Ask HN: Why don't VCs just "suck it up" and pay founders a competitive salary?

44 points by burtonator 1 year ago | 71 comments

Most startup founders and early employees make about 1/2 of what they can working for MAANG companies.

IMO this leads to the following problems:

1. Most startups that COULD exist are never actually started because the founders want to be making higher salaries working at Google/Microsoft/Meta/etc.

2. The only founders that actually move forward are ones that have a significant amount of cash in the back from previous startups.

3. The founders and investors aren't properly aligned. The founders want to exit but the investors want them to go long so that they get their unicorn exit.

Now #3 is mitigated in some situations by having the founders do 'partial founder buyout' where they sell some of their equity into the next round for a few million dollars each.

But this is an admission that there's a problem.

It just seems like everyone would be better off if VCs would just get over it and put in more cash and allow their portfolio companies to pay more competitive salaries.

I know this is happening in the AI space right now with companies paying more to pick up top talent - so they don't go to work for MAANG.

This is inherently bad for startup employees and they are directly subsidizing profits for the VCs.

The VCs get to diversify but the startup employees don't.

DoreenMichele 1 year ago |

Startups are unproven ideas.

MAANG companies are proven businesses.

Lots of people would say "Yes! I shall pretend to work on establishing a viable business if you throw scads of money at me!" And not ever really develop a viable business.

Founders get rich by having equity. Some of them get stinking rich.

It's basically a form of betting that incentivizes actually succeeding at finding a viable business model. That's the only way that makes sense. Otherwise you are paying people to pretend to work.

The "pretending to work" issue gets talked about a fair amount. People attend conferences because it feels like work. People rent offices and set up business bank accounts because it feels like work. Etc.

Real work involves solving a real problem and getting people to pay you for it.

That doesn't automatically happen because people call themselves "founders" and invent a business name etc.

smfjaw 1 year ago | |

I grew up lower middle class, which gave me a good hunger to go to college, get a degree and make some money. VCs are trying to incentivise that same mindset except by making with riches equity instead of opportunity

zooq_ai 1 year ago | |

Exactly. Also why startups within an organization fail at a higher rate, because there still treat it as a 9-5 job with no hunger or fear of failure.

extr 1 year ago | |

What exactly is the argument here? That we can't pay founders too much, or else grifters/lazy people would take over to line their pockets with VC dollars? That's basically a non-sequitur.

The issue at hand is that there is probably some correlation between a founder's opportunity cost and probability of success. Smart, driven people could be doing a lot of things with their time. Working for years on end for $200k/year for a small probability of a large exit is not practical for a lot of them. Working for $400K might be. OP's point is that as an investor, you might be better off having fewer, higher quality founders and paying them the higher opportunity costs. Would you rather fund 10 teams of monkeys or one team of ex-executives with proven experience building/scaling/etc?

freefaler 1 year ago |

As a 2-times founder, one VC funded and one bootstrapped I think there is a fundamental difference of the world view of a founder and a cash-optimizing employee you're missing.

Startups are just businesses. Business owners value money, but they also value independence and freedom to do what they want to do. The "don't tell me what to do" gene is highly correlated with them. The only resource you can't buy is your time and investing it into your ideas brings a lot of meaning into the daily slog. Also if you have your own company, you decide the rules and people you surround yourself with. If you spend 1/3 of your life working, this is a non-trivial contributor of your quality of life.

This is the first reason. Founders really hate working for other people.

Regarding salaries, the more cash you burn, the less time you have to understand the market and create the product. Salaries are expenses and you need to be very stingy until you get to profitability.

This is the second reason.

And something I've seen in the "startup" crowd. From the VC marketing bullhshit they assume that the "only" way to create a company is "to create the next billion dollar company". It's the game of the VC's, grow and sell. Yes, 3% of Facebook can be worth more than 40% of 5 Million ARR company, but if you multiply it by the chance of creating the next Facebook you'll see that it's riskier and you loose too much control and the first reason you're doing your own thing.

In summary, if you're thinking about short term salaries it's best not to try to do a startup, better find a good paying job and invest in an index fund. This will be safer and on average yield better.

bruce511 1 year ago | |

I concur. If you are -asking- this question, then VC startup isn't for you.

If you are asking this question, then bootstrapping really isn't for you.

That's OK. There are these 3 very different employment models for a reason. They appeal to different people. Neither is better than the others.

While the original question is about immediate financial reward, that's only one part of the equation. Other parts include risk, control, secureness, impact, potential etc.

