Last night I spent about 30 minutes talking to a couple of startup founders about how much money a startup CEO should make. Then again this morning I met with another startup founder and we talked about how much equity he should have AFTER his Series A investment. There is no answer, but I’ll give you a few ideas.
My experience is likely pretty close to what most of my peers have experienced:
- Architel – worked for one year without pay, $150K second year.
- ShopSavvy – worked for three years without pay, $195K fourth year.
- ViewMarket – worked for one year without pay… (hope I get paid soon
Brad Feld, one of the most respected early stage entrepreneurs suggests startup CEOs should make $100-250K with a potential bonus of $0-100K and equity ranging from 1-20%.
Peter Thiel insists that a startup CEO should NEVER make more than $150K per year. He explains, “A categorical rule of thumb that Founders Fund has developed is that no CEO should be paid more than $150k per year. Experience has shown that there is great predictive power in a venture-backed CEO’s salary: the lower it is, the better the company tends to do. Empirically, if you could reduce all your diligence to one question, you should ask how much the CEO of a prospective portfolio company draws in salary. If the answer is more than $150k, do not invest.”
Prolific angel investor David Rose argues, “It should be discussed directly with the Series A board director, and it is up to you to propose something. … it will likely end up somewhere between $100K and $200K. I’d personally suggest +/-$150K.”
Seth Levine from Foundry Group suggest that companies that have raised $1M or less should pay between $75-125K. Companies that have raised less than $500K should pay $75K. Companies that have raised $1-2.5M should pay around $125K.
At the end of the day 100% of the experts in the space ALL agree, “Don’t starve yourself. Make enough, just enough, not to starve so you can focus 100% on the success of your startup.”
If you are starting a company between the coasts (i.e. not on the East or West coast) you likely get CONSTANT questions about revenue from investors. In many cases, focusing on revenue generation early is a great idea; however, in other cases it is a HUGE mistake. Seriously.
It is not uncommon for venture firms like Sequoia to recommend that a startup wait to monetize, but that advice is almost never given to startups here in Dallas. For example, one of the entrepreneurs I mentor has a technology product that is currently in beta trials with potential customers. His investors are pushing him to generate revenue, but the truth is that he’d be much smarter to focus his energy on getting more FREE beta trials with more potential customers. The trials are really helping him refine the technology and building goodwill with his potential clients. To top it off, his sales cycle is LONGER than the amount of cash he has available. If his investors demand he focus on sales he will fail even if he succeeds. What should he do? Convince his investors that monetization should happen AFTER his Series A.
If your product isn’t ready for prime time – don’t try to sell it. If your investors are looking for revenue tracking PRIOR to your next round AND you know that you can’t meet their expectations you need to change their expectations. Don’t be afraid to honestly evaluate your situation and set yourself up for the win – not the failure…
What do you think about the proposed dust jacket for Founders?
When Robert and I co-founded Haul/ViewMarket we raised an angel investment round from several angels including 500Startups (Dave McClure and Christine Tsai), VentureSpur (Dave Matthews), Silicon Valley Growth Syndicate (Will Bunker). In each case we identified something special and unique about each group BEFORE we approached them for an investment. I believe you need to understand why it would make sense for a particular investor to invest in your deal BEFORE asking them to invest in your startup. Here are a few reasons that make sense to me (there could be lots more):
- Deep understanding of the market – assist with product/market/fit
- Extensive experience in the space – assist with deals that can ‘make’ the company successful
- Strong investment reputation – assist with first institutional round
In my experience it is almost ALWAYS a mistake to raise money from an angel just because he has the money to invest. The BEST reason to raise money from an angel is that he/she has an inherent ‘gift’ that can increases your chances for success. For example, say you are building a better railroad car that will change the face of rail transport. You need $500K to build your railcar and you meet an angel investor named Jim. He just retired from Burlington Northern Railroad and LOVES your idea. The fact that he loves your idea should give you a LOT of confidence that you are on the right track. Additionally, there is a good chance that he will be able help you secure a HUGE client. It is a win-win. You get the money you need, a great advocate, social proof AND a potential client.
Be careful about the unsolicited angel begging to get into your round – especially if he is purely looking for a financial return. It is likely he doesn’t understand the risks of angel investing (e.g. you’ll lose all of your money in the majority of deals) AND he may freak out when you pivot six times before settling on the right business model. VERY early stage startups are fragile and they won’t survive activist investors – i.e. Carl Ichan would make a horrible angel investor IMHO.
