Founders Need to Take Risks

September 16th, 2013 / Comments Off on Founders Need to Take Risks

I have a negative visceral reaction to people who don’t want to take any risk—especially to founders at a new startup, where everyone involved is taking risks. As an investor, I’m looking for entrepreneurs who are willing to take the same bet on themselves that I’m taking on them. That means getting a big equity stake, but forgoing a big salary.

I’ve walked away from investing in companies where the founders were paying themselves and their teams big salaries. Startups by nature are never flush with cash and they must preserve the cash they have to invest in the company. Of course, startup founders are going to receive a base salary that is significantly less than what they could make at a big company, but they also receive equity that makes the potential upside much greater for significant wealth accumulation.

So, how much should founders pay themselves? It should be enough to take care of basic needs so they can focus 100% on the company, but not as large a salary as they would make at an established company—that would drain too much cash.

What about the rest of the team? I like to see everyone—employees included— taking a risk, but you want to pay them enough so they will be fully committed to the company, and not have to take another job or live off of savings. Offering everyone equity is a great way to get everyone aligned with what is good for the enterprise.

Are there any exceptions? As always, you need to understand the full picture so you know when to break the rules. When Meg Whitman hired me, eBay was is a difficult position and she was recruiting me to fix it.  I was very well compensated at Gateway and she made me a very competitive offer to join eBay—at that time it was double her salary and five times more options than she had given anyone else.

It’s necessary to know what someone is being paid and what will “move” them to fully commit to you. A killer engineer will have several offers with great salaries and great equity. Know what other startups are offering to remain competitive. However, do not compare yourself to bigger companies—you will be offering a lower cash package, but giving them a higher upside. While it might sometimes be necessary to make exceptions, understand every compensation decision you make (or break) will set a precedent.

Despite all this talk of money, financial gain is not what’s most important to the entrepreneurs we meet. The best entrepreneurs want to change the world. Money is not the primary motivation, only a secondary objective. They trade a big salary, security and 99.9% of their time because they can’t imagine doing anything else.


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