How much Should the Founder/CEO Be Paid?

Is the title of “founder” or “CEO” very cool? But he or she indeed has to work hard. Today let’s see how much salary does a founder/CEO usually ask for? (The founder of a startup group is usually the CEO.)

A US press has once conducted a research on US startup companies and the result shows that the annual cash salary of the founder is about $100,000~250,000, and the CEO is usually paid most; the bonus ranges from 0 to $100,000 with some certain stock rights, but usually below 20% after several rounds of financing.

After all this is the figure across the ocean. In order to figure out the figure this side, we Huxiu have interviewed some international well-known venture capitals and founders/CEOs in China. We aim at common Internet startups.

1. How much is the labor cost in a startup? 1/5~1/3 of the financing.

For a startup, labor cost is important and heavy. A noted VC tells us although it is hard to say the exact number – it differs in different industries – there are some laws: the labor cost occupies 1/5~1/3 of the financed amount and that is also where the founder/CEO’s salary comes from.

Take a ¥2~3 million Series A round as an example. The median labor cost will be about ¥500,000 for 12~18 months, and ¥33,000 averagely each month (the number will be higher for labor-intensive companies such as game companies). For a startup group of 3~4 people, everyone’s monthly salary is about ¥10,000 and even less if someone outside the group joins.

2. Who decides the founder/CEO’s salary?

As the founder and meanwhile the CEO, one can decide his or her own salary, but needs the permission from the board. Different investors have different attitudes towards CEO’s salary – some think the less the better while some may raise it a bit if they think it too low.

Zeng Liqing once said on his microblog,

“The statistics in the past five years tell us, the salary of the founder/CEO is inversely proportional to the ratio of the company’s success.” (10:05AM, 3/30/2013)

He clearly opposes a high salary of the founder/CEO. Later on, famous investor Cai Wensheng and Zero2IPO Group’s founder/CEO Gavin Ni (Ni Zhengdong) forwarded this to show approval. (@Cai Wensheng: The startups I have known all prove it! @Ni Zhengdong: We’ll never fund startups whose groups are paid high!)

3. High or low pay reflects the “attitude”.

Investors generally believe that the salary reflects a problem of “attitude”.

In the eyes of investors, it can be understood if the CEO’s salary is some thousand higher than others’; twice, a little bit strange; more than three times … “what is this person thinking about?” So for those who have ever been in the top of a company, they should not expect a higher salary in the startups than before. The labor cost of startups is always in tension, and each VC will think it odd of the idea like “employ a less intelligent person so that I can take more and let others take less”.

Although some CEOs will be paid higher for more work, in many startups the CEO’s salary is usually not the highest, but the second or third. If there is a new “outside” partner, this person may get higher salary on the contrary.

Another interviewed VC shows a more radical opinion: before getting Series A round or profiting, the founders who are financial independent will not be paid, and other co-founders get ¥5,000~10,000 a month for a basic living cost.

Therefore, for many startup-ers who are not financial independent yet or under the pressure of family financial problems, a low salary is a very practical challenge. In many situations, they need other family members to support the family, like the founder of Dianping.com, Zhang Tao, who has been a kept man during the early period.

4. What does the CEO depend on? Maybe some stock rights.

Take a startup with three partners as an example. The founder will take 70% of the stock rights, and each of the other two co-founders takes 10%, and the last 10% is for option pool.

It takes averagely five years for a social network company to go public, and a software company may need eight years. The company will get funding every one year and a half and each time the stock rights will lose about 20%. So after several rounds of financing, the founder only has 5~30% shares and other co-founders have even less.

Of course the company’s value may change after financing. When the company is in good operating condition, it is still possible for the founder/CEO to get some extra benefits – but limited. If founders are going to get married, buy houses or have to pay for medical fees, they can sell some stocks to VC, usually 1~2%, otherwise the investors will not permit – still “attitude”.

Dividends also do not fit startups, because investors intend to leave the money for the company operation unless the profit is splendid or listing is hopeless. It is generally believed that the founder can only benefit from the stocks when quitting (listing or acquisition).

Now we have already got a basic conclusion of the founder/CEO’s annual salary in China:

a. Angel investment: Financing of a few hundred thousand to a few million yuan. Annual salary of a few ten thousand to 100,000 yuan; usually taking less or nothing.

b. Series A round: Financing of a few million to a few ten million yuan. Annual salary of a few ten thousand to over 200,000 yuan; only for basic living cost.

c. Uncertain afterwards. If the CEO asks for higher pay, usually the board will agree – 10,000 or 20,000 yuan more doesn’t matter for good work.

At last, we also interview three founders/CEOs to figure out their salary. One of them is on intelligent hardware (Series A round), one is on online education (angel investment) and the last one is the founder and CEO of a game company (already acquired) – all of them said they are (were) paid nothing.

Their reasons and conditions are:

The founder on intelligent hardware is under heavy living pressure. Although he takes nothing now, he thinks it suitable if he can get the average salary of technology and management position. One of the reasons of his 0 yuan pay is to let him devoted to his work, the other reason is that the hardware is going public soon.

The founder on online education is in a good financial condition, but he takes nothing because online education is an industry with high investment and slow profit. When asked suitable salary, he answered, “3000 yuan.”

The founder on game is somewhat different from the previous two. In the beginning, the founders were still undergraduates without so much pressure, so they hadn’t get dividends until the game gained revenue. In the good time of mobile games in the year of 2011~2012, this company was purchased by another famous game company. These founders didn’t need to consider the problem before they even started to – they have joined in another company.

Too low pay is unfair to themselves while too high defrauds investors. An investor concludes that, “For a founder/CEO, money should be put on the group. Their pay even should not be related to the financing. The company’s development should be the priority.” Another investor also says that, “It’s really hard to do startups and be the CEO. If you only want to make a lot of money, then don’t wrong yourselves.”

The following is the advice from Pam Newman’s article Paying Yourself During the Startup Phase posted on Entrepreneur magazine.

• You’ll most likely not be able to take a real salary for the first six to 12 months you’re in business.
  
  
• You should have enough in savings to cover your living expenses so you’re not relying on your business to cover personal expenditures.
  
  
• When you do start paying yourself, determine what you would be worth in a similar position if you were an employee. This is a good starting point when the company is able to sustain your payroll. While you may feel you deserve more, you need to start small and work your way up the compensation scale as your profits allow.
  
  
• Owners often take draws to supplement their payroll, if profits allow. For tax purposes, the payroll and draws are kept separate. They’re also classified separately on your financial statements.
  
  
• Don’t increase your compensation just because the business has some extra cash. That money should be saved for expansion purposes and unforeseen situations. If you get in the habit of always taking out the extra cash as compensation, you may not be able to monetarily handle any unforeseen circumstances that could be detrimental to your business. Ensure that your business has money set aside for a “rainy day.”

(The investors and founders don’t want to disclose their names since some privacy and sensitive topics are involved.)

Original Arthur: Qi Meng