CEO Salary as Best Indicator of Startup Success

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Last week I was talking with an angel investor that was lamenting an investment gone bad. The investment, at the time, looked great: big market opportunity, strong (supposedly) sales pipeline, $3 million+ already invested with a pre-money valuation less than invested, and strong investor downside protection for the bridge round. Quickly, after making the investment, the wheels started coming off the pre-revenue company with the sales pipeline proving to be much too optimistic, the burn rate not getting any better, and management not making the hard decisions.

After he recounted the experience, I asked him how much the CEO made at time of investment: $175k. I asked about the CEO’s salary at the time of the major cuts post bridge round: $175k. At that point I mentioned the Peter Thiel opinion:

The lower the CEO salary, the more likely the startup is to succeed.

The angel investor said in retrospect that the CEO salary, especially after lack of progress and being pre-revenue, was a huge red flag. Moving forward he’s not going to make that same mistake twice.

What else? What do you think of CEO salary as the best indicator of startup success?

Comments

20 responses to “CEO Salary as Best Indicator of Startup Success”

July 24, 2011

Chris Puttick

USD175k salary belongs in profitable companies with solid 5 figure turnovers. Now, a package worth USD175 with salary 1/3 of that and the rest in some well thought out mix of performance-related bonuses, that would make sense…

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July 24, 2011

Dave

CEO pay should be based on the financial success of the business. My personal opinion is that it should by as close to $0 until the business breaks through, or whatever the minimum absolute requirement is. Take a lead from Steve Jobs and pay yourself $0. Plus, it will make the CEO work that much harder and use the funds for growth and equity appreciation, if the founder is a true entrepreneur and confident in his skills.

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1. July 25, 2011
  
  adamwexler
  
  Wow, stellar comments all the way down! I’ll give my impression from personal experience…
  
  I have been building http://gorankem.com for the last 3+ years. I haven’t taken a penny. I still believe wholeheartedly in the overall vision behind the Wikipedia-like resource we’re building, but as our traffic has grown exponentially over the last few months, it’s become that much more real that the short-term monetization strategy is a bit shaky.
  
  From personal experience, I agree with Mike’s comment below that the CEO should probably have a concern for financial results. My lack of concern for income has probably clouded my focus on building a financially strong company. In my young 20s, I could get away with pursuing a ‘hobby’ rather than a true business. At 26, I have to start reevaluating a bit.
  
  As for the other mentions about the ideal salary, I’d say it should be enough to cover living expenses. I completely agree a startup CEO should not be forced to wrap his head around how he will get by while the company ramps up (esp for B2C plays). A startup CEO should be eating & breathing the company 24/7/365.
  
  The CEO needs to stay hungry…but not starving…
  
  Reply
July 24, 2011

Jeff Barnes

The angel investor needs therapy if he invested that much money in with the CEO taking that much salary. I agree with Dave – $0 is plenty as a salary in a start up

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July 24, 2011

Steve Reaser

I agree that $175k is too much in the vast majority of cases.

However $0 isn’t alway a good idea; you want the founding team to be laser-focused on building the business. If they don’t have enough cash/income to get by, they are wasting energy on things other than building the business (even if it’s just energy spent on worry, not actual time spent working a side job, begging parents for cash, etc).

It’s basically the same principle behind Google offering perks like on-site dry cleaning, day care, etc… they don’t want their engineers wasting any mental energy on things other than Google.

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July 24, 2011

tomeilon

$0 is a crazy number to suggest for a founder/CEO post investment. $175 is too.
The CEO needs to be paid enough to live comfortably to that they can make the right decisions to grow the business at the right pace. Also taking in some key hires is crucial, they should be paid about the same as the CEO. $50-90k seems about right.

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July 24, 2011

pfreet

The less you pay your ceo, the more likely they are to walk away when financial troubles arrive. Do you want the CEO focused on their own financial problems, or the company’s. And don’t forget that mrs ceo might be a problem. Find out what they need to live on, pay them that, and no more.

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1. July 24, 2011
  
  Titash Neogi
  
  As a startup CEO for the past 1 year, I have been on 1/3rd to 0 salary range. I agree to a low CEO salary – just enough to cover costs decently. But a NO or too low ceo salary can be a very bad idea. You need the CEO focussed on the business – not on how to pay his bills each month. 🙂
  
  Reply
July 24, 2011

Pieter Dubois

Imagine you are replacing the founder-CEO with someone from your VC network as CEO. What would it take to entice him to take that position? Stock for sure, but a lot of dough also.

