“If you raise [$500,000 to $700,000], you can pay the two founders decent salaries, you’re able to hire one or two other people, and that gets you maybe eight months, almost a year, except you have to start fundraising again three or four months beforehand."
A $50k salary for a founder is about the limit until the company is actually raking in some dough, unless the goal is to feel important and drive that sucker into the ground.
I agree that if it is possible you should do that. I'm drawing zero salary right now myself.
But more importantly - strong talent is expensive.
The average studio apartment in Manhattan is $1900, leaving you with $500 at the end of each month to cover every conceivable expense. MTA to-from work alone ate $180 of that between the two of you.
When I did delicious, one of my employees could get to our office in manhattan from wburg faster than I could from the Upper West Side, too...
There's just as big of a bedbug problem in Manhattan (if not worse) and it's not confined to cheap buildings. My office building got infested and it was primo real estate.
Finally, Williamsburg is no longer cheap unless you luck out and find an apartment-by-owner rental where the owner is senile. In a weird warping of reality, you can get a better deal in the Upper East Side (if you go over towards 1st/York.)
I agree that the problem is citywide. My intended point was that there is now a big new transaction cost to renting in NYC (and soon to renting in most cities).
It is obviously possible to cite a life plan that will navigate you through an arbitrarily low comp plan. Just sleep on a couch and eat rice and beans, you can make a go of it at $20,000/yr!
Founders are very highly compensated in equity, so asking that they take a lower salary is a reasonable argument, but may not be practically possible. (People with mortgages shouldn't start up? etc)
The main issue is that strong talent can get better prices elsewhere, so you either have to give them a huge chunk of equity, or reasonable salaries.
I think people here are talking about startups that 1) can be bootstrapped in a year 2) by two or three college kids 3) with little significant technology other than RoR and mySQL or whatever. I avoid investing in startups like this because honestly I don't think they have great chances of having exits.
Say startup A has 3 founders willing to take $100k gross. They hire 2 $100k employees 100k expenses. Startup B is a single founder with a mortgage that needs $100k and hires 4 $100k employees and $100k expenses to get the same amount of work done.
Startup A has 1 year runway on 400k. Startup B has 1 year runway on $600k. Would this be reflected in valuation?
$20k/year for rent? (When I was renting, I never paid median.)
$20k/year more than a $300k/30 year mortgage plus insurance. (Property tax adds another $4k or so in SJ.)
And yes, a $300k mortgage is possible in SV - older founders could have bought a while back and I suspect that some folks are paying about that now.
Even if I could, though, so what? Again: you can live in SV on $19,500/yr. People do it. That doesn't make $19,500 a reasonable comp package.
In discussions like this, people tend to talk as if there are two alternative comp plans: either (a) the package where founders build their own futons out of cinderblocks and shipping pallets, or (c) market salary.
There is, believe it or not, (b): significantly lower than market --- which for a startup founder in SV is probably north of $120k/yr --- and significantly higher than subsistence. The (b) comp plan is the rate that would allow a startup founder to:
(1) Rent (or make mortgage payments on) the same home they had prior to starting the company
(2) Continue making car payments on the car they bought last year
(3) Maintain all previous insurance levels
(4) Maintain phone, cable, and Internet
(5) Cut meals out by 50-75% but keep the grocery list approximately the same
Every one of these items is negotiable, but so is having a private sleeping space. If you want all of them, though, you're paying substantially north of $50k/yr in SV. I'd think $75k is closer to the mark.
The median income in SV is $85k ($96k if you're tech). People judge the quality of their lifestyle based on their peers. It's hard to argue that you'd feel just find with $40k after tax.
I'm getting sucked into what I admit is a very boring discussion, I know. I just wanted to make the (a) (b) (c) point.
That may be true, but we agree that you could pay less.
"reasonable comp package" is meaningless. There's market and there's desired, but we're talking about what a founder could live on in SV.
Many people can live on something just north of what a grad student lives on. Some can't.
The former have more options than the latter. Most people can arrange to not have car payments. Some can share expenses with a partner.
Some people may choose to maintain a $100k lifestyle instead of founding a company because the latter would require them to live on $3-40k. (I lived on less while I was unemployed.) Others won't.
My point is that it's doable and I don't think that it's a huge sacrifice. Other people will disagree. As a result, some of them won't be founders. That's okay as long as they understand the consequences of their choice and that it is a choice.
