But forgive me This post is probably a little rambling.
I had a call this morning with a founder I recommend. He’s out there raising money, and received a term paper from an investor (yay!), but the investor suggested that the founder and co-founder not take a salary. The investor argued that the founders were “working for equity,” and the investment should not go to the founding team.
That, ladies and gentlemen, is an absolute hoax. Now, if this was an isolated incident, I might write it off as a clueless investor. As the fundraising climate continues to change, I’m hearing more investors suggest things like, “You need to raise from us to extend the runway, but don’t pay yourself.”
That’s why you collect money
The point of fundraising is to move quickly and reduce your company’s risk. At the pre-seed stage, there are many unknowns, so there are many risks: Will the product work? Can you find customers? Do you pay for the product? and so on.
However, there’s another risk for the company: In the early stages of a startup, founders can’t afford to lose focus. God’s voice says, “Attention!” I must have a big red button on my desk that does that. I recommend it to startup founders. For most beginners, this is the number 1 challenge.
It makes sense: opportunities are everywhere and entrepreneurs are, well, entrepreneurs. It makes sense that they would be tempted to keep their options open for as long as possible.
But do you know what the biggest distractions are? Not being able to pay your mortgage, rent, car payment or the next haul. As a founder, it’s your duty to focus on building your startup to succeed as quickly as possible.
As an investor in these startups, it is. yours A duty to help the startup get to that point in as short a time as possible. Telling founders not to take a salary is incredibly counterintuitive on many levels.
One caveat: This does not mean founders should pay themselves above market value. That said, it doesn’t matter if you’re an experienced developer and Facebook recruiters are calling and offering you a $250,000 salary. On a good day, it’s easy to say no, but guess what? The life of an entrepreneur is hard and there will be many bad days. Some days, throwing in the towel and paying a check can seem like a daunting task.
Pay what you need and make it easy for you to say, “Well, I could be doing a lot more at Facebook, but I’m working on something I believe in here. In other words, if your market cap is $250,000 a year and you can make your finances work by paying $150,000, pay that much and set some milestones that will bring your salary closer to your market cap. If those milestones are tied to revenue or other financial goals, all the better.
Try this for size: “I’m raising $3 million right now, and once the financing closes, I’ll pay myself a salary of $130,000. After we hit 300,000 ARR for three consecutive months, I paid myself a $30,000 bonus and increased my salary to $150,000 per year. After we hit $1 million for three consecutive months, I paid myself a $50,000 bonus and increased my salary to $250,000 a year.
Here are four more reasons to tell that investor to wrap up their holdings tightly and put them deep in a file cabinet that never gets sunlight.
You are not working for justice – you have abandoned justice
Investors who try to tell you they’re working for equity are a little disingenuous.
Yes, as a founder, you have the advantage of holding equity in the company. But when you founded the company, you and your co-founders owned 100% by definition. As your company evolves, that ownership percentage usually only goes in one direction. When you raise money, you issue more shares and dilute yourself.