How do I approach founders about salary inequality in a startup?

Question

To add a little context, I joined a startup as a fullstack developer in late 2017, making me the fourth member of a team of two founders working sales, and me and a colleague doing the actual development of our platform. Upon joining, I got a 5% equity share of the company (now fully vested) in exchange for a ~$4k buy-in at ~$80k valuation. We've since then received a small investment of ~100k at a ~$1M valuation, and have scaled up our business but still only keeping it to our four member team.

The business has been good, and we're now about to close a pre-seed/seed round of ~200k at a ~$5M valuation to scale up and increase our team. This will be a first round that will be followed by another in a year or two.

I've had the exact same salary since I started, $3500/mo, without any raise. In the early days, we established a contract that would entitle me to bonuses if the sales were good enough over two consecutive months (which they've been) but costs has at the same time been too high to pay out any of my bonuses which I've foolishly accepted. I've brought this up lately, and only been told that we will look over the salaries "soon".

The two founders, both owning 25% each of the company, has had a salary of $2500/mo, but since the 2019 year it was decided that they would get a bump in their salary to $3500/mo, to support "their way of life". This was a decision made by them and the CTO.

All this has left me with the feeling of being undervalued and underpaid, given that my current salary is well below market salary. At the same time, I really blame myself for not speaking up sooner.

I don't know how to properly balance the equity vs salary equation, but I feel that their high number of shares in the company should argue for a lower salary on their part, and my low number of shares should argue for a higher salary. Is my way of thinking just wrong or even begrudging, and if so, what would be the correct way to view the balance of equity and salary?

Keeping in mind that we've worked closely together for more than three years which has made us good friends, if I should approach the founders with my concerns, how would I do so and what arguments would I use?

Answer 1

Founders get more shares. That’s the way it works. It’s their company. 5% is a very good equity share for a non-founder.

This has nothing to do with anyone’s salary. Eventually they are going to be CEO or whatnot and get paid way way more than you. Their salary has nothing to do with yours. (Heck, they were paying you more than they were taking for a while...)

The question is, is your overall package of the work, the equity, and the money competitive or otherwise compelling? The real problem is that your shares have vested and I assume you e exercised them, so while them going up is good it’s no longer a direct financial incentive. Usually there is a re-up of more options, or increased salary, or some mix of both.

You can talk to your founders, just keep their finances out of it. “Hey, I’ve been enjoying this, but there’s a limit for how long I can work for under market value. My shares are already vested and so other jobs paying legit money are getting tempting.” If they can’t make something work for you, it’s fine to say “well I have to go make some livin’ money now, maybe I can come back after the A round...”

Answer 2

I don't know how to properly balance the equity vs salary equation, but I feel that their high number of shares in the company should argue for a lower salary on their part, and my low number of shares should argue for a higher salary.

What do you want to happen? What will make you happy? Assume you are negotiating for salary bump, or more stocks for yourself without looking at anybody else at the company.

For example, ignore when manager says "I'd love to give you a bump, but there are no money right now". Do not reply with "Yeah but what about those founders' bonuses?.."

Figure out what you want, and then proceed with negotiation process, e.g. see discussion here: How should I properly approach my boss if I'm feeling underpaid?

Answer 3

Let me phrase this in a way that might make you a bit happier: They've effectively paid you a six figure salary.

Your company is valued at 5 million right now. You've got 5% shares. That's $250,000. Combine it with the $42k of regular salary, and you've averaged $125k/year!

The reason your salary (and their salary) is so low is because they're trying to use as much money as possible to grow the business. That's expected,to the point where founders will usually not take a salary at the start of their venture.

So up until now, no, you haven't been underpaid. You've been in the same boat as the founders, though effectively a smaller version of it. And keep in mind, their "style of life" bump in salary was merely placing it at the same level as your existing one. They're still only effectively paying themselves $42k/year.

Basically, the question is this: when is the company out of 'startup' territory? When will you drawing a more normal salary no longer negatively affect the company's ability to grow? To be honest, you're about that that point - after all, your company is finally going to be taking on a larger staff. So you're at a good point to say, "I'm glad we were able to get this startup off the ground. I'd like to stay on, but at this point, I'm going to need a more standard salary for my efforts."

But here's the thing: you have not been underpaid or undervalued. You need to understand that going in, because otherwise you're going to come off as being ungrateful. You've effectively earned a 6-figure salary for your efforts in this startup. It's definitely okay to ask for a standard salary now that you're out of the startup phase, but don't go into this thinking you were exploited.