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Founder CEO Compensation

We have 3 founders which we equally distributed 20% equity to. The remaining 20% is for investment and key employees. The buiness plan shows annual salaries of 150k and quarterly divident payments. We have chosen one as CEO, this individual has a background in sales and feels he should have a bonus structure in place to be compensated for the business he brings to the company on top of salary and dividends. We are currently in the final stages of raising 1.5m.

My thoughts is hes double dipping and the bonus hes looking for will dilute the dividend payment to the other founders and investors. Granted this individual will bring business in, the issues is with the other two founders is we feel lets take a reasonable salary and reap the rewards of our effort and success through the quarterly dividend payments.

My question is, is it common practice for a founder who owns 20% equity to seek an additional bonus based on sales? If so I would appreciate examples of fair bonus structure for a CEO so all founders will earn equally and not have one with a disproportionate salary. I appreciate any insight you can provide.

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

My .02 cents

1. Most investors I know will frown or have issues on the double dipping. Be sure that you disclose (even highlight) this during your round to avoid problems later on. As a startup, one of the BASIC function of a CEO is to sell the company (sales) and is part and parcel of growing a startup and should not be treated as separate performance measure. This however does not prevent the Board or company from handing out performance bonuses at the end of the year....but not as a function of sales but results of operations and plans. Having said that, EVERYONE involved should be expected to grow the company or bring in business.

2. Number 1 is also premised on an assumption that the other 2 founders are also involved in the management of the company with various functions. Even if they are not, it does not completely negate the point of number 1.

3. The "attitude" of wanting a separate piece of the pie simply indicates a much more different goal and culture that a startup CEO usually has or want to promote. You must have heard of startup CEOs getting $1 (or "survival") salaries? Think about the frame of mind or motivation for that kind of setup.

4. On a much bigger picture, not sure about your business plan but deciding on the quarterly dividend at the onset is pretty presumptous. I would have recommended (1) let the board decide on it at a later date based on growth and cash needs (2) funnel all available funds into growing the company (3) focus on value creation (ie long term) than short term returns.

5. Number 3&4 leads me to believe that you are starting on the wrong foot or frame of mind...or at least from what a typical startup would do or think. While a lot of CEOs "condition" or manage their employees' and investors' expectations for the long term, your setup is short term biased.

Anonymous
(President) |

Thank you for the insight Emerson and Wayne, the two founders to include myself and another are both executives (CFO & COO) from a previous employer, we both left to start our own company. We have a well developed pro-forma and the salaries are not exorbitant to start nor are the dividend payments. You are both on our page and just looking for second opinion which you both provided. Thank you

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

When I read a biz plan for a startup and see a) "high" salaries, b) bonus plans for founders outside of stock, c) dividends in the first few years I have this reaction:

I'm not investing in a company just to pay salaries
I agree with Emerson on Bonuses
I'm not investing so the original founders can get their money out (unless I'm buying 100%, then we're talking employment contracts, no stock and that's a different scenario)

These three issues have me look at other startups to invest in.

Anonymous
(President) |

Thank you for the insight Emerson and Wayne, the two founders to include myself and another are both executives (CFO & COO) from a previous employer, we both left to start our own company. We have a well developed pro-forma and the salaries are not exorbitant to start nor are the dividend payments. You are both on our page and just looking for second opinion which you both provided. Thank you

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