Startups, money and founder salaries
Hot topic! I used to work a lot and closely with the founders of startups, and now I am one myself, an S21 graduate of the Y Combinator batch (so there are inside-insights-benchmarks). I have seen different approaches to this issue. How much do founders pay themselves? Below we will focus primarily on pre-seed/seed companies.
The most important misconception about startups is that by closing a round, for example, for a few million dollars, the founders immediately get richer. This is obvious to many intelligent people. But the less intuitive truth is that any founder who is able to raise some money for their startup earns much less than if they were employed or freelanced/agency. Therefore, someone you know who has raised a few million dollars (which certainly sounds powerful) is likely to earn much less than another friend of yours who is a good developer.
Here is a strong conclusion:
If it doesn’t work out outside of startups, then it’s unlikely to work out in startups. This is true in other big life decisions, such as immigration: if there were no successes at home, moving to another country most likely will not add them. That is, to go to startups (or emigrate!) Preferably from a base that can be multiplied.
About the income of the founders there are many different reports, datasets – from investors (they know the metrics of many startups), from other founders (they live this life), from hrtech companies (do surveys) and just curious. All of them generally confirm the thesis stated above.
As a result, there is such a very striking phenomenon: there are a lot of inhabitants of the adventurous (“gold mining”) mindset around tech startups. But in fact, real progress in startups is achieved by workhorses who did not come to make a startup for the sake of money. And if you look at the statistical chances of founders to enter the cash in the form of an exit, it will be clear that all this is not about money.
And there is another logical trap here. And what are startups for, if not for the sake of money? There are so many noble options that have been voiced publicly, including by popular people in the industry: to change the world, to contribute to society, to create jobs, and so on. But any critical person who imagines how people work is unlikely to believe this.
In the real world, everything is a little less beautiful!
Here is my list of motivation options:
Firstly, In successful founders, I see the same psychological trait over and over again: they are disgusted by being part of something big, a cog in the mechanism. (although many other people need it – they build successful careers). An example at the most grassroots level: successful founders don’t write comments online (and never did, until they were successful!)
Some might say that such denial is due either to over-ambition and high heart rate, or to poor social skills. And to a large extent he will be right.
In other words, this is the unwillingness/inability to integrate into the existing system of society. But you can integrate into the economic system, and on your own terms! This opportunity is being implemented in startups. Sometimes unconsciously.
Secondly, status in society decides a lot: it is fashionable to be a founder (especially if there is big news about a startup). This is something that they don’t like to talk about at all, because in other words – “show-offs”. Although determining one’s place in society and the desire to improve it is one of the key aspects of human nature on which civilization is built. For example, being a prominent philanthropist is an honor, while buying $35k Hermes bags is frowned upon in respectable circles. Although these are two examples that are far from each other, they do not differ much in terms of the final contribution to society (social / economic).
Let’s return to the founders: the bottom line for the founders is a choice: to live in peace with a normal income or, having lost money, greatly increase the status in the environment, especially if it is IT.
Third, quite often start-ups are started out of naivety: fragile minds sometimes go to start-ups, believing that there are good chances to earn more. Such cognitive errors are usually made by young children. When we hear that “a startup ended because the founders burned out”, it almost always means one thing: the realization has come that the primary motivation can no longer be supported by reality.
Where is the money?
Many see working on their startup as an interesting career alternative., including in terms of making money. It’s clear about the salaries of founders, but observations are also interesting about what the financial situation of most successful founders was at the moment when they decided to start a startup!
One of the most common cases among successful startups is when a founder starts something of his own, having already achieved some significant result in hiring and, most importantly, has enough confidence. And often the choice is not like “something doesn’t work with my job, I’ll make money with a startup!”, But “damn, I don’t want to give up an interesting career, but I really want to try myself in startups!”
As far as money is concerned, very often at the start, the founder has enough savings to work full-time for many months without a salary. Or at least he is confident in his demand, so that if anything – quickly take a contract / find a job.
Beyond the obvious runway of a new beginning, psychological confidence is an important factor. It is much easier to think strategically ten years ahead (which is a must for a venture startup) if you don’t have to think about daily bread every day. Sometimes the confidence is expressed in the form of “Well, if it doesn’t work out in the valley, I’ll go back to my parents’ house in a wealthy suburb of Philadelphia.” Having a solid plan B makes all the difference!
There are many beautiful stories when a poor Indonesian comes for the American dream and builds a unicorn. This is inspiring, but not common. Ivy Leauge graduates from wealthy families are statistically much more likely to succeed in startups. And this, of course, is not about money here and now (like the story when Bezos’ parents almost closed Amazon’s pre-seed), but more about the strategic mindset (due to certainty of a different nature) and less fear (risk) of failure.
In no case do I want to dissuade anyone from doing a startup! But you need to adequately assess the chances. A more sensible reasoning, if there is a desire to engage in a startup, is “is it OK for me if I earn half as much as today for the next five years?” Or “Will I feel good if I don’t earn anything for the next two years? And is there enough money for this? These options are statistically much more likely.
Someone will say “well, yes, but I’m still ready to take a chance!” And here the non-obvious observation is that the vast majority of good founders are not risky people at all. I would say that this type of people have a minimal risk appetite. Including because a startup is years of work and very slow progress with an uncertain result. And risk-taking people don’t gravitate toward these types of businesses.
A good obvious option is to study the market, build, saw a startup in the evenings, in your free time from your main job. Sounds reasonable! Moreover, the viability of almost any idea can be tested fairly quickly. But with this approach, a trap often awaits: when moving from a hobby project to a daily full-time routine, working on a startup may no longer look so attractive!
As in the post about founder salaries, here I wanted to convey the same idea, but from a different angle: if the motivation to make startups is money, then statistically success is much less likely.
And if such reasoning does not depress, then you need to urgently make a startup! 🙂
