Answering the question about Founders’ Salaries

When a founding team of 3 founders expects a salary of 3 lakhs per month (each) in a funding round of 2 crores for an 18-month runway, just the founder’s salaries make up 81% of the total investment outlay! Funding a startup so that it can afford founder’s salaries does not make any sense to me. Therefore, there are 3-4 deals in AVF’s current pipeline that are being held up even though we are interested in investing in them, due to a mismatch in founder’s expectations of salary and their venture’s capability to pay them that amount.

The common objection raised by this founding team is that they are taking a cut on their previous salary or from what their market rate salary currently is. This argument doesn’t suffice since the last company or any company that could afford to pay the founders that exuberant amount is not a start-up, but invariably a company in the growth or more mature stages of its life cycle. The capabilities of that company and the startup that they currently working in are very different; additionally, those employers would not give them the title of Founder, any time soon.

In my opinion, the total Founder salary bill (for a 2 Founder startup) should be capped at 15% of the total round that is being raised or 25% of the total annual salary bill for the startup, whichever is lower. The founder is going to be well compensated by the massive chunks of equity that they hold, and impressive prices that it can be sold for in the future. This will more than compensate their current sacrifice of market rate salaries.

47/2018