If my startup is pre-product and pre-revenue, should I offer a potential cofounder a salary in addition to equity? That’s the the latest hot topic on FD:Discuss community. We’ve considered both sides of the argument and have concluded that the best recipe for success starts with an equal partnership. Cofounders should have substantial equity and wait to earn salaries until their company has cash flow.
1. You’re not earning income as a founder
It’s a fair assessment to say that entrepreneurs sign up for this life with the assumption that they will relinquish a salary for a large share of equity. If you aren’t bringing home the bacon to your own family/pet/plant, it’s fair to argue that, neither cofounder should until there’s enough revenue or you’ve raised money. Here’s where being generous with equity is extremely important. You’re sharing your dream and everything that comes with it – the risk, the reward, the punches to the gut, and the pay-off. Having one-half of the duo pulling a salary while the other doesn’t could cause resentment. Your compensation should be equal if you’re truly 50/50, whether you can code or not.
2. You want a cofounder, not an employee
You’re looking for a partner to bring long term value, think for themselves, challenge you, and bring an idea to life. People are more willing to do this when they have more on the line. Paid employees expect that at the end of the day you have the final word. You don’t want to bring on a cofounder who’s under this presumption. As we like to say here at FD – if they join for the money, they’ll leave for the money.
See also: Traits That Define Great Entrepreneurs
3. You want to build company culture
The cofounder relationship and structure lays the foundation for your company culture. If you don’t want a top-heavy, paycheck-oriented culture in the long run, practice what you preach from the start. If you want a team that rolls up their sleeves and is willing to take on the risk, you should set the precedent with your cofounder agreement. In the early stages, all available cash must be spent wisely on growth. In other words, it should go towards everything BUT founder salaries. Salary expenses come from raising capital, so hold off until you’ve locked in investors.
Exception to the Rule: You Can Afford It And They Can’t
There may be life circumstances that do not allow for the right cofounder to surrender a salary. There is no mandate or scientific formula for calculating founder compensation, and financial burdens and external factors are often a reality. Most seed-stage startups can’t come close to matching market rates for top CTOs, but it’s important that you both can live without the worry of providing for your families. Ask your partner what they need – not what they want – upfront. If it’s just enough to cover basic living expenses, you might decide that it’s worth the investment and/or you can actually afford it. Calculate the window you feel comfortable negotiating and trust your gut. If you’ve found The One, are you comfortable with the idea of losing them?
Your business partner is an investment no matter how you slice it. The right person can make or break the company. If you think your cofounder isn’t bringing enough to the table, or one of you is silently thinking “I’m building YOUR idea, so I should be paid,” the problem will not be solved with money. You shouldn’t be working together.
At FounderDating we emphasize focusing on people first and ideas later (ideas change). The bottom line is that while each cofounder dynamic is unique in how it functions, all relationships are built on trust, passion and share sacrifice. Give yourself time to find the right person – it’s never too early to get started. At the end of the day you have to do what’s right for you, your cofounder, and your piggy bank.