[tptacek]

This is the calling card of a very boring argument. $50k ($40k after taxes in California filing single) is $20k after the median single bedroom apartment rent in Santa Clara county, leaving you with $1600 headroom every month. This is comfortable if you have very, very few expenses.

It is obviously possible to cite a life plan that will navigate you through an arbitrarily low comp plan. Just sleep on a couch and eat rice and beans, you can make a go of it at $20,000/yr!

[joshu]

Right.

Founders are very highly compensated in equity, so asking that they take a lower salary is a reasonable argument, but may not be practically possible. (People with mortgages shouldn't start up? etc)

The main issue is that strong talent can get better prices elsewhere, so you either have to give them a huge chunk of equity, or reasonable salaries.

I think people here are talking about startups that 1) can be bootstrapped in a year 2) by two or three college kids 3) with little significant technology other than RoR and mySQL or whatever. I avoid investing in startups like this because honestly I don't think they have great chances of having exits.

[netcan]

It sounds like at early stages founder salaries are an issue. Does the number of founders and their salary needs have much of an impact on early valuations?

Say startup A has 3 founders willing to take $100k gross. They hire 2 $100k employees 100k expenses. Startup B is a single founder with a mortgage that needs $100k and hires 4 $100k employees and $100k expenses to get the same amount of work done.

Startup A has 1 year runway on 400k. Startup B has 1 year runway on $600k. Would this be reflected in valuation?

[anamax]

> 50k ($40k after taxes in California filing single) is $20k after the median single bedroom apartment rent in Santa Clara county

$20k/year for rent? (When I was renting, I never paid median.)

$20k/year more than a $300k/30 year mortgage plus insurance. (Property tax adds another $4k or so in SJ.)

And yes, a $300k mortgage is possible in SV - older founders could have bought a while back and I suspect that some folks are paying about that now.

[tptacek]

I'm not sure what your point is. I have a ~$300k/30 mortgage, and I'm not paying less than I would for a 1 bedroom apartment in San Jose.

Even if I could, though, so what? Again: you can live in SV on $19,500/yr. People do it. That doesn't make $19,500 a reasonable comp package.

In discussions like this, people tend to talk as if there are two alternative comp plans: either (a) the package where founders build their own futons out of cinderblocks and shipping pallets, or (c) market salary.

There is, believe it or not, (b): significantly lower than market --- which for a startup founder in SV is probably north of $120k/yr --- and significantly higher than subsistence. The (b) comp plan is the rate that would allow a startup founder to:

(1) Rent (or make mortgage payments on) the same home they had prior to starting the company

(2) Continue making car payments on the car they bought last year

(3) Maintain all previous insurance levels

(4) Maintain phone, cable, and Internet

(5) Cut meals out by 50-75% but keep the grocery list approximately the same

Every one of these items is negotiable, but so is having a private sleeping space. If you want all of them, though, you're paying substantially north of $50k/yr in SV. I'd think $75k is closer to the mark.

The median income in SV is $85k ($96k if you're tech). People judge the quality of their lifestyle based on their peers. It's hard to argue that you'd feel just find with $40k after tax.

I'm getting sucked into what I admit is a very boring discussion, I know. I just wanted to make the (a) (b) (c) point.

[anamax]

> I have a ~$300k/30 mortgage, and I'm not paying less than I would for a 1 bedroom apartment in San Jose.

That may be true, but we agree that you could pay less.

"reasonable comp package" is meaningless. There's market and there's desired, but we're talking about what a founder could live on in SV.

Many people can live on something just north of what a grad student lives on. Some can't.

The former have more options than the latter. Most people can arrange to not have car payments. Some can share expenses with a partner.

Some people may choose to maintain a $100k lifestyle instead of founding a company because the latter would require them to live on $3-40k. (I lived on less while I was unemployed.) Others won't.

My point is that it's doable and I don't think that it's a huge sacrifice. Other people will disagree. As a result, some of them won't be founders. That's okay as long as they understand the consequences of their choice and that it is a choice.

BTW - SJ's $86k/$96k median household income is for households. Most SJ households are dual earner and they're not renting two one bedroom apartments.

