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Business Finance Management
August 10, 2021
You've done the market research. You've developed a sound business plan. You've secured venture capital funding. Now, it's time to hire the top-tier leaders your company needs to continue evolving.
Hiring and compensation of executive talent are among the most important and impactful decisions founders must make in the earliest stages of a business; having the right person in the right leadership position can mean the difference between the success and failure of your venture. But because of limited cash on hand, the lack of an established compensation formula, and the unique demands of leadership roles in these early stages, deciding how to compensate your first executives can be extremely difficult.
So, how do you decide what an appropriate startup executive compensation package looks like for your business?
There is no one-size-fits-all solution to the problem of determining executive compensation, but there are a few key considerations and best practices for tech founders and entrepreneurs to keep in mind when determining a startup CEO salary and other executive compensation.
How much money is currently in the bank? What's your burn rate and runway? Have you begun to generate revenue? If so, how much, and how sustainable is it? For even more accuracy, create a cash flow projection model to see how various scenarios might impact your business cash flow and, consequently, how much you can afford to pay. A base salary that's too low may deter top prospects from signing on, but a base salary that's too high can cut into your runway and increase the likelihood of early failure. Investors of VC-backed startups may monitor and weigh in on this as well.
Executive salaries can vary dramatically depending on the industry in question. For example, the average salary for a startup CEO at a seed stage company is $120,000 per year across all industries. However, breaking the data down by industry reveals a wide range of CEO salaries; that the average tech company CEO salary in seed stage biotech companies is $147,000 per year, while the average annual salary for the same position in ecommerce is only $80,000 per year. Take a look at norms in your industry to get a sense of market rates, what's competitive, and benchmarking for future hires.
The shift toward working remotely had already started prior to 2020, but the COVID-19 pandemic drastically accelerated it. Now, exclusively remote executive positions are becoming more and more common. With cost of living in the San Francisco Bay Area skyrocketing, hiring executives from areas with a lower cost of living presents an opportunity for founders to take advantage of top-tier talent while spending significantly less on cash compensation.
Cash-conscious startup CEOs may opt to take low salaries, setting a culture of cash efficiency for the company. Marc Bernioff of Salesforce, Jack Dorsey of Square, and Jeff Bezos of Amazon all famously took low salaries as startup leaders—but each of them were independently wealthy prior to their respective companies IPOs. The approach of startup CEOs taking the absolute lowest salaries is not always feasible. It’s important that founders pay themselves a salary that allows their most essential needs to be met, so they can focus on building and growing a successful company. If a startup CEO takes a low salary and the stress of covering rent, buying food/groceries, or accessing quality healthcare becomes a distraction, the CEO’s frugality quickly becomes unproductive—which is bad for business.
Because startups have relatively little cash to work with—especially in the earlier stages of fundraising when initial executive hires usually occur—salaries and bonuses will generally be lower than the industry norm. And while larger, more established startups and private companies may be able to offer employees robust benefits packages and perks, it's unlikely the level of benefits and perks early stage startups can offer will be a significant factor in attracting executive talent.
So, what does this leave early stage startup founders looking to hire their first executives? The answer is equity.
Equity compensation pays executives in the form of ownership of the company—either by directly granting shares of stock in the company or derivative-form company stock like stock option grants. Because most startups have limited cash available, equity stake will likely be an important part of an executive compensation package.
Emphasizing equity stakes as part of a startup executive compensation package will also help to attract prospects who truly believe in and are willing to take risks for your startup; the value of their stock or stock options is directly tied to their performance and the resulting level of financial success the business sees during their tenure.
Hiring and compensation decisions are a crucial early step in growing your startup, but to make the right calls, you need the right information
Zeni gives you highly accurate, real-time, 24/7 access to the key financial metrics you need to make important decisions, and even automatically calculates critical information, including your net burn, runway, and cash zero date. Zeni was created to serve the unique needs of startups, allowing you to view the up-to-the-moment information and perform the essential financial functions necessary to make your startup succeed.
To see how Zeni can help you make these important decisions, click here to book a demo.