Ultimately the path for you depends on your personal value to each attribute. For the best possible returns, at lowest risk, go be an employee. For most control, good potential, mid-risk, bootstrap. For high risk, massive potential (but most likely implosion) go VC. All

alephnerd 1 year ago | |

> From the VC marketing bullhshit they assume that the "only" way to create a company is "to create the next billion dollar company"

We don't (or at least we shouldn't).

The issue is as a VC you have LPs who are very demanding about returns. VC represents a minority of their total capital outlay, but they put money in VC in order to get outsized returns.

If I'm the Ontario Provincial Pension and I gave a VC US$200M, I expect to make way more money from the VC fund than I would have investing in the stock market, or bonds, or gold, or to a PE/IB/Hedge Fund.

VC is just another financial instrument that is a part of diversified portfolios.

If I had to use stereotypes, if PEs are alcoholic coke heads, VCs are kombucha swilling stoners and trippers.

salomonk_mur 1 year ago | | |

If you are the Ontario Provisional Pension, you expect to make roughly the same in every category you invest in, since every higher return option comes with higher risk.

It's the cornerstone of investing. You diversify to hedge risk, not to increase total yield.

majormajor 1 year ago |

To play devil's advocate - since we're talking about "pay yourself less than Google" not "pay yourself nothing" - what would happen if someone was throwing tons of money around and telling founders (and early employees, while we're at it, who also take less than Google et al) to pay themselves several more hundreds of thousands of dollars a year?

They'd attract a lot of people to fund, for sure.

You'd lose a bit of a filter around risk tolerance to try to weed out scammers, though. There are absolutely a bunch of people who would take that money with no intent or ability to deliver a solid company in the end.

So they'd probably want to be EXTREMELY selective; moreso than Google by far since there the financial loss is smaller both absolutely ("one bad hire's salary for 6-12mo" vs "a multi-million dollar seed investment") and likely as a percentage of revenue/bank account.

I think they'd either get ripped off and disappear in a few years or just be small and stay small and not make a huge difference overall.

It doesn't seem entirely different than the attempted Softbank "de-risk startups by picking a winner early and pouring in crazy $$" approach.

nemothekid 1 year ago |

Founders usually decide their salary, not VCs - if you are raising a seed and decide to use your runway to pay yourself a competitive salary then that's on you. How you decide to spend your seed money is up to you (barring fraud). Same for early employees, they negotiate with the founder, not VCs. Founders are the type of people who even if they were paid more, would plow that money back into the business - it doesn't make sense to take the tax hit.

I may be mistaken, but I've never heard of a VC dictating salaries.

tptacek 1 year ago | |

Technically, after your first priced round, you'll have a board; you probably control it, but perhaps not after your second round. The board will approve a headcount plan, with implied costs.

Realistically the management team (the operators, not the investors) do control most of this.

The subtext of the question though isn't why operators don't increase comp; it's why investors don't kick in enough to let startups compete with comp packages from FAANGs.

(I think the answer is: it's because most startups fail.)

nemothekid 1 year ago | | |

I think the comparison to FAANG is unfair. Most operators, after a priced round, AFAIK, are paid fairly, sans FAANG. The idea that any startup should have similar comps to companies that have been growing 50%+ year/year for decades with money shooting out of every orifice isn't realistic. Most startups don't compete with comp packages from FAANG for the same reason that Target doesn't offer competing packages - they aren't making that much money. An exception, OpenAI, which is completely flush with money.

More succinctly, FAANG salaries aren't market rate salaries - they are above market. I find operators are paid in comparison to similar sized companies, especially companies that appear "mature" after their 2nd or 3rd priced round. It's the same reason the quants at Chase don't make as much as the quants at RenTech, doesn't mean the Chase quants are being paid under market.

alephnerd 1 year ago | |

> I may be mistaken, but I've never heard of a VC dictating salaries.

We don't exactly (Boards are a thing) but we do give recommendations of decent salary ranges, but then again, serious founders are not going to ask to get paid a Director at Google's salary when they're the CEO of a 5-6 person startup.

ilrwbwrkhv 1 year ago | | |

Get paid 995_850 for not doing much, whereas startups are much harder and are a lot more work.

Somewhere the inventives are misaligned for sure.

banish-m4 1 year ago |

Founders who are too comfortable (past exits or high TC) tend not to be hungry hustlers willing to strive to get over the finish line (mandatory sports metaphor). The people who are hungrier tend to be: recent immigrants (sorry Americans), people who are broke, people who exited another career like military esp. spec ops, sports, or racing.