Yesterday I was listening to one of the entrepreneurs I mentor telling me a story about one of his favorite investors/directors. The investor is what I call a ‘seagull’ – he flies in, shits on you and flies away. I must admit that I am horrible at managing investors and board members – my advice is to do as I say, not as I do. Here are a few ideas for both investors and directors (often the same folks):
- COMMUNICATE regularly with each investor/director by sending a monthly progress/update email. Spend 30 minutes detailing all your accomplishments, challenges and go-forward plans. You don’t want to wait until your next board meeting or until they email you asking what the hell is going on.
- ASK each investor/director for help each month. Think about how each investor/director can help you – perhaps with a product launch, a candidate for employment or a business development deal. If you keep them busy they will be a LOT less likely to get in your ‘business’. One of two things will happen – you will get much needed help or he will hide from you.
- MEET (in person or via phone) with each director PRIOR to each board meeting. Show him your agenda and ask him if there is anything he’d like discussed at the meeting. If there are controversial issues to be discussed determine where he stands. If he’s on your side enlist him to meet one-on-one with directors who might not be on board yet PRIOR to the board meeting.
- DOCUMENT each interaction with your investor/director. The day after your board meetings email an overview of what happened and what decisions were made to each director. You will approve the minutes at the next board meeting, but you’d be surprised how time can change your perception of history. Do the same thing EVERYTIME you engage with your investor/director – a quick followup email detailing what was accomplished and what everyone has committed to do is VERY important.
Let me know if you have any ideas to improve your investor/director relationships.
There are a million reasons why you might not be getting meetings with venture capitalists on Sand Hill Road. The most common reason is that you’re simply not trying hard enough. It turns out that it is REALLY easy to get a meeting with a VC – it is his job to meet with you. Referrals are the BEST way to get a meeting, but if you don’t have a referral you can make your own. The following is my sure-fire method for getting a meeting every single time:
- Step One: Identify the VC and partner you want to meet with (make sure the partner you choose funds startups in your space).
- Step Two: Identify the CEO of each company where the partner is a member of the board of directors.
- Step Three: Call the CEO and let him know you are considering working with [partner name from VC] and you wanted a reference. 100% of the time I have left a voicemail after dropping the name of the VC I have received a return call. The CEO will be happy to give you a reference and you’ll be surprised how candid many CEOs are.
- Step Four: Call the VC and let him know you talked to his CEO and that he received a glowing reference. Ask for the meeting. 100% of the time the VC will return your call and as long as your company is in the right space and at the right stage you’ll almost always get the meeting.
Despite the fact that I’ve shared my ‘sure-fire’ method each week I get a message from an entrepreneur asking for help finding an investor for his or her startup. The message goes something like this, “Working on the next big thing, can you refer me to a few local investors?” In variably I will put this request in my ‘to-do’ mailbox and forget to respond. Sorry? Not sorry? Here is what you CAN do:
Remember that scene from Jerry Maguire where he tells his client, “HELP ME HELP YOU!”
Here are 9 things I need so that I can you can help me help you:
- Explain the stage of the product/service: idea, prototype, mvp, revenue, growth, exit…
- Tell me about the team: how many people, functional skills, full-time/part-time…
- Explain the funding you seek: seed, angel, series a, series b
- Tell me how much you are going to raise: $100, $250, $500, $1M (whatever)
- Tell me the form of the investment: common stock sale, preferred stock stale, note…
- Tell me who you’ve talked to previously and their thoughts
- Tell me how you plan to spend the money – i.e. what are the use of funds?
- Tell me your future fund raising plans after this raise.
- Send me your fund raising docs (if available) and your deck (a must).
You may not have all of this information, but send as much as possible. Save me time. If I can help I will. If you make me send you an email asking for this information – well I’m not going to. I might send you this post and ask you to try again. But no hard feelings right?
More and more frequently I hear folks talking about how we need more diversity in the startup community. We need more female founders. We need more African American founders. We need more homosexual founders. We need more disabled founders. I call bullshit.
We need more startups and more founders. Period. I am a HUGE believer in equality of opportunity. After traveling the world I’m convinced that America IS the benchmark when it comes opportunity. Sure, I’ve read the studies that show America is at the bottom of opportunity for minorities, but I contend ANY study that looks at outcomes as a measure of opportunity is really measuring ‘equality of outcome’. Countries that focus on ‘equality of outcome’ end up with the worst outcomes for EVERYONE however equal those outcomes might be.
IF we have an equality of opportunity problem here in the United States (and perhaps we do) it needs to be solved at the start, not the end. You can’t fund unqualified women, African American, homosexual and disabled founders and expect positive outcomes. If you do, you’ll destroy the underpinnings of our entrepreneurial eco-system. Investors need to invest their money in the BEST startups and founders regardless of race, creed, sexuality or disability.
If it took you longer than 10 seconds for you to come up with a number I recommend you find another line of work. If you don’t have a burn rate I would argue you’re not running a startup. Even Amazon has a burn rate!
