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How to Set Starting Salaries

Determining the salaries of your company's founders will impact both funding and friendship.
September 16, 2002
URL: http://www.entrepreneur.com/article/55550

Q: I'm starting a company with two friends. I will be CEO; they will be the CTO and COO. Should we all have equal salaries, or should they be different? I have enough in my budget to pay each of us something in the low six figures.

A: Setting salaries is an art, not a science. I've seen startups work great when each founding partner had an equal salary and equal share of the company. I've also seen startups work when there's great inequity between the partners. The question is: What criteria should you use to set the salaries?

First, salaries shouldn't depend on experience--not in my book. Salaries should be related to management results. Spending 10 years running a company that never showed a profit should command a much lower salary than 10 years spent running a spectacularly successful company in a variety of market and competitive conditions.

But I'd make an exception: At the end of the day, results are only somewhat under your control. If a candidate had managed an unprofitable business but claimed to have very high-quality management and operational processes, that could be a good sign. In that case, I would want very detailed presentations of the management processes, so I could decide whether or not I was willing to bet on those processes in my company.

Salaries shouldn't be set based on a salary survey. In a cash-poor, startup environment, does it makes sense to pay anyone a six-figure salary? Prior to 1996, it was almost unheard of to pay six figures in a startup. You were expected to take a salary around 30 percent below market (assuming that still left you enough to live on) and do whatever it took to further conserve cash.

Here are some more things to consider:

Salary Considerations

You should set salaries for the best working relationship and best business performance. In your shoes, I'd set three moderate, equal-base salaries at about $50K each. I'd want everyone to feel they were treated fairly, and no one to feel they were getting the same or a better deal than they'd get on the open employment market. If you want to reward people for the differences between their jobs, set up a bonus structure related to some combination of personal and group milestones. Keep the overall structure simple (salary plus bonus) and the bonus criteria simple enough so that the motivations and rewards are very clearly connected to each person's contribution.

As the company grows, raise your salaries last. Use the extra money on building infrastructure, hiring people who will accelerate your growth, developing marketing campaigns and forging deals that will give you access to the channels you need. Once the business is healthy and thriving, then you can raise your salaries. If the business is successful, you'll be rich enough so it won't matter. But if the business isn't successful, you'll be demonstrating to investors that you have the ethics and business sense to align your interests with those of the people who put their faith in you.

Stever Robbins is a venture coach, helping entrepreneurs and early-stage companies develop the attitudes, skills and capabilities needed to succeed. He brings to bear skills as an entrepreneur, teacher and technologist in helping others create successful ventures.