Starting a Business: Startup Founder Salary and Stock Vesting

There’s a lot to consider when starting a
business, but the relationship with your co-founders is probably one of the most critical parts. I learned about early vesting and salaries
the hard way. On the company I started in 2012, we did have
a good vesting agreement in place, but failing to define salaries spiraled badly. I ended up with about $16,000 in credit card
debt, which may not sound like a lot to you, depending on where you live… but 23-year
old me, living in Costa Rica where the salary that I could aspire to was $12,000 a year-
it looked like I was going to spend the rest of my twenties paying that back. So today, we are looking into founder agreement
when starting a business. Now, let’s start with stock and vesting. Once again, if you don’t understand how stock
works, you should check out this video. Let’s look at a simple and common scenario. Founder A comes up with a business idea for
a tech startup. He has a business background and is a great
hustler, but can’t code. He seeks out Founder B, who has a tech background
and has the experience to become the company CTO moving forward. By tech company I mean an app, a SaaS, a hardware
product, etc… an online store, for example, is not necessarily a tech company. If you’re Founder A and you are starting an
e-commerce platform, learn to use Shopify or Squarespace and build it yourself, at least
until you start generating revenue. So back to the original case,
How many shares should Founder A get, vs. Founder B? Probably a lot of debate here, but I am going
to say in this situation this should be a 50/50 split. While Founder A has the idea, he can’t execute
it without Founder B. The idea, and the business are worthless without Founder B and being
this a tech company, the product is just as important as the marketing, sales, fundraising,
etc… Now, this may be re-balanced if, for example,
the business has some traction before Founder B comes in. And don’t count ‘talking to customers’ as
Traction: I’m talking revenue, sales, rounds of funding… users at least. That traction is worth something, so Founder
A should be compensated for reaching that traction before Founder B came in. The essence of this story is, whether there
are 2 or 3 founders, the original company split should be equal- unless there is an
additional value already provided by one of the founders, in the form of money or traction. Now, let’s say Founder A and Founder B agree
on that 50/50 split, and six months later Founder B leaves. That would suck for Founder A who now has
a missing-in-action partner who owns 50% of the company. This is what Vesting is for. Founder Vesting is an agreement in the way
stock is issued, while the founders are entirely dedicated to the business. We’ll get back to the meaning of that. A standard agreement is a 12-month cliff and
4-year vesting. This means that we’ll take stock of each founder,
say 500,000 shares, and split them in 48 months. That’s about 10,416 shares per month. For the first 12 months of working for the
company, this stock will not vest: this is the cliff. That means if that person leaves, he won’t
take any stock in the company. The stock is a protection to the remaining
co-founders in case that person leaves very early in the company’s story. On the 12th month, at the stroke of midnight,
the vested shares for those 12 months will be executed, which means that founder will
now own 125,000 shares of stock in the company, one-fourth of his take. The remaining shares will continue to vest,
monthly, thereafter. In case of that person leaving, the remaining
founders are still protected and have additional stock for recruiting a new team member, and
the person who is quitting is compensated for his work at a critical stage of the company. Now, if you have a US business, it’s really,
really, really important that you file an 83(b) election if you are receiving vested
stock. I can’t stress this enough. If you forget, and your business grows or
gets funded, you might end up with thousands of dollars in taxes. You can find a free template for this on FounderHub. OK, so we’ve established vesting. An additional challenge here is many businesses
don’t start with funding or money in the bank. So the founders still have day jobs or side
projects to pay their bills. How do you establish, then what ‘fully dedicated
to the business’ means? It’s tough. I’ll lay out my example and hope that provides
some guidance. Once again, similar conditions are easier
and ideal. If both founders have day jobs, then they
can agree on a certain number of hours per day. The problem is when one of the founders has
a day job, and the other one doesn’t, or if one of the founders has a family to support
and the other lives with his parents, or in a city where the cost of living is lower. This is where salary agreements are useful. This is what I didn’t do the first time, but
learned a hard lesson and solved it for, my second company, Slidebean. When we started the company, we agreed that
each founder would have a $1,000 salary. While our living situations and monthly expenses
were different, we decided that was enough to live in San Jose. The priority was obviously taxes, legal
fees and so on… but as long as the company had money after those necessary payments,
everybody would get their full paycheck. If there weren’t enough money, we’d get equal
paychecks with whatever funds were left, and the company would ‘owe’ us that salary. We self-funded the company for about a year,
mostly with small consulting projects. We agreed that those were company projects,
not individual projects… so even though the project only involved one or two of us,
the money we made from that would be the company’s money, and not that individual’s. This worked rather well for us, only a couple
times we had to delay our payments- and we agreed that it was each one’s responsibility
to ‘survive’ until the next paycheck came in. Defining a limit here is also useful, maybe
3 or 6 months, after which the founders are allowed to take on day jobs without that being
considered ‘leaving the company,’ for vesting purposes. Defining that salary and where it stands in
the company’s cash flow priorities is critical. It’s not pretty when companies run out of
money, and there isn’t enough money to pay stuff. That’s a terrible time to agree on things. You should decide on things when things are
moving forward, on good-will… and put it in writing. It doesn’t have to be a lawyer-approved legal
document, simply draft these rules in a document, print it, sign it and stand with your word. Some other tips here,
Come up with salaries that you can realistically afford as a company. If you live in different cities, you might
agree on a salary adjustment for living costs. If one of the founders has savings or money
flexibility and the other one doesn’t, the solution is NOT to cut his paycheck but to
use that money as an investment in the company. For example, let’s say Founder A and Founder
B both live in the same city, but one of them has savings, and the other one doesn’t. A solution here would be for Founder B to
collect a salary and Founder A to not get a salary, because ‘he doesn’t need it.’ That will create a mess afterward. Founder B has been receiving a salary and
Founder A has been eating up his savings. A good approach here would be for Founder
A to invest $10,000 in the company and get a fair stock compensation in exchange for
that. Both get equal salaries since they both live
in the same city. This is my point when I say founder relationships
are like marriage. You need to be open about this stuff and be
prepared for new circumstances as the business progresses. I became a dad six months into starting the
business… which could have been a mess unless there were agreements that had been in place before that. Let me know what you think of these ideas. If you are open to sharing, leave a comment
below with the logic on how you distributed founder shares so that others can learn from your example. A lot of you have come to us with amazing
comments on the content we generate. We’re glad it’s useful! Each one of these videos takes about two weeks
of work to make, and it costs around $1,000- We’re making a whole video about that. If you like the content, share it and of course,
give our AI-presentation platform a try. You can prepare business proposals or start
working on your pitch deck; the exercise of making one can give you a notion of what you
should be focusing on as a founder. Creating an account is free, and you can’t
beat free. See you next week.

