Salary vs. Equity: How to Calculate Founder Compensation (Part 1)

Salary vs. Equity: How to Calculate Founder Compensation (Part 1)

Figuring out how to fairly compensate the founders we work with has proven to be a complicated question. We’re trying to strike a balance between providing a salary that makes it possible to live in Vancouver during early-stage development, and equity, which could someday represent considerable wealth, but won’t put food on the table in the short term. We’ll deal with equity in a later post, but for now I’d like to talk about figuring out the salary part of the equation.

Typically the founders we bring into the SPV fold are not independently wealthy – they need to eat, pay rent and bills, and in some cases, support a family. We understand that to live in a city as expensive as Vancouver they need to have a consistent income to allow them to focus on building a business rather than worry about where their next bowl of ramen is coming from. Equity is a strong incentive, but if we expected them to work for equity alone we would lose a lot of good people who simply couldn’t make ends meet.

 

Founders must put skin in the game

That said, there is a certain amount of risk founders must assume when they sign on to our entrepreneur program. If they want to work with us they need to put some skin in the game, just as we have. We’re staking our time, reputation, network and money on the companies we build. So must they.

During our entrepreneur selection process — the program we use to find founders we want to work with — we expect candidates to put in approximately 20 hours per week for the first month without expectation of compensation. We consider this part of a very thorough interview process. Those not selected will still come away having learned a lot about launching a business, so their time won’t have been a waste. Those who are selected to go on in the program are paired with a project (our future companies are all called “projects” until it’s time to incorporate) and funded with a first tranche of $20K which is used to hit some business validation milestones, and then another $30k tranche to hit the next round of milestones. From this modest amount of funding, we decided to allow founders to choose just how much they will pay themselves. But there is a catch. The higher the initial salary they pick, the less equity they get.

equityvssalary_graph_v2_360To figure out how this would work, Mike came up with the idea of giving the founders an “indifference curve” which plots how much base income a founder would need versus the amount of equity they would receive. To us, it doesn’t matter where they choose on the curve – i.e. we are indifferent, but to the founders, it lets them choose the balance between equity and salary that’s right for them. They can choose whether the salary gains are worth the loss in equity, but no matter how you look at it, the first six months will be lean – perhaps too lean for some – especially those with families.

Ultimately, we know that we are going to lose some people in this process, but we feel that those who really want to make it work will somehow figure out a way to make it through the initial six months.

Photo by camknows / License: CC 2.0

 

Jonathan Bixby

In no particular order, I’m an active angel investor, mentor, and serial entrepreneur.

2 Comments

Scott Parslow

about 2 years ago

Is there a part 2? Please and thank-you.

Mike Benna

about 2 years ago

Hi Scott. There is a part #2. We'll talk about our model for determining equity in a post coming out middle of next week."

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