I have written about this notion previously, but I feel the need to reiterate what was said in these changing times.
Here is the premise: When a founder starts a company, there is often not never enough funding to pay the founder for her hard work.
This is the harsh reality of the startup money racket.
Ahh, dear reader, the founder takes care of herself by doing the following:
1. The founder sets up a compensation account into which an entry is made every month as if she were able to pay herself a fair wage for the magnitude of her services.
2. The founder accumulates — accrues — this notational amount every month and totals it at the end of the year.
This idea is what I call the “founder note receivable” and it is a fair way to compensate founders for all the uncompensated work they put into building their company when they could not afford to pay themselves.
Believe me, you founders have bloody well earned this money, darlings. This is EARNED.
Judgment comes into play here, grasshopper, but let’s say you build a company that has $10,000,000 in annual revenue Year 3, and a value of say $25,000,000 — then a fair rate of pay would be $150,000 annually for the founders.
Make sense? That’s 1.5% of gross revenue per founder.
Yes, the founder note receivable is a promissory note with the promise to pay when there is a funding or liquidity event. And, yes, there is interest on the note — 5% always strikes me as a fair rate.
Say you take three years to find traction and then you raise a Series A of say $3,000,000 — fair game to retire all or part of that founder note receivable (which might be $450,000 by that time).
Make a careful read of the preceding sentence — all or PART. Do not get greedy or be unrealistic. Be clever, measured, smart — which, of course, you naturally are as you’re a founder.
I can understand that is the conventional wisdom, but this is not theory. I have advised founders who have done this and who have been paid.
The toughest part of this sale is the new, first time founder. Believe me the Ivy League boys with the mousse in their hair (the VCs) are not going uncompensated, cher. Those new BMWs/Teslas are not being paid for by some side hustle.
At its core is fundamental fairness — there is sweat equity and there is fair compensation. They can both co-exist. Why not?
One of the things that triggered this particular post was a recent convo I had with a VC who inquired on the subject as one of his companies had such an arrangement and he wondered if I had ever heard of it.
[Delicious irony — I had advised that founder on the subject some five years ago and, apparently, the old boy remembered my advice. Life is so rich and delicious.]
Long story short, the VC didn’t have any problem with it. The company was doing a follow on round and he realized the founder notes receivable had been there from long before he invested in a prior round and he simply hadn’t noticed them, but now with this follow on round, they had bubbled to the surface.
Translation: they had been there all along; he’d just missed them. The fact they had been there, were in writing, and had a little moss on them made them perfectly legit in his assessment.
He went with them and the founders received a payment for 25% of their outstanding founder notes receivable and an agreement to retire them in their entirety from company profits over the next two years.
In the harsh world of startups there is one (amongst many) immutable rule: You do not ever get what you deserve; you get what you negotiate.
Negotiate a fair deal with and for yourself, founders. Nobody else is looking after you and you’re in this for the money.
But, hey, what the Hell do I really know anyway? I’m just a Big Red Car.
