Salaries for startup directors / executives

This is in two parts – the problem that lead to me even caring, and then some very interesting conclusions that can be drawn from looking at last year’s aggregate data on how much tech startups ACTUALLY pay their execs. A lot of random speculation is thrown in, I don’t stand by most of it, but it’s interesting how much stands out just from looking at the aggregate data.

PS: to all the people reading this blog for the MMO tech stuff, I hope you don’t mind the shift to a lot more business stuff lately. This is what happens when you put together a new startup :). I promise there’ll be more MMO-specific stuff in future…

Setting salaries for new startups is tough

At some point in the not-distant future I’m going to have to provide projected financials for the first 3-5 years of our startup. I prepared this many weeks ago (how do you know how much funding you’re looking for if you don’t know what you’re spending it on? My advice: create your financial spreadsheet as one of your first activities, but keep it simple), and it was all straightforward (I know most of the data I need for these things off the top of my head by now) – except for salaries / compensation for the executives (both founders and any other senior management – CEO, CFO, CMO, CTO, etc).

I have 2 co-founders, so between us we’re covering CEO, CTO, CCO (Creative). At some point, we’ll want someone doing the job of CFO, and someone doing the job of CMO (whether they get those titles depends a lot on how much the company needs them to do). So, potentially half the executive-level management of the company will be founders (with appropriate levels of equity / ownership of the company), and half will be employees (although – depending on how valuable they are to the company – probably with significant equity of their own).

But … what *is* “appropriate”? What’s normal? In an annual salary (including some level of bonus) how do you balance cash, equity, vesting, and options? I’ve worked in startups where the directors were paid the average wage for the anyone in employment (circa $60k at the time), and their upside came through having higher allocations of options / accelerated vesting at year end and in bonus. I’ve even worked at one startup where directors were paid much less – around the level of a high-end graduate-salary in their respective professions (which caused some issues of its own). Those were both companies with very very young staff, though – in each case I think only 1 in 10 of the staff were over the age of 30 (including the directors – which, again, caused some issues of its own).

So, when putting together my spreadsheet, I tried to find details on “normal” levels for startups (whilse being very aware that every company – and, more importantly, every investor – has a different take on this; don’t assume this is standardized – it’s all negotiable). I found a lot less data than I expected, and in the end I created reasonable estimates based on the salaries people of the right level could guarantee getting themselves elsewhere, and factoring in a positive opportunity cost for the fact this is a startup where they’ll get to do a lot more cool stuff than elsewhere, and I ignored the equity levels. That was OK for my needs back then, but I’ll need to do it properly soon.

StartupCFO, to the rescue…

And then I spotted this 2007 report of compensation / salaries for executives in IT and technology startups, courtesy of Mark MacLeod (who blogs at TheStartupCFO). This was very useful, and having a quick skim through, I noticed a few takeaways that I thought I’d blog now for future reference

Cash Compensation

• Base salaries for core execs are all very close to $150k, only big difference is that CEOs get a lot more ($215k)
• Averaged across companies, execs in all positions hit approx 2/3 of their bonus targets (very interesting when evaluating how much YOU might earn from your contract, or from the other side: when evaluating how high to set targets for your execs)
• Core execs all have a bonus that is 25-30% of base salary, big difference is Sales (but not marketing), who gets over 60% of base as bonus, and CEO/COO, who gets 40% for leading the company (?)

Where Companies Locate Talent

• Compared to average, Investors are more likely to refer / choose the CEO and/or CFO
• Compared to average, CEOs are less likely to refer / choose the CMO, CSO, and CFO (i.e. the sales/marketing side, and the finance side – interestingly, all of which are roles that traditionally fall on the CEOs shoulders in early stages; maybe they’re less keen to lose them?)
• Obviously … CEOs are less likely to refer CEOs (hey, want my job? here you go!), and massively likely to refer “President/COO” (due to the often ultra-close relationship between CEO and that position) – no news here

Equity for Execs

• President/COO position has massive discrepancy between average and median (this backsup to my theory that these two titles hide some very different meanings of the roles at different companies, and is part of why I discount the president/COO as being too vague in all the other results)
• When hiring a CEO, expect to give them 5% equity
• When hiring any other core exec (CFO CTO CMO CSO) expect to give them 1%-1.5% equity
• CTO and COO do a good job of aggregating some extra equity after being hired to the company, most other execs never get any more
• Most companies giving equity to execs when hiring them do it in the form of incentive stock options (two thirds) or non-qualified stock options (one seventh)

Severance

• CTO’s get the worst severance packages of any of the core execs (interesting given how in all other measures they tend to do in the top tier of the core execs – why? do they tend to be less inclined to leave, or be not so good at negotiating severance?)
• CTO and Head of Engineering are also the least likely to have any severace package at all (hmm…)

Organizational Structure (which execs do you even have?)

• Everyone has a CEO (duh!)
• Most have a CTO (duh!)
• CFO’s suddenly become VERY popular as soon as you raise a second round of funding, and remain so for future rounds
• Slightly more companies start with a head of Sales than a CFO, and although it switches round (still only small difference) when that all-important 2nd round funding comes in (and a CFO is foisted on the company, or the amount of money being dealt with simply now demands a dedicated senior exec to handle it) … if the company goes to future funding rounds, then the CSO / Head of Sales becomes massively popular – practically everyone has one! (i.e. the company becomes secure, no longer a startup, growth and profit becomes primarily through plain sales, like normal companies)
• Founders that were other execs tend to transition to becoming Head of Business Development as the company grows and goes through more and more funding rounds (no surprise – it ain’t a startup any more, so they get replaced by people more experienced with corporates; they also know the market/business better than anyone)
• Companies tend to shed their founding CEO – although a good third of them hang in there to make the company a massive one, with four or more rounds of funding
• Companies tend to retain their founding CTO’s, if the CTO survives the first round of funding

Dilution

• CEOs tend to start by owning almost half the company, even after one round of funding (less 10% – they probably sold 20% to an investor, losing 10% off their 50%, going down to 40%; the rest coming out of co-founders shares)
• Other core execs tend to start with a lot less – around 20% for the CTO, for instance (I think this is being skewed: we know all companies have CEOs, but where they are a 2-founder company, the other founder will vary among the core exec roles. So, CEOs averages get disproportionately more benefit from the 2-founder case; CTOs are often present in companies with 3 founders, hence starting with 20% – this suggests that in those cases, the CEO is also starting with 20% after first round funding)
• If the company goes to 2nd round funding (i.e. its doing well, becoming a real company), then the median ownership levels out at around 5% for each core exec – but a small cadre of CEOs hang on to a lot more, dragging the average up to 10% (c.f. above comment about skewing in the 2-founder case)
• Companies that go really big, and reach four funding rounds, the least well-off CEOs bottom out – the 25th percentile drops from 5% equity to a mere 2% equity – but the good ones all suddenly cluster tightly around %8 (I suspect this may be skewed by 2-founder companies reachign a 4th round that is more like the 3rd round for other companies? Reaching a 4th round of funding is pretty unusual)
• For those same companies, something odd happens with the core execs – the average equity ends up above the 75th percentile (is this because they have to pay really high equities to attract talent good enough to join someone else’s company instead of starting on their own? I have no idea, just guessing)

Anyway, go read the report for yourself – but some of the above figures (the real conclusions, rather than my random observations ;)) are useful enough for me to use directly in future as rules of thumb.