Compensation for a CEO – it’s not all rainbows and sunshine

Setting compensation for a Founder and CEO is full of thorny issues. Set it
too high and you look piggish (or worse). Set it too low and you may not be
able to stay in the role financially, or you are undercutting yourself. Maybe
you should target lower than market to set a tone for the rest of the company — everyone should sacrifice to build something bigger, right? Should your co-founder, not the CEO, receive the same compensation? What does your comp say for the company’s culture in terms of being data-driven? In terms of being frugal? In terms of focusing on equity vs. salary vs. bonus? While most of the team won’t know your comp, some will, as will the board, and it will have an impact on those things.

Setting CEO comp is tricky for lots of reasons, not the least of which is the
perceived integrity (or lack thereof) of the CEO who sets his/her own comp.
Here are some things I learned as a CEO for nine years and an investor in
dozens of other companies. 

Board comp committee– Once a board exists, I don’t think CEOs should
set their own comp in isolation. I think a check & balance system is
critical to avoid the CEO being under- or over- paid, either in perception or
reality. At the Seed and A Round stage, the board will likely not be big enough to justify a separate committee. In that case I think the board itself, without the CEO voting, should approve the CEO’s comp. When the board gets to be about 5 people, often at Series B/C range, creating a “Compensation Committee” is appropriate. Some companies ask the Comp Committee to approve all executives’ comp. That is often appropriate for later-stage companies, but initially having that committee approve at least CEO comp is important. The committee is typically a subset of the overall board and ideally consists of an investor and an independent board member, or two investors that came in at different times (and thus have some balance in their interests). 

Data, Data, Data– I’m a big fan of leveraging compensation
studies for all roles at a startup. It helps limit the time a CEO is spent thinking through one off deals for employees and helps with pay equity. Pairing the compensation with a clearly articulated leveling grid helps all employees understand what level they are at, what is expected of that level (and the next), and what the compensation will be at their existing level. You’ll have to decide where in the comp bands you pay as a company (for example,75th percentile for technical talent and 60th percentile for business talent is one framework I’ve seen at several startups). Comp studies aren’t perfect, but broad surveys like Options Impact and Radford are useful guides nonetheless. You’ll find that Founder/CEO comp is often different (lower in cash, higher in equity) than hired gun CEO comp. When talking with my board about my own comp, I drew from these external surveys and tried to be data-driven. Options Impact is the one I like the most for younger companies and Radford for later-stage companies. Pro-tip: If you or others are advocating to pay employees in the 90th percentile, think through the 2nd and 3rd order implications. What will it mean for the burn rate? What will it mean for the type of employees that you get and whether you’ll be able to truly identify those that are (at least in part) joining for the vision and mission?

Cash Comp (Salary & Bonus)- Founders, including myself, often get
through the first few years by paying themselves less than market, choosing
instead to use the cash on the rest of the business. While there are times when this is simply required, time and again I have seen it putting unnecessary stress on the Founder/CEO and thus on the rest of the company. I did that for the first six years of being CEO, and to be blunt I regret that choice. Because I was taking a below-market salary for most of my time as CEO, there were several years that I had to routinely dip into savings and sell investments in order to cover our family costs. I felt financial stress on top of typical CEO stress. I believe this type of stress can sometimes lead to the CEO making more short-term decisions and can prevent them from taking big swings. 

Equity Refresh Grants- Over the past year I’ve spoken to a number of
Founder/CEOs with four or more years in the position. Of these, around 30-50% think they own less of their company than they should (about 80% of the time I agreed), and they don’t see a path to getting more. I’ve seen it cause non-trivial morale issues, including at wildly successful unicorns. I went for a walk with the CEO of a fast-growing unicorn recently who has talked to me for years about how he believes he owns dramatically less than he should. In a recent round this caused meaningful tension with investors, and he believes that tension is perhaps irreversible. 

Refresh grants are a touchy subject for the Founder/CEO to bring up and I
wish investors/board members proactively raised the issue more often. When researching my own, and helping other Founder/CEOs think it through, I found it was most common to receive one every four years, and have each grant vest over the subsequent four years. The actual amount, however, is difficult to calculate and is more art than science (here the comp studies fall apart quickly). Is percentage grant or dollar value more important? It is influenced by stage, performance of the CEO, performance of the company, investor appetite, future financing needs and many other factors. With all those caveats, I found 2-4% refresh grants for Founder/CEOs to be a fairly helpful range in most situations.  

Secondary– Perhaps the least talked about component of a Founder/CEO’s “comp” is secondary, or the sale of his or her shares. This typically happens during a financing but can, depending upon investor interest in the company, take place at any time. I wanted to include secondary for CEOs as it is an important lever to consider for your own financial situation. Investors, new and existing, will want to know you are incentivized to keep building after you take the secondary. I have found that a good rule of thumb for companies pre-growth stage is to cap the secondary in any one round at 10% of your holdings (i.e. if you own 20% sell no more than 2%) or $2-10m,
whichever comes first. Clearly that’s a massive range and depends upon the
stage of the company, its performance and that of the CEO, investor interest,
your own life stage (whether or not that’s fair), your ability to negotiate,
and a variety of other factors. I’ve seen new C-level executives (non-CEOs) who have been on the job less than 18 months take out $10m and I’ve seen founders and CEOs that have been toiling away for more than a decade beg their board to sell $250k for a house down payment only to be rejected. 

There are several reasons why this topic is sensitive. First, investors have
preferred stock and you will likely have common. It doesn’t seem right to most investors that the Founder and CEO, or any employee, should get paid before they do. While venture seems like an incredibly lucrative game, it often takes many years to get rich, and an investor may become jealous (even if they don’t articulate that jealousy). They may be worried about the precedent — how many other employees will want or deserve secondary? What happens in the next round? In addition, a VC needs you to work with a maniacal focus — and selling millions (they believe) will take your eye off the ball. Even if they don’t ask these questions, you should. Be aware that there are legal rules around how to offer secondary to other employees or investors and make sure you discuss these with your corporate counsel. [Note: I find it odd that secondary is often considered comp, given the person worked for those vested options and often must spend the effort to find an investor to buy them, but that’s the way secondary is usually viewed.] 

 I’ve never seen a Founder/CEO work less hard post-secondary. In my
experience they are trying to build something much bigger than themselves or a few million in secondary — they take tremendous pride in what they are
building, and the financial relief that comes from secondary doesn’t lower
their pride or focus on the company. If anything, it empowers them to think
longer-term, knowing that they have some cushion to take bigger swings. When secondary isn’t possible, and the Founder/CEO doesn’t have prior financial stability it can have meaningful impact. I’ve heard some successful entrepreneurs talk about their fire, focus and decision-making being at least influenced by a lack of financial security. Those Founders/CEOs sometimes begin to obsess over smaller wins and more certain projects because they are worried about losing everything. 

To reiterate, your comp decisions influence your company’s culture and your
relationships with key teammates and the board. At the same time, your
financial stability will influence the stress you already feel as a leader at
the company. Consider the importance of inputs and not just outputs: how was the decision made, who was involved, what data was leveraged? When you’re done, put it to bed — and get back to building.