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Founder compensation deflation

May 25, 2011, 9:13 PM UTC
Fortune

Tech startup valuations are on the rise, but salaries for their CEOs are not.

By Brad Svrluga, contributor



It’s a frenzied world out there for seed and early-stage deals, with valuations going up up up, supply of capital at historic highs, raw startups raising multi-million dollar “seed” rounds (some in our portfolio) and founders taking money off the table. But despite all the apparent madness, the entrepreneurs I’m talking to seem to be consistently, and refreshingly, resisting the urge to line their pockets with big salaries.

I take my hat off to all of you guys and gals, and point to this as a difference between today’s environment and the capital “B” Bubble of the late 1990’s. I celebrate it not because I think these founders don’t deserve to get paid, but because I think they are collectively making a very powerful statement about their optimistic commitment to the companies they are building, and showing great leadership in the process.

This vintage of entrepreneur seems to really understand the value of equity, and appears genuinely interested in aligning her interests with her investors. It’s a remarkably refreshing thing to see, and very different from the profligate days of 1998-2000. It bodes well for all of us.

Counterintuitively, this downward pressure on founder comp is even stronger today than it was a few years ago, when cash was considerably harder to come by. Whereas today I most commonly see founders working for 50% of market comp ($75-125K for a CEO, vs. the $150-250 base you’d need to recruit an early-stage CEO), 3 to 4 years ago my non-scientific survey suggests the standard was more like founders getting 80-90% of hired gun comp.

In fact, I walked away from one very attractive deal a few years ago in no small part because the founding CEO said he simply had to make $325K per year after raising a $2 million Series A. That’s what he had been paid at the job he left to start his company, and he couldn’t cut his personal operating budget any lower. Not very entrepreneurial behavior, we didn’t think, and I was deeply worried about what else that behavior might be signaling. (NOTE: Turns out he was worth the dough – he’s more or less knocked the ball out of the park since then. Damn.)

Remarkably, today’s founder comp phenomenon is happening concurrent with an incredibly competitive environment, and corresponding boost in compensation, for technical talent and VP-level hires. But as other compensation grows steadily, one of the best CEOs in our portfolio still pays himself $60K/year despite the fact that he lives in Manhattan, has raised several million dollars of venture capital and has a company that is doing fantastically well. And this is not a guy with a trust fund or a massive exit from a prior company to feed off of. He’s eating Ramen, drinking Budweiser and focusing on driving hard to make the very large piece of equity that he owns worth as much as possible. He recently made a key hire who will likely make 4x the CEO’s cash comp this year.

Did he ask the board for a raise? Nope. He could get a $100K raise in a heartbeat if he wanted to push on it, I’m sure. But he knows that $100K is one more month of burn, and thus another $100K of dilution he would have to take. Effectively, he’s doubling down on his investment in the company every month by living as lean as he can. Think that generates goodwill with his investors? Hell, yeah. Sends a signal to employees? You bet.

Admittedly it’s a bit of an odd dynamic, and this guy is certainly an extreme case. After all, I do think it is very important for the CEOs we back to be not just super-motivated, but also happy and comfortable in their daily lives. A CEO who is hyper-stressed about balancing his checkbook at home is not going to be as effective at the office as he might otherwise be. But within reason, all shareholders, founding CEO included, are better off if compensation is kept under control across the board.

Perhaps it’s that today, with the environment frothy and the exit market stronger than it’s been in at least 4 years, real entrepreneurs are able to focus much more on the brass ring than the W-2. They’re confident in what they’re building towards, they can see a path to a lucrative exit, so they take the long view on wealth creation. That smells like a terrific leading indicator to me.

I’m going to keep a close eye on this dynamic. If entrepreneurs start betraying their deflated optimism with demands for heftier W-2’s, I’ll know the party must be coming to an end. In the meantime, I’ll enjoy the alignment that comes from this incredible crop of entrepreneurs and their parsimonious ways.

Brad Svrluga (@bradsvrluga) is an early-stage VC; co-founder and Managing Director at High Peaks Venture Partners. He blogs at Can I Buy A Vowel?