Founders should help themselves by reducing their personal expenses to as close to zero as possible.

There's metric shittons of cash but there aren't a lot of investible teams onto something awesome with excellent timing. VCs and angels aren't just going to write larger convertible notes because you personally want more money. You must demonstrate business value that can be accelerated with varying amounts of cash and deliver when you get it, without giving away too much equity.

tippytippytango 1 year ago |

It’s a test to see if the founder values their equity more or less than the salary gap. If not even the founder values equity more than the gap, then they should close down and go get jobs.

extr 1 year ago | |

This sounds good but the math makes no sense. The salary gap we're talking about here is minuscule compared to non-trivial amounts of equity in a successful company. $400K vs $200K per year for 5 years is $1M total. If the company is successful at VC scale, $1M will be dwarfed by the value of the equity. And how much better of a founder can you buy for $400k vs $200k? I can think of a ton of people in the Bay Area for whom $200K is a non-starter but $400k is "tell me more".

majormajor 1 year ago | | |

You aren't paying yourself for 5 years out of your first raise if you succeed.

But if your first raise is 2M and you want to hire a few people with it and make it last a year, an extra 200k might be a big dent in your runway. Or get your investor to give you 10% more.

tippytippytango 1 year ago | | |

Yes, the founder should be valuing their equity far more than the salary gap. If they don’t, then something is gravely wrong with the business as they are essentially valuing it near zero.

extr 1 year ago |

IMO you are entirely correct OP, and it's to everyone's detriment. A huge talent pool locked out of creating new forms of value because investors are too cheap to bump salary from what is arbitrarily considered "pretty good but fair" to "competitive with top rates". Seriously, I love some of the comments here saying $300K/yr is obscene but implying $150-200K would be fine. This difference is a rounding error in the grand scheme of the money involved.

dannykwells 1 year ago |

Founders can make a "competitive" salary, if they have existing experience for the actual job of being a founder (i.e., previous executive leadership experience).

For many, being a founder is not just "taking a risk on an unproven idea" it's also a career change from being a solo IC or technical leader to being an executive, with very, very different requirements for success, so the risk here is compounded.

muzani 1 year ago |

It's an outdated perspective. MAANG doesn't appear to pay the most anymore [0]. Across levels, only Netflix scores top 50.

Of the top 10, 4 are VC backed startups, 3 are mature/listed (including Netflix), and 3 are finance.

Of the top 20, 10 are startups, 5 are listed, 5 are finance.

It seems that startups are your best bet for good money overall. If you rank it by seniority, startups tend to pay much higher for less experienced people and MAANG only has the highest end game pay.

Which also reflects why many startup founders are young. If you're very experienced, then you're probably best off joining MAANG. Even then, it's likely that MAANG doesn't even pay the best rates anymore; some of these top paid people likely have tenure as well. There's a flood of applicants, so why should they pay top tier?

If you're really young, you'd be better off joining or starting a mid stage startup, rather than climb up the career ladder of MAANG.

Or the strategy is often to get a job at MAANG as a resume item, so you could raise money from investors later or jump into a top tier company like Roblox.

[0] https://www.levels.fyi/leaderboard/Software-Engineer/All-Lev... (Software)

alephnerd 1 year ago | |

Unrelated but I didn't realize how much Coupang pays, but then again it makes sense given how successful they are in APJ.

Maybe I should brush up my Systems knowledge and Korean...

solaarphunk 1 year ago |

There is an equilibrium function that is basically unyielding.

On one side, target IRR and thus valuations are fixed for the investor by their LPs

On the other side, runway and thus survival rate are fixed by local market prices for founders who are risk tolerant and maximize for the same IRR as the investor.

The only solution is to physically move to a place that isn’t as stupidly priced as the Bay Area.

I think there is a reckoning coming, where investors will realize that backing startups in locations where costs continuously increase will become a suckers game. Survival rate naturally will go down due to shortened runway, while fundraising milestones will stay fixed - decreasing the expected IRR of the asset class.

light_triad 1 year ago |

The main draw to starting a startup is not to get rich from the salary, but from the equity. Founders are not really equivalent to employees, they create value from nothing and revolutionise industries, if they're doing it right.

It all comes down to the classic question: do you want a high chance (a%) of getting a decent amount of money ($b) or a very small chance (c%) of getting an enormous amount of money ($d)?