BTW - SJ's $86k/$96k median household income is for households. Most SJ households are dual earner and they're not renting two one bedroom apartments.
I'm not crazy famous guy like Joshua. We bootstrapped 5 years ago. Sorry, dude, I never had to eat ramen. Or, look at Patrick. He's not living on ramen either. He flies back and forth from Nagoya to Chicago on a semiregular basis. He just launched a product. How many hours do you think he worked this week? I betcha it isn't 40. And this is his launch week.
I'm going to go way out on a limb: the $50k salary bit is just macho BS. Have at me, Andy, I can take it.
In some cases, that is the decision that folks have to make. In others, it isn't.
It depends on lots of things, including, but not limited to what the funders are willing to do and the founders' resources.
More power to the folks for whom this isn't an issue. I think that other folks shouldn't make the decision thinking that you can't live on less than $50k in SV. I'm not saying that anyone should make that decision, I'm just pointing out that it's an option for a lot of folks who might think otherwise.
In other words, grandparent has a very important point. In the context of all the stresses associated with startup life, moving to a new apartment (or city), cutting costs, and living on ramen is not even on the top 10 list.
Now, for someone like joshu who has a track record, fine, they don't have to live frugally their second time out of the gate.
On the other hand, if you have an exit that size, why raise money at all? Why not self-fund the whole shebang? If you think VC $ "legitimizes" it, ok, maybe give a traditional investor a small piece...but not much more than that.
Bottom line is that people who are able and willing to live on ramen can turn $700k into years of runway -- and are enriched for the kinds of people who can build a profitable cost-conscious business.
Are you willing to live on ramen for years? Good on you. Really.
Bucket my take as "the perspective of a founder with a family to take care of", noting only that if you forego the externally-funded "aim the cannon at the moon and shoot yourself out of it" game plan, you can do better for yourself with a startup than ramen.
> Are you willing to live on ramen for years? Good on you. Really.
Indeed I was (during grad school), and am, as are many/most YC alumni.
And I hesitate to mention this as it's such conventional wisdom -- but as for self-funding, absolutely one should bootstrap for as long as possible before accepting outside investment. To further belabor the obvious, pay yourself well when the company is profitable, or even better wait for exit. Here's Peter Thiel on the same topic:
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http://techcrunch.com/2008/09/08/peter-thiel-best-predictor-...
The lower the CEO salary, the more likely it is to succeed. The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money. It aligns his interest with the equity holders. But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks.
In practice we have found that if you only ask one question, ask that.
I think many teams find that by the time they've scaled headcount even to a minimal degree, the founder's take-home pay is no longer a major budget concern. At least, that's how I've seen it rationalized.
(Don't ever worry about offending me, but thanks for the concern.)
Seriously, how much do people spend on the kids? Also, we have this thing called the Internet now, you don't have to live in SV to start a tech company.
Where you live is a choice, and living in Manhattan is choosing luxury.
[1] Or assorted other overpaid NYC workers.
A bigger problem is that talent is very expensive. A top-notch engineer just out of college costs about $120k/year when you factor in insurance and other expenses (this number will likely go up even more). A senior engineer can easily cost $150k - $180k/year. That's not counting recruiting costs, which are about a third of first year's salary (You can find recruiters that will work for 15-25% but they won't get you any good engineers). Between a team of five, and other expenses, a startup that raises $500k is incredibly underfunded. People say startups are getting cheaper, but the primary expense is talent, and talent is getting more expensive. So startups are getting more expensive too. A superb team of five (with two founders) costs about $700k/year, so IMO raising less than a million at the least is irresponsible.
Doesn't the angel round buy the company time to get either a higher fidelity prototype or actually launch the business and get some traction before going for the bigger Series A?
Do you mean a VC funding cycle where most funds are distributed in one quarter over another (or time of year)?
Maybe I continue to miss something.
Thanks
Consider: Does an angel want take some dollars and a) invest in a new hot startup that he just got introduced to or b) double down in a startup that hasn't seen traction yet and is going back for another year's worth of runway?
Using story-based reasoning, the investor is able to convince himself that A is a much better opportunity.
Though I would have thought most start-ups are not returning to Angels for a follow-on round, but rather progressing to VCs for a seed round.
I see your logic as the business is probably relying on the initial angel to lead a Series A.