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41 thoughts on “Starting a Business: Startup Founder Salary and Stock Vesting

  1. It's quite insane to see so many views in such a short amount of time! Thanks all for watching. This is one of my favorite videos so far.
    I'll be around today to answer any questions you have.

  2. Is it possible to get the salaries from the very first month ? I mean if we get funded by investor, can we take salaries immediately after the investment ?

  3. Can you please make a video about startup mistakes. Also Explain to explain what happens of the company was not set on vesting periods and what are ways to fix them.

  4. Thanks for the info. It's very timely for me. It's always troubled me because I'm getting an additional developer on board a business that I have run for more than a year. I this will form good bases for me to know how to compensate him

  5. More often than not, a 50/50 equal split isn't the best way to divide up the shares if you ask me, VC's or angels.
    It might seem fair, but it isn't. An egalitarian approach isn't the best if you're starting a serious business.

    Some founders have much higher opportunity costs by joining your startup, and should be compensated for that.
    Similarly, some founders contribute much more to the value of the company, or are expected to.
    And don't forget, that some founders can be the unique heart and driver of the whole business, and are much more invested emotionally as well than others who could drop out right after the vesting period.
    People are different, so treat them as such, out of respect for yourself and that of your co founders.

    Love the video though. You're doing good work!

  6. Great content. Short & clear!
    I have a question about employees shares. How to set it? What happened if it is unused after a period of time

  7. What video animator / editor do you use? Please share the details in description so that we could make such videos too 🙂

  8. very great content – I am in the process of setting vesting contract. Would you be able to cover how new investors can come if founders do not agree on dilution? Is there any other ways solving this? Thank you so much, this is very important topic.

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  10. I think 30/70 split would be more fair. Founder b is doing the coding which means that whether or not the business is successful, founder b would have sacrificed his time. He therefore has a larger risk in relation to founder a. In tech, coding the MVP is more often than not, the most important part because everyone has ideas

  11. Your channel is excellent. A lot of useful videos. You deserve more subs.

    This is helping me tremendously heading into the early stages of my tech business.

  12. I watched all your videos, you are very motivated so could you tell us about Business Model Canvas with examples , Potential Users interviews, Talking with investors who has not tech business background, Time Management for solo-entrepreneur.

  13. Hola, me gustó mucho su video. He visto un buen número, pero el de ustedes es corto y claro. Tengo un emprendimiento de tecnología para "revolucionar" la industria del café. Ya hay oferta de un inversionista (porque no he buscado más aún). Como no tengo dinero por mi cuenta, debo trabajar por un salario dentro de la empresa que manejará el emprendimiento. No he tengo claro cómo repartir las participaciones (equity) para darle al proyecto. He hecho varias empresas, pero siempre he puesto igual cantidad de dinero que los demás y adicionalmente hago el trabajo. Esta vez no quiero que sea así. El proyecto lo llevo trabajando por casi tres años. Les agradezco sus sugerencias.

  14. What if founder A (business background) has already built a reasonable MVP through an external development company and has also hired some tech staff for maintenance. Now then founder A approaches founder B (Tech background) to join the team, what % you reckon this would be?

  15. Founder salaries are mostly arbitrary to provide a type of value or effort given, but I see the point that a tangible regular benefit does in itself become a motivation to increase share value by making the business work better

  16. I'm a founder A, my brother is a founder B, he's coding. Other business procedures unrelated to coding we do together. So I get 50% of shares, he gets 50% + a developer salary.

  17. I don't agree with the idea of 50/50 equity. My previous startup actually failed due to the founders conflict. Because, everyone had the authority over everyone. So, I think if there are two founders it should be 51/49 not 50/50. Personal opinion. 😊

  18. Wondering when did you discuss with co founders how much salaries each one get once you got funding, or it is with the investors before they agree to fund? Plus from other videos you said there are other things would include under salary such as product development. Question is, who decide how many % of the funding will go to salary, office, etc – the CEO or the investors?

  19. Great video I appreciate the time an expense you guys take putting this out there.

    Keep it up, I'm on about four or five videos of yours, and looking forward to the next one

  20. Great video! Just wondering, what if i am the founder and i paid a development team to build the mvp app for me. They gave me a discount but one of their condition is to make them the first employee to maintain the app. Should i still give them any equity?

  21. Ok, your definition of "traction" and credit for that is very reasonable. But what if the Founder is CTO, naturally CEO (leader-hustler) and on top of that he's developed the product as computer model proving specifications ready to be manufactured (a few years of work as R&D researcher), researched market and much more but he needs CMO co-founder to develop customers or traction sufficient for seed funding? Split 50/50 is not fair. Product dev' is a lot. LitMotor has burnt a few million (!!) US$ without a product but based on animation and a cute-looking enclosed scooter that can't be used as a vehicle so it's actually a prototype of the failure.
    What do u say?

  22. When founder A has saving and Founder B doesn't, if Founder A puts money in company and draws salary, it causes tax disadvantage. would't it better if they agree on a share issue agreement based on pre-tax amount of salary for founder A?

  23. Thanks a ton for making this video.
    I feel it is extremely important for all the founders to know this before they start their entrepreneurial journey

  24. Great video..I made the same mistake in my first business so I think this advice is amazing.

    I understand splitting the salaries before the company generates sufficient profits to maintain 2 founders' salaries but how do you determine the founders salaries once the company is generating reasonable profits to pay the founders a reasonable salary?

    Do you split it 50/50 based on equity split or do you base the salary on job description such as CTO and CEO market related salary? This is a tricky one as if both founders have 50/50 split then motivating for one of them to have a higher salary as CEO due to the increased stress and responsibilities of that role vs CTO role, may cause issues if the CTO is not in agreement.

    What's your opinion on this?

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