How do you Determine Proper Compensation for Startup CEOs and Early Employees?
For first-time founders and leaders of early-stage startups, determining compensation for the CEO and early employees can be tough. On the one hand, you need to hire the best talent, retain them, and incentivize their performance to have the right team in place to grow. As a founder and/or CEO, you also want to pay yourself enough to get by and prevent money from being an unnecessary distraction. On the other hand, you need to keep cash in the bank and appease your investors and board members that you’re extending responsible offers.
How do you determine what’s best? The right approach won’t include a one-size-fits-all answer for every business. However, successful founders do tend to establish consistent tactics early on and lean on research to find their solution. It includes understanding the competitive compensation you can afford, the value of your business, and the sum total of benefits available to you and your employees. Here are some of the best practices and advice on approaching your boards with proposed plans once you’ve determined the right way forward.
Average Startup CEO Salary in 2021
In the Kruze Consulting report on 2021 CEO salaries, the team surveyed over 250 startup leaders and found salaries have slightly increased. While they initially dipped at the start of COVID, the average CEO salary is now hovering around $146,000 a year. The salary varies by company stage and industry — learn more below:
Startup CEO Salary breakdown by Industry
One of the places to start when evaluating your CEO salary is by evaluating the benchmarks and peers in your industry. As you can see below, the average salary of a seed-stage startup CEO varies depending on the industry. The following data is from the Kruze Consulting 2021 Startup CEO Salary Report:
- Biotech – This has remained fairly consistent year to year as the space is more mature.
- Ecommerce – Ecommerce companies can be started and built with individuals and smaller teams leading to a smaller salary
- Fintech – A hot space in VC leading to more companies being funded with more money.
- Hardware – A more mature space leading to a higher salary.
- SaaS – Similar to fintech, a hot space in VC leading to more companies being funded with more money.
While the industry certainly has an impact on a CEO’s salary — the stage and capital raised seem to have the largest impact on a startup CEO’s salary
Startup CEO Salary breakdown by funding stage
Using the same report, Kruze Consulting 2021 Startup CEO Salary Report, as above you can see that the capital raised greatly impacts a startup CEO’s salary.
Presumably, as a startup raises more capital they are growing as a company. This means that the CEO likely deserves a higher salary as they continue to bring in the new revenue and grow their bottom line. For example, if a company has gone on to raise their series A that is a testament to the companies growth and should be reflected on the CEO’s salary. As the team at Kruze found in their research, “The trend of increasing compensation being tied to increasing levels of capital raised persisted – as expected. Seed stage salaries – for companies that have raised less than $2 million in total funding – seem to be still recovering from the COVID crisis, and the overall pay there is down from $120,000 in 2019. However, at all other levels pay is more or less flat to up quite a bit.”
- $0-$2M (Avg) – Companies that have yet to prove product-market fit so likely as a lesser salary
- $2M-$5M (Avg) – Similar to $0-$2M this range has yet to give investors and board members the full confidence of a large exit
- $5M-$10M (Avg) – On the path to a larger exit and team warranting a larger salary.
- $10M+ (Avg) – Likely companies with a solidified model and likelihood of a large exit.
Related Reading: The Understandable Guide to Startup Funding Stages
How to Determine a Startup CEO Salary Startup CEO Salary Calculator
Once you understand the benchmarks and industry trends, it is time to determine what your annual salary should be as a CEO. While there are quite a few factors that go into determining your salary we find the following to be most important. Certainly, there are a few other factors that will go into a startup founder’s salary as well. For example, if a founder is headquartered in Silicon Valley their cost of living is higher and likely requires a higher salary.
How much money is in the bank?
This is an especially important question to answer when you’re trying to hire your first employees. You have to be able to afford the talent you’re recruiting without cutting your financial runway unnecessarily fast for some quick-to-compete cash package. If the CEO is also a founder, it will be much easier to manage their annual salary because the value of their compensation package will likely lean much heavier toward equity than cash. But bringing in non-founders takes actual dollars and requires confronting these tough questions: how much money do we have? How long will this last us? How does a cash package for X employees change this?
What’s your current valuation?
Next, it’s time to determine what your business is worth so the value of equity can be established. For venture-backed companies, you can find this answer through an official 409A process or less formally (as Fred Wilson proposed in 2010) by using the valuation of your last financing round or the most recent offer you received to purchase your business. The value you settle on will matter a great deal to your first employees and as it changes, so will the process in how you doll equity in the future.
What’s the competitive salary for this position and experience?
