Episode 23: Pay
Thirty-five bucks for the most recognizable logo on the planet? Yep, that’s what a famous founder Glenn talks about in this episode paid for his fledgling company’s first logo. Not a bad deal. The kind of deal you should be looking for if you’re the founder of a bootstrapped entity. But what about pay for you and your cofounders and for your early staff if you’re a funded startup? Stocks? Cash? A mix? Listen in as Doug and Glenn take on the – often thorny – issue of pay.
Transcript
Glenn Suart 0:00
[Be]cause you don’t want the founder, if you’re the investor, thinking about where they’re going to pay for their next meal or their kids teeth or something like that. You want them focused on the business, so take the bills off the table.
Doug Ross 0:25
Welcome to Conversations on Startups, a podcast brought to you by Douglas Ross, author of the book, Spark Click Go: How to Bring Your Creative Business Idea to Life, and Glenn Suart, of Today’s Great Idea, a radio series featuring over 300 origin stories of businesses, brands and inventions that have changed the culture. Welcome to today’s conversation.
Doug Ross 0:48
Hello, and welcome to another episode of Conversations on Startups with Doug and Glenn. I’m Doug Ross, author of Spark Click Go, and I’m here with my friend and colleague, Glenn Suart. Glenn.
Glenn Suart 1:02
Hi, Doug. Glenn Suart, in Canada. Today’s Great Idea, we help people start businesses. And we tell stories. And, you know, our theme today is about compensation and how much you should pay yourself, etc. We’ll get to that in a second. I got a great story for you, Doug. You tell me which company or person you can think of here.
Doug Ross 1:22
I am so bad at guessing. Last time we were together it was U-haul. What else do people carry behind their vehicles that could become a business and…
Glenn Suart 1:33
…that’s orange!
Doug Ross 1:34
Yes! That’s orange! Maybe I’ll do better today?
Glenn Suart 1:37
Well, you know, maybe we’ll have to improve your compensation. All right. So Carolyn was a journalism major at Portland State University, and she had an elective to fill. So she decided to take a design class. And she loved it so much that she switched her major to graphic design, which is kind of cool. And to make ends meet she did some work for a professor on the side. And that Professor ran a company and… as well, and he needed charts and graphs whenever he met with executives and stuff. So one day the professor overheard Carolyn say she couldn’t afford oil painting supplies. Well, he had a looming production deadline and he needed a logo for his products. So Carolyn did five of them for him and he rejected four. He liked the fifth one, didn’t love it, but thought it would grow on him. And so Carolyn invoiced $35 for the logo and the professor paid it and hired her to do other graphic design work. Well, the product with Carolyn’s logo on it was a massive hit and the company went public. And one day, 12 years later, the now former professor who runs [the] company, invites Carolyn to a lunch at the company where he unexpectedly – this is the kind of thing that you like to have happen to you – he gave her a diamond ring engraved with the logo and an envelope stuffed with stock shares so that Carolyn now could afford all the oil painting, you know, supplies she ever wanted for life. 50 years later, the logo that Carolyn came up with is immediately identifiable with the product and even has its own name. Do you have any idea… [what] logo I’m talking about?
Ben 3:18
You’re listening to Conversations on Startups with Doug and Glen, thanks for joining us.
Doug Ross 3:27
Well, I don’t because unless I was nodding off during that story, which I shouldn’t have been, it was very good story, I didn’t hear much about the business. I just heard about Carolyn and her graphic arts.
Glenn Suart 3:40
That’s right… it’s the Nike swoosh.
Doug Ross 3:45
Okay. Good job for her.
Glenn Suart 3:47
And I tried to give it away with Portland, you know, because of course it’s based in Oregon,
Doug Ross 3:52
You see, another clue that should have just beat[en] me over the head.
Glenn Suart 3:58
I should have said that the guy ran with it. That would have been better. That would have been a dead giveaway. Right?
Doug Ross 4:04
Oh, Excellent. Wow. Okay.