According to Wikipedia burn rate ‘is a synonymous term for negative cash flow. It is a measure for how fast a company will use up its shareholder capital. If the shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down.’
Knowing your burn rate is super important. There are two ways to calculate burn rate – gross and net. To calculate gross burn simply add all of your monthly expenses on your income statement with all capital expenditures and other regular uses of cash on the balance sheet and cash flow statement – the total is your ‘gross burn rate’. To determine your net burn rate take all of your cash receipts from revenues including all incoming cash you receive each month. Now subtract that from your gross burn and that is your ‘net burn rate’.
The other number you need to have burned into your brain are the number of months you have until you run out of cash – i.e. BINGO. Take the amount of cash you have in the bank and divide by your net burn rate and you’ll know how many months you have left. Make sure you start raising money six month BEFORE you’re out. Raising money takes longer than you think. You never want to hear, “Negative Ghost Rider, the pattern is full…”
My friend, Molly Cain, just took over as Executive Director of Tech Wildcatters, a startup accelerator based here in Dallas, and she’s in the process of putting together the 2015 class where she expects to get around 500 applications for 16 slots. Applications are due by January 13th (apply here NOW). HINT: early applications get the most exposure! Should you join a startup accelerator? The quick answer is YES.
First, what is an an accelerator? Generally, it is a fixed-term (usually 3-4 months) program that provides mentorship and educational components, culminating in a public pitch/demo day. The application process is highly competitive with less than a 3% acceptance rate. Most accelerators invest between $20,000 and $120,000 per company in exchange for 1-8% of a company’s equity. Each class, held once or twice per year, consists of 5-20 startups consisting to two or more founders.
Second, why should you attend an accelerator? First, accelerators only accept between 1-3% of applicants. This means that IF you get accepted it provides ‘social proof’ that you and your team is onto something. It is a level of ‘curation’ that will help you attract the attention of Venture Capitalists after you graduated. Second, you get direct access to LOTS of entrepreneurs and mentors who have ‘been there, done that’. Finally, having graduated from an accelerator you are part of an ‘alumni network’ that can provide you with POWERFUL connections.
Finally, which accelerator should you join? The first decision you need to make is whether or not you’d like to stay in the Dallas area. If you can go anywhere I’d recommend the following, in the following order:
- Y Combinator – $120K in funding for 7% equity, located in Mountain View, CA. They’ve funded more than 500 companies in 30 markets. The total valuation of their portfolio is $30B – with three of their companies worth over a billion each. Y Combinator even takes established companies into their fold – accepting Quora this year (the company has raised more than $161M in venture capital). You can apply here.
- TechStars – $118K in funding for 6% equity, located in Boulder, CO. They run programs in Boulder, New York City, Boston, Seattle, San Antonio, Austin, Chicago and London. More than 114 companies have gone through the program and 92% of them are STILL active. TechStars does not release financial information on its portfolio companies. You can apply here.
- 500 Startups – $75K in funding for 7% equity, located in Mountain View. They run classes in Mountain View, San Francisco and Mexico City. You can apply for the Mountain View program here. The San Francisco program here. The Mexico City program here.
If you want to stay in the Dallas area there are three great options depending on your company’s focus.
- Tech Wildcatters – $25K in funding for 8%, located in Downtown Dallas. Applications are currently open for their sixth class starting in March 2015. TWC tends to focus on enterprise startups, but I’ve seen them take a wide variety of startups. Apply here.
- Health Wildcatters – $30K in funding for 8%, located in Downtown Dallas. They just completed their 2014 class and applications aren’t open yet for the 2015 class. HWC focuses exclusively on healthcare related startups.
- VentureSpur – $30K in funding for 6%, located in Downtown Dallas. They just completed their 2014 class and applications aren’t open yet for the 2015 class. VentureSpur focuses on retail related startups.
At the end of the day accelerators are VERY competitive. Remember, only 1-3% of applicants get accepted so apply to a few if you can. Put your best foot forward and if you can I highly recommend that you meet with the program’s director BEFORE applying. Show them you’re interested AND ask them how to get accepted – i.e. how much time and effort you should spend on your application.
Almost ten years ago (June 13,2005) I began blogging regularly about my experience with startups and entrepreneurship. The blog has gone through several name changes including TexasVC, Texas Startup Blog and finally StartupMuse. Over the past couple of years I’ve spent less and less of my time blogging and more actually working with entrepreneurs. In April I began an experiment to focus my time and energy with ten entrepreneurs. The plan was to work with them on a weekly basis for a full year. To ensure the entrepreneur had skin in the game I charged for my time – $1,000 per month + 1% of their company. The experiment has been pretty successful so I have decided to expand it by offering three different levels of engagement based on the stage of the entrepreneur’s startup. You can learn more about the program here.