Founder Compensation & Equity Benchmarks
Synthesizing Insights From the Data
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Founder compensation benchmarks are among the most clicked links across all our INSIGHTS DIGEST episodes, indicating the importance for founders and investors alike. The problem with many studies, however, is that they only cover partial aspects, rarely painting the full picture. Therefore, the ambition with todayās episode is to bring it all together and create a comprehensive guide to founder compensation.
Why is Founder Compensation so Complicated?
Navigating the delicate balance between fair compensation and prudent business practices is no easy feat, especially under the scrutiny of investors. Conflicting expectations about what constitutes a reasonable salary can create significant tensionāinvestors often prioritize runway preservation, while founders need sufficient income to sustain a viable lifestyle.
It's essential to remember that while lean times are part of the early startup journey, the idea of founders scraping by indefinitely is unrealistic. Founders must secure enough income to alleviate financial stress and maintain focus on building their businesses.
These challenges are made even more complicated when considering that founders often come from different backgrounds: One might be 25, single, and living in a smaller Spanish city, while another is 45, raising kids in New York City. These different living situations lead to dramatically varying financial needs, and striking the right balance is difficult.
Transparency around compensation creates trust among employees, investors, and stakeholders. The decisions founders make about their own pay can set the tone for company cultureātransparent and thoughtful compensation signals fairness and alignment with growth, which can help attract and retain talent.
In this episode, weāll look at best practices from scientific literature, and provide a snapshot of the current landscape, using real-world data to help you make informed compensation decisions.
Compensation and Equity
One of the fundamental trends in startup compensation is the inverse relationship between equity stakes and cash compensation. As founders hold larger equity shares, their cash salaries tend to decrease (Wasserman, 2006). This dynamic is rooted in the concept of psychological ownershipāequity provides founders with a direct, personal stake in the success of the business, fostering a focus on long-term value rather than short-term gains.
Equity ownership also aligns founders' interests with those of other shareholders, emphasizing growth and later profitability. Unlike cash compensation, which tends to encourage more conservative decision-making, founders with significant equity are often willing to pursue riskier, innovative strategies, betting on the companyās future success (Alkebsee et al., 2021; Atif et al., 2020; Bruton et al., 2009). The long-term incentives provided by equity mean that founders are more likely to prioritize visionary moves over short-term financial stability, thereby enhancing the company's potential for substantial growth.