The values of a, b, c and d are different depending on your background, experience, connections, hunger for risk, etc. You have to find the decision thresholds that make sense for your situation.

blueyes 1 year ago |

You don't understand.

A lot of the time, founder CEOs decide their own salary, as well as that of their employees. Why would a founding CEO want to shorten their runway by paying MAANG salaries to themselves an others? It decreases their likelihood of success by shortening runway and burn. As soon as the funding that VCs give founders is wired to the bank, the founders are playing a zero-sum game with every dollar. Their job is to decide the best allocation of capital.

A startup, by definition, is a team in search of a business model. They're not profitable or self-sustaining. If you're Google or Meta, you have at least a chance of saying "for every dollar I pay this engineer working on ads, I get this many dollars back." And sometimes that return/salary ratio is very large, so it makes sense to pay them a ton. That reasoning does not apply to startups. That is, you earn your high salary by contributing to a profit-making product.

When your product or profit do not exist, you get compensated in options so that your incentives align with those of the business as a whole.

VCs invest progressively larger sums as an idea is proved out and risk is eliminated. I don't see any other world that makes sense. Most overfunded startups die before they ever find product market fit because they hire too many people, have a hard time pivoting, and lose their hunger.

Given the choice between hunger and complacency, I'd say founders with hunger are probably more likely to succeed that complacent ones. Earning a MAANG salary makes you complacent, all other things being equal.

alephnerd 1 year ago | |

Not too hungry though.

For the love of god just pay yourself a decent living wage. We don't need founders who spend half their time in a food line or burns out due to personal cashflow issues.

mstaoru 1 year ago |

Startup founders often decide their own salaries. With a limited capital, it makes sense to invest it into hiring the best talent and doing the best marketing, paying yourself a minimum viable amount to survive. If the startup works out, there is a big payout in the end. Paying yourself less, you increase the likelihood of everything working out.

Also, as an intangible benefit, having less cushy life puts you in a more aggressive mindset which is important.

elintknower 1 year ago |

Competent founders should pay themselves $110k. No glory in going into debt for a bet with rich people's $$. At the very least enough to cover your expenses post tax.

drivingmenuts 1 year ago |

Basically, they're doing what they do because they can. Both sides want the maximum moo for the minimum of milk and investors have the upper hand because they have the money. While many people have smart ideas, it's challenging to get those ideas to succeed without tons of money.

methodical 1 year ago |

If a would-be founder doesn't want to start a company because of their salary, then it's probably for the better. An early-stage startup isn't a vehicle to funnel VC money into your account at the rate that multi-trillion dollar companies give it out.

sshine 1 year ago |

I joined a startup as the first employee. One year and €1M in VC spend later, and they were in a cashflow problem.

You can definitely give yourself a too high salary as founder.

I’ve learned that I’d make that money stretch a lot longer.

lulznews 1 year ago |

Paying code monkeys fair wages ain’t a good way to get rich …

beaeglebeachedd 1 year ago |

Supply and demand. If you don't like it supply a better skillet, less ownership, or better yet fund someone yourself in a way that lives up to your ideals.

ttul 1 year ago | |

I came here to make the same comment. If you’re founding a company and it’s a fantastic investment opportunity, nobody will have any problem with you paying yourself a great salary. If the opportunity is less great, then they may take issue with their money being used to pay the founder so much money. The optics of a high founder salary in any case are poor; investors view your founder equity as a major component of your compensation and they want you to be somewhat hungry for success rather than being satisfied with your base pay.

If your startup is a few years old and you’re looking to make more cash, I suggest negotiating a bonus package with your board of up to 100% of your base salary. If you hit targets, few investors will argue with paying the founder a decent bonus.

freitzkriesler2 1 year ago |

Supply, demand, and unproven ideas. There are plenty of ideas and founders willing to work for peanuts and this is business not a charity.

It sucks but it's the hard truth.

htrp 1 year ago |

This is a feature, not a bug of the system.

alephnerd 1 year ago | |

No it's not. Founders can and should pay themselves a decent living wage. But I absolutely will reject a 2 person startup's CEO from paying themselves $300k a year if I was on their board.

consumer451 1 year ago | | |

Yeah, I have heard that it's a but of a negative signal if founders are paying themselves "nothing." Is this true?

burtonator 1 year ago | |

Feature that benefits who? the VCs? I think that's what you're trying to say (with sarcasm).