[tptacek]

Andy, what I'm objecting to is the binary notion of living an absurdly pared down lifestyle versus starting a company. It's not a tradeoff. Apparently, it's not even currently a tradeoff if you want to take venture capital (taking VC improved my prior fulltime salary by about $40k the one time a company I founded raised it, but that was during silly season)... but I know it's not a tradeoff if you can sell.

I'm not crazy famous guy like Joshua. We bootstrapped 5 years ago. Sorry, dude, I never had to eat ramen. Or, look at Patrick. He's not living on ramen either. He flies back and forth from Nagoya to Chicago on a semiregular basis. He just launched a product. How many hours do you think he worked this week? I betcha it isn't 40. And this is his launch week.

I'm going to go way out on a limb: the $50k salary bit is just macho BS. Have at me, Andy, I can take it.

[anamax]

> Andy, what I'm objecting to is the binary notion of living an absurdly pared down lifestyle versus starting a company. It's not a tradeoff.

In some cases, that is the decision that folks have to make. In others, it isn't.

It depends on lots of things, including, but not limited to what the funders are willing to do and the founders' resources.

More power to the folks for whom this isn't an issue. I think that other folks shouldn't make the decision thinking that you can't live on less than $50k in SV. I'm not saying that anyone should make that decision, I'm just pointing out that it's an option for a lot of folks who might think otherwise.

[btmorex]

You're right. It is a boring argument. Every time I get into it, I realize that most people don't even know what saving money is. Saving money != spending like an average person so I don't know why you would quote the median apartment price. Obviously, you would try to find a cheaper one.

[tptacek]

Without getting into value judgements about financial planning: what you don't want your comp plan to force founders to do is move to a new apartment (unless subsistence wages is part of your strategy).

[ramanujan]

Don't see why this follows. Many job offers require relocation. And YC itself requires relocation (for 3 months) to the Valley, with the expectation of subsistence wages.

In other words, grandparent has a very important point. In the context of all the stresses associated with startup life, moving to a new apartment (or city), cutting costs, and living on ramen is not even on the top 10 list.

Now, for someone like joshu who has a track record, fine, they don't have to live frugally their second time out of the gate.

On the other hand, if you have an exit that size, why raise money at all? Why not self-fund the whole shebang? If you think VC $ "legitimizes" it, ok, maybe give a traditional investor a small piece...but not much more than that.

Bottom line is that people who are able and willing to live on ramen can turn $700k into years of runway -- and are enriched for the kinds of people who can build a profitable cost-conscious business.

[tptacek]

Personally, I think you should self-fund the whole shebang.

Are you willing to live on ramen for years? Good on you. Really.

Bucket my take as "the perspective of a founder with a family to take care of", noting only that if you forego the externally-funded "aim the cannon at the moon and shoot yourself out of it" game plan, you can do better for yourself with a startup than ramen.

[ramanujan]

Hey tptacek, didn't mean any offense and hope none was taken.

> Are you willing to live on ramen for years? Good on you. Really.

Indeed I was (during grad school), and am, as are many/most YC alumni.

And I hesitate to mention this as it's such conventional wisdom -- but as for self-funding, absolutely one should bootstrap for as long as possible before accepting outside investment. To further belabor the obvious, pay yourself well when the company is profitable, or even better wait for exit. Here's Peter Thiel on the same topic:

----

http://techcrunch.com/2008/09/08/peter-thiel-best-predictor-...

The lower the CEO salary, the more likely it is to succeed. The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money. It aligns his interest with the equity holders. But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks.

In practice we have found that if you only ask one question, ask that.

[tptacek]

The 37signals management team pays themselves in Wisconsin farmhouses and (note plural) supercars. They seem to be doing just fine. I'm wary about C.W. that suggests founders should suffer for suffering's sake. Then again, 37signals never really went out for VC, either. I don't know anything about Fog Creek internals, but Joel and his partner don't seem to be suffering too much either.

I think many teams find that by the time they've scaled headcount even to a minimal degree, the founder's take-home pay is no longer a major budget concern. At least, that's how I've seen it rationalized.

(Don't ever worry about offending me, but thanks for the concern.)