Not all your founder-CEO’s are 22 year olds still living in their mother basement who can easily be tricked in discounting their time to $0 and forget about the opportunity costs. Peter Thiel gives $100k grants to youngsters who drop out of college to start a company. He’s setting his sights on another type of public than a lot of founders belong to.

Adeo Ressi indicated (http://tcrn.ch/nrklSN), through data coming from his Founder Institute alumni, and corroborated by other studies, that a large % of all startups are started by people older than 35. Apart from ideas perhaps informed by a longer life experience, that means inevitably, family, children, mortgages. It doesn’t mean less dedication to the venture, as often a substantial amount of life savings have been poured already in the venture. This is something younger entrepreneurs can’t claim and is easily forgotten by said investors, but it also brings constraints that cannot simply be ignored. The one comes with the other.

If you, as a VC take fees for ‘advice’, and add paid-for boardmembers and ‘professional’ executive management which takes liquidity out of the company and at the same time expect the founders to live on thin air for another 2-3 years, how long do you think they will keep a spring in their step when coming to work. Once investors enter they want the company to grow to deliver the required returns on that investment. That means professionalization, 100% focus and stop having founders manage their company as an expensive hobby. That translates to a correct remuneration also.

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July 24, 2011

Mike Schinkel

When I saw the title of this post I thought you were going to say “The higher the pay the more successful the startup.” But I see you were tackling a different angle, and one I do not completely disagree with either.

Let me give a counter concern. If a CEO is too little focused on money then you can have someone who is willing to build a business for the sake of building a cool technology solution and not one that focuses on the financial end results. Further, I agree with some of the others who say that if a CEO is worrying about paying his bills (or having to worry about pressure from Mrs. CEO) then that is no good either.

A CEO salary should allow the CEO to handle the first 3 tiers or Maslow’s hierarchy (http://en.wikipedia.org/wiki/Maslow's_hierarchy_of_needs) but not fund the latter two. The pay needs to be low enough that the CEO stays hungry but not so low that he or she stresses over paying his or her mortgage. And how much differs depending on the age, experience, and the prior success of the CEO. $125k annual salary would be insane for an Atlanta-based single Ga Tech grad with no kids, about $250k might be reasonable for someone who is used to $500k and with a lot of financial obligations, but who has also previously delivered stellar results for investors with prior startup success.

Said another way, the principle makes sense in general but there is no single right number either.

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July 24, 2011

Dave

If the founding CEO has too many other financial distractions then maybe this is not the best start-up to fund. And, I am talking about a founding CEO and not a hired gun. If you have to hire a CEO too early this is another red flag! The initial money should be invested in people and the CEO pay is irrelevant in setting a benchmark for other exec pay, depending on the complete comp package. Who wants to fund a business so the founder can be comfortable? Maybe there is some rationale for this Techcrunch post: http://techcrunch.com/2011/04/30/internet-entrepreneurs-are-like-professional-athletes-they-peak-around-25/

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July 24, 2011

Ira Wallace

Look at the link. In the end, Peter Theil said that the average salary for a start-up CEO is $100K to $150k.
Has the right principle.

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July 24, 2011

Dave

Peter Thiel: Best Predictor of Startup Success Is Low CEO Pay

It seems Peter is not recommending $100-$125k as he was “hesitant” to answer this question, but said the lower the pay the higher likelihood of success. The only compemsation a CEO should be focused on is a juicy exit. I couldn’t agree more. Seems perfectly in line with David’s post.

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July 26, 2011

Anh Tu Sam

$175k – WTF? I had anything near this when I was in management consulting few years back. In my last start-up my salary was below $50k during 1st year (with monthly 5 digit revenues). I guess I should ask my business angels for more next time 🙂

Disclaimer: I’m based in Germany.

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August 4, 2011

Greg Elofson

Well, a few data points. If you’re starting as a junior associate at a Big Law firm, your salary is $165,000. If you’re starting at Goldman as a novice IB, it is about $260k with bonuses in your first year.

You will work 80-100 hours/week. And you won’t quit after your first paycheck and go surfing.

The junior associate is driving toward that seven figure partnership, and the Goldman IB is aiming even higher.

If your founders have never been able to afford a new car, and a six figure salary distracts them as new and untested wealth, then it *might* make sense to add to their salary slowly. Otherwise, as someone wrote above, make sure their income allows them to forget about their own personal wealth issues…they only distract.

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