The reality is most venture-backed startup CEOs typically make somewhere between $75,000-250,000. This has long been an acceptable salary range depending on the cost of living adjustments and the value of the business, and as long as the fledgling business isn’t truly desperate for cash. As noted in Business Insider here, Seth Levine’s observation on CEO salary in 2012 still holds true compared to the 2019 Kruze salary report data above: early on companies that have raised $500,000 or less cap out at $75,000, companies that have raised $1 million or less pay between $75,000-$125,000, companies that have raised between $1-$2.5 million pay closer to $125,000. The greater the fundraising numbers are from there, the more likely the CEO pay range climbs closer to $250,000.
How to Determine Startup employees Salary
Determining how to properly compensate employees at a startup is also a tricky task. As we wrote about in our post, “How to Fairly Split Startup Equity with Founders,” startup employees are generally looking for something more than a salary — transparency, collaboration, ownership, responsibility, etc. Oftentimes a startup can’t offer the salary an established Fortune 500 company may be able to offer but they can offer equity and intangibles that an employee can’t find elsewhere. With that being said — a salary is what ultimately can be the factor that determines if an ideal candidate will jump ship to join your company.
How much common stock will you issue an employee?
Your employees have options for where they work. Many of those options will offer greater short-term rewards, while you are likely to offer below market value in cash compensation. But early employees will be attracted to your business in part because of the long-term payoff. “When someone works for less salary than they deserve (meaning: what they could make elsewhere), I think of that as a cash investment they’re making in your company,” Jason Cohen writes. That comes in the form of common stock.
Paul Graham has put together some valuable formulas for determining the equity of your first few dozen employees based on the expected value they bring to your business. That said, it’s unlikely in most cases for non-founders to receive more than 5% of the business (bringing on a CTO can be the one common example of exceeding this mark). Previously Brad Feld has argued that a founder CEO will be in the 5-20% range, a founder CTO in the 2-10% range, other co-founders between 3-7% and non-founder early employees between 0.5-5%. Market value for equity is dynamic though and the necessary points to attract an individual employee can vary.
Related Resource: How to Fairly Split Startup Equity with Founders
Are you issuing stock options or restricted stock to your first employees?
In their helpful guide on employee equity, Gusto evaluates the decision to issue stock options, the chance to buy stock at a certain price, and restricted options, the right to buy stock under specified restrictions. The distinction between the two may impact early employee decisions on how they personally value their stock. You will want your boards input on this process early on.
Related Reading: Employee Stock Options Guide for Startups
What motivates your early hires?
Now comes the really hard part. “For your first key hires, three, five, maybe as much as ten, you will probably not be able to use any kind of formula,” Fred Wilson writes. “Getting someone to join your dream before it is much of anything is an art not a science.”
You’ve got a package in mind that includes a salary you can afford and an equity stake that makes the offer competitive if your company grows as expected. But you’re hiring unusual people to take this ride with you and understanding the package that will satisfy their ambition will also likely require rounds of negotiations and probing questions from you about their true motivations.
Are your investors on board?
Much like a competitive package for an employee, a CEO’s compensation and equity stake will require negotiations – this time with your investors. Having the above questions answered will help. Staying within a competitive range is needed to appease your current board and attract new investors (for example Peter Thiel has publicly stated he passes on any startup saying it’s CEO more than $150,000). As a CEO, you also want to examine your own motivations in a negotiation, especially if you are attempting to increase your salary or equity stake. “When two sides in a negotiation can’t come to a deal, it’s often because the two sides don’t have a clear enough view of what each other’s alternatives are if they can’t agree,” Tim Jackson writes.
You don’t want to walk away from a tough negotiation having damaged your relationship with investors on your own compensation or shown irresponsibility when proposing packages for early employees. A well-researched proposal that clearly assesses your company’s current financials, demonstrates the expected impact fairly compensating an early employee or CEO will have and honors your commitment to delivering the return they expect on their investment will get you to reach mutually agreeable terms. Transparency and preparation are key.
Related Reading: Private Equity vs Venture Capital: Critical Differences
Startup CEO Salary FAQ
To sum up the common traits that go into determining your salary as a CEO, check out the common FAQs and takeaways below:
How much should a startup founder CEO pay themselves?
In 2021, the average CEO salary was $147,000. At the end of the day, it is entirely dependant on the business, industry, and lifecycle.
How does funding impact startup CEO salary?
The later the stage a company is, the higher their salary is. As a company matures and grows, so does the salary of the CEO.
How does your industry impact startup CEO salary?
Industries and different verticals can lead to varying salaries. Markets that are receiving more funding and exiting at higher clips generally warrant a higher salary.
How much equity do startup CEOs get?
This is entirely dependent on the funding and financial instruments a company decides to use. Someone that has funded their own company and taken no outside financing might own 100% of the company. On the flipside, a founder that has raised multiple rounds of venture capital might only own a small % of their company.