Glenn Suart 4:06
Did I say that in there? I don’t think I did in the script. So anyway, long story short, she got $35. She was ecstatic. But really, you know, Phil, the guy who ran, of course, Nike, Phil Knight, he realized the value that that logo had given the company and even after the fact – he didn’t have to do anything – he went back and… and thanked her immensely. So it’s a great thing. But this brings up the subject of compensation and especially at the beginning. How much do you pay yourself or [do] you pay your… your partners or colleagues who help you start? So what’s your thought, Doug, on that?
Doug Ross 4:40
Yeah, my thought is, well, actually I like your story. And of course I didn’t hear the story before that. As people will know we… we pick a topic and we… we do a little independent prep and then we have a conversation that our – any listeners can listen in on… so… But what I’m going to pull out of your story is that the person was paid in two ways. One was cash and one was stock. And generally speaking, I like that. I don’t like one, only one or the other for startups. And by that, I mean, if you pay your… yourself, in fact… well… yourself might be okay – but subject to affordability which we can talk about – but if you only pay yourself in stock and your co founders and maybe some early employees or people that are helping you out, that may never turn into usable funds, let’s say. So there’s lots of reasons for that. So I like both. I think it’s highly dependent as well on what your funding status is. So we have… if you’ve got a bootstrapped company – and I don’t know much about Nike at the time – but obviously [he] didn’t have a lot of money. [No] He was just trying this thing out, so let’s call him bootstrapped, and he paid a low fee – I like that too – being smart about [Yep] who you’re working with at the beginning, that’s great. So in a bootstrap situation you don’t have the cash lying around to pay yourself much and that’s quite different from a funded startup where you may have enough money to pay, I like to use the term stipend, for yourself which implies enough to buy groceries, gas, heat, etc, that kind of thing, as opposed to benchmarking your salary against maybe something you earn previously at a company or something like that. Long winded answer to your question.
Glenn Suart 6:41
But it’s a good one because I think I’m pretty well aligned from seeing lots of different things. I tend to agree with all the points you made which, of course, doesn’t make it super interesting as a conversation. However, the…
Doug Ross 6:56
We should build in some debates in this. We’ll have to do that in future.
Glenn Suart 7:00
But no, let’s think about the extremes. Some people, you’re right, start a business and they think, well I’ll just pay myself, you know, what I was getting paid before, to your point. But that money should probably be going into… invested in the business and investors who invest in you aren’t gonna want to see you taking a ton of money out – they want you to be a little bit hungry at the end of the day. So to your point it’s probably more than subsistence, in terms of dollars. [Be]cause you don’t want the founder, if you’re the investor, thinking about where they’re going to pay for their next meal or their kids teeth or something like that. You want them focused on the business, so take the bills off the table. On the other hand, you can’t just pay them in stock either for the same kind of reasons – people gotta eat. And the business… if they’re not making enough money, then they’re not focused, again, on the business for the long term. So some type of combination really makes sense. One of the things I’ve come across a couple of times is, you know, people have a good idea, they want to do something and they almost immediately, you know, because they liked me I guess, they say, Hey, why don’t you have a piece of the action right away? And I, you know, I go crazy at that point. I politely, you know, I say no. If they’re going to start giving away portions of their company, early… early on… you don’t know who your partners are and all the people who are involved yet. You’ve got to be careful about giving away stock. And you have to do it carefully. Because the people you give stock away to, you’re married to them for a long time unless they sell the stock and they’re not going to sell the stock until it’s worth something. That’s one of [the] things I’ve seen before Doug… it’s scary. [Yeah] But it also… it’s easy to to give away stock because it’s not worth anything. And a lot of people who start up businesses don’t have a huge amount of money in the beginning. So that’s why they feel like it’s… oh we’re giving away stock… it might go somewhere. That’s a dangerous sign right there.
Doug Ross 8:59
Hey podcast listeners, we’re gonna take a short break now. If you’re enjoying the show, feel free to invite your friends, remember to subscribe, and if you want to help spread the word leave us a review on Apple Podcasts or your favorite podcast app. Each episode of Conversations on Startups focuses on a single topic. If you want to comment on something you’ve heard on the podcast, or suggest a topic for us to cover in a future