Salary Inequality Among Co-Founders: How Common?

I have accumulated a backlog of interesting questions posed to me by founders and investors (and by my students!). For many of them, my quantitative CompStudy data should be able to provide some answers. In this post, I will tackle the first of those questions.

In my past analyses of entrepreneurial compensation, I have focused on founder vs. non-founder salary differences (e.g., the Founder Discount), on founders’ equity splits (the Idea Premium, how teams split, when they split equally, and the potential implications for team stability), and on related issues (e.g., vesting and golden handcuffs). However, I recently got a question from a member of a founding team, asking how often co-founders are paid the same salary — i.e., founder-vs.-founder salary differences.

To tackle this question, I combined my annual datasets from 2005-2009 (including both Tech and Life Sciences ventures), and focused on the ventures that still had at least 2 co-founders working as members of the venture’s executive team at the time of the survey. I ended up with a dataset comprised of 2,815 co-founders from 1,148 ventures.

Across these ventures, 26.7% of the time, all remaining co-founders were being paid the same exact salary.

However, this differed by 2 important dimensions: the number of rounds that had been raised by the venture, and the number of remaining founders.

Number of Rounds Raised

As shown in the chart below, the percentage of equal-salary co-founders was much higher when the venture had raised one or no rounds (37% equal salaries), than when it had raised multiple rounds (dropping to 27% after the B-round and 19% after the C-round).

Note: Across the 1,148 ventures in these analyses, 43 ventures were pre-investment, 264 had raised one round, 367 had raised two rounds, 270 had raised three rounds, and 204 had raised four or more rounds.

Number of Remaining Founders

The chart below shows how the percentage of equal salaries differed based on how many founders were still working as executives in the venture, focusing on whether there were 2 remaining founders or 3.

For ventures that had raised no rounds or one round, there was little difference in the percentages of co-founders with equal salaries. However, from the B-round and onwards, if there were 2 remaining co-founders, the chances that they were being paid the same was much higher than when there were 3 remaining co-founders.

How Unequal Were They?

For the co-founders who did not have equal salaries, how much of a gap was there between them? Across all of the unequal-salary ventures, the median percentage difference between the highest and lowest paid of the remaining co-founders was 29.6%. In other words, the highest-paid remaining co-founder made 29.6% more than the lowest-paid remaining co-founder.

The chart below shows that this median difference is actually relatively steady across stages of financing, varying from a high of 34.8% to a low of 28.6%.

The final chart breaks out this median salary difference by whether there were 2 vs. 3 remaining founders. For every stage of financing, ventures with 2 remaining founders consistently had lower salary-inequality than did ventures with 3 remaining founders — not a surprise, given that the more people involved, the more likely the divergence regarding the importance of their roles, their levels of commitment, and other factors that should affect compensation.


Next Steps

In future analyses, I’d like both to develop these analyses into more-rigorous regression models, and also to examine whether there’s a linkage (negative or positive) between equal equity splits and salary equality among co-founders. Looking forward to posting those results to this blog.

However, I’d also love to hear what related questions or potential analyses came to mind for you. Please post your thoughts on the results above and/or your requests for other future analyses!

6 Comments
  1. I would be very interested in the “why” here. My initial reaction is that when outside money comes in, they will shift the salaries such that the person with the most value add is retained with a higher salary. So this is expected. But what is the rational most commonly used for paying founders different amounts?

    Is it purely visionary CEO vs. grunt implementer? If so, is that a fair comparison of founder to founder salary splits? Or should the grunt really be considered as joining after the vision of the company is in place.

    Please excuse me if these questions are answered in more detail already. I will try and review the data from the links separately.

    Also, what is the breakdown by industry? Thank you.

  2. For seed stage companies where cash is particularly tight, I often tried to preserve cash by trying to tie compensation to lifestyles of the founders. In one case, I had two founders. One was married with a house, mortgage and 3 kids. The other was single and living in an apartment. The former was paid about $6500 per month and the latter, $3000. Once we raised a B round, cash compensation was adjusted to be equal.

  3. Noam, your Founder Frustrations blog is fascinating.

    Just wondering, are you aware of founders establishing a company constitution that gives members equal voting rights, even though they may not have equal equity?

    I suspect that a greater source of frustration may be having an unequal say, rather than unequal ownership and this may provide some solution.

    Regards,

    John S.

  4. Thanks for the comment, John S., and for the question. Voting rights and equity percentages are indeed separable, and I have seen such agreements used as a way to resolve short-term decision making issues. At the same time, in the longer run, those kinds of disconnects between decision making and equity stakes (a temporary band-aid that doesn't resolve the underlying issue?) often turn problematic; things are usually more stable when they're consistent with each other, and are tied to contributions, value, etc.

  5. Noam,

    Thanks for your swift comment -I take your point re: inequity approximating instability.
    With some post grad class-mates at Qld Uni
    I'm researching the path to commercialize a few inventions and thus, the fascination for the subject of your research.

    I also like the concept on keeping the ownership of the intellectual property separate from the start up company, with the IP to be viewed as an asset on exclusive (and generous) long term license.

    I'm hoping this concept may allow for a company structure that obeys your “empirical” laws of stability, while also maintaining the inventor-founder’s original ownership of IP.

    I’m working on the assumption that the formula to calculate IP licensing fees needs to be flexible, but also predictable under a range of company activities and future profit scenarios.

    Any experience with this type of proposal?
    Your reflections are much appreciated.

    Regards,

    John S.

  6. Noam,

    Just wondering how the typical salary structure would work for 3 co-founders (one who inverted idea) has different equities, would get paid?

    Thanks,
    Casey

Leave a Reply