Correct me if I'm wrong though.

craftit 1 year ago | | |

My take is that it means founders are sharing the risk by investing in the company and by taking a smaller salary than they could otherwise. This means there is a clear motivation to get a successful exit for them as well as the VC's

burnte 1 year ago |

I think you may be wrong on 3, I think more founders want to stay, and investors want a fast exit for big bucks.

HWR_14 1 year ago | |

Point 3 is about risk not time. Most founders would rather have a 100% chance of their stock being worth 1 billion than a 1% chance of being worth 200 billion and a 99% chance of being worth zero. For VCs, the choice is opposite.

alephnerd 1 year ago |

What is a "competitive salary" as defined by you?

Most VCs ik are fine with founders paying themselves a market rate base, but I also work with VCs in the Bay Area and Seattle scene - maybe you're from France, Germany, Canada, or some other less founder friendly VC scene?

Also, as a founder your driving goal is to make a company that would succeed. It's up to you to decide your compensation package, but paying the CEO of a 2 person company $300k is just plain dumb.

What has happened to HN? First a post about a guy selling corruption as a service (yes, employees at private companies can be hit by corruption style laws) and now this?

toddmorey 1 year ago | |

Prior founder here: I think this is a fair question and glad it was asked for discussion. They raise a good point about the pool of potential founders being limited by the necessity of a low salary. I think it will always be part of the VC funding model, though.

However, also important to note that VC funding isn't the only way to do a startup.

alephnerd 1 year ago | | |

I'd agree if they phrased the question as "What is a reasonable salary I should pay myself to build my company" it would be fine.

By phrasing it as "Pay a FAANG TC (most of which is public stock anyhow) or it's not worth it" is clearly hubris, because it implies that FAANG is somehow superior to other employers (they ain't) and it assumes that founders are somehow superior to mid or senior level leadership at large public companies (they ain't - they're the same people a majority of the time).

> However, also important to note that VC funding isn't the only way to do a startup.

Yep! This! VC is just a way to raise private capital. If you can successfully build on the bootstrap model go for it.

dotcoma 1 year ago |

Because if they did, they would end up attracting more of the wrong kind of founders, that’s why.

gadders 1 year ago |

Because they only want other middle/upper class founders like themselves.

contingencies 1 year ago |

You can pay yourself a high salary, you just have to raise more to do it.

moomoo11 1 year ago |

That’s not how it works.

People who start companies don’t find any satisfaction making 500k tc. They want 1 billion tc.

I was making a good ton of money working at a unicorn that IPOd but then it’s like okay that’s boring. I came in a few rounds before IPO what must the founder feel like (they’re billionaires lol) What would it be like to have 100 million or more, maybe a billion?

Worst case scenario I get a job and pull in 500k tc plus

codegeek 1 year ago |

"Most startups that COULD exist are never actually started because the founders want to be making higher salaries working at Google/Microsoft/Meta/etc."

Sorry but I disagree. People who start startups are people who don't care that much about making more at a larger company. They do startups because they hate doing what they are doing and want to create something of their own or solve a real problem that no one solved it for them.

If I was a VC and someone wanted me to invest in their "idea" but only if they get paid the same salary they make/could make at a FAANG, I wouldn't trust that founder. Just doesn't work that way. The point of startup is that it is hard and you still want it bad.

Honestly, if you start throwing money like that, it will attract the wrong types or the "Wantrepreneurs". My 2 cents. Feel free to disagree and counter.

tptacek 1 year ago |

Putting more cash in means making fewer bets, holding constant the stage of startup VCs want to invest in.

VCs aren't employers. They're buying something (equity) startups are selling. The sellers can set whatever price they'd like; the market will clear at a particular price.

santiagobasulto 1 year ago |

> Most startup founders and early employees make about 1/2 of what they can working for MAANG companies.

As a bootstrapped entrepreneur: “yeah, I wish”.

fxd123 1 year ago |

Because VCs don't have a hard time finding startups whose founders will stay around for lame pay.

xyst 1 year ago |

I wish founders would think about building their company sustainably rather than relying on cheap cash from VCs and giving away all of your equity.

It's a shame we are in the "get rich quick" era. Private Equity, Vulture Capitalists, "Angel Investing" are all the same types of people. Reckless gamblers that don't give 2 shits about you, your company, or employees.

Your company is just another hedge against their other bets.

sgammon 1 year ago |

Yes, I have this cake. Why can't I have it and eat it. You should be able to eat the cake you have and yet still enjoy it. I am so angry with investors because the world is zero sum /s