The issue of startup salaries often sparks debate. I would go as far to say it is often one of the key conflict points for many entrepreneurs and founders starting out their businesses. Along with wearing many hats when a business first starts out. My view is simple.
Money does make the world go round. That much is true, especially for startups. Hiring the best developers, marketers and business development wizards can be a top priority for new businesses. And this usually means paying a premium for top talent. But hold that thought.
Startup salaries: a matter of capital efficiency
I recently published a post talking about the lost art, or forgotten quality, of capital efficiency. Here I tried to make the point that the dominant approach from Silicon Valley – and all those around the world who try to copy it, is broken. The fundamental flaw is this. In the never-ending quest for growth (which basically is driving a business under illusory vanity metrics), entrepreneurs and investors fall into the world domination trap, i.e. the “we’re the next facebook phenomenon”. They forget that the raison d’être of any business is to serve their customers’ needs in a profitable way.
While the symptoms of a company suffering from lack of appreciation for capital efficiency may vary widely, the most common one is that of high startup salaries.
An unfortunately truthful tale of startup salaries goes something like this:
- We have to grow
- In order to grow, we need the best possible people working for us
- The best possible people are expensive — of course they are
- But, that’s why we raised capital, isn’t it?
- Let’s then hire them and start paying high annual compensations in the order of several hundreds USD
- And this while we are not making any money [yet]
Feet on the ground
I mean, it does not take a genius to understand that this approach in general is unworkable. Or that the handful of exceptions where it did work outweighs the thousands of others where it did not?
The brutal truth is that until the business becomes profitable everyone in the company, from the CEO to the receptionist, should have a salary below market average.
Let me explain why. If the company is loss-making and salaries are high, that basically means that the company should keep fundraising – indefinitely. The more successful the company becomes in fundraising, the less pressure the organization feels to become profitable. The attitude is “we’ll fund raise again and investors will provide the little bit of extra we need”. But in this way, you just keep extending the runway without ever taking off. What happens next? Naturally the business NEVER becomes profitable.
No chicken and egg situation
One of course can argue that in a very competitive marketplace it is impossible to get a good enough workforce unless you’re paying high startup salaries. Rubbish. Yes, everyone has their role and must know their worth, but in the beginning, break-even is paramount. I will point to the famous Florentine thinker Niccolò di Bernardo dei Machiavelli. Some 500 years ago in his notorious book ‘Il Principe’ he says that a State (or a leader, or a Kind, or, in our case a business) cannot depend on mercenaries for manning their defense forces. Why? Because “mercenaries tend to be brave and heroic in times of peace; but most of the times they fail to be of any usefulness in times of war”.
In my line of thinking there’s a direct analogy between mercenaries in Machiavelli’s writings and the super-well paid “experts” that startups tend to hire in order to achieve their planned growth: Machiavelli advises State leaders to create national armies, composed by soldiers who will fight for patriotic reasons. Exactly the same goes for startups. They need armies of employees who have a strong sense of ownership of the company. Based on both an emotional and on rationale. These “soldiers” will always do whatever is required for the long term good of the business. Conversely, the 21st century “mercenaries” will usually jump ship at the first sign of problems.
An epilogue
To sum up, make sure that all of the startup’s workforce, from the CEO to the receptionist, do feel like they have a stake in the business. By this I mean through actual stock options, but also through open, frank and interactive communication. You need to make sure that you truly listen to your team, don’t just inform them.
If you are successful in doing that, then something magic will happen. All of a sudden you won’t have to pay extremely high startup salaries any more and you’ll save your company from falling into a potentially fatal situation.
