startup investing, startup accounting, taxes, or venture capital please contact us. You can also follow our YouTube channel and our blog for additional information on accounting, finance, HR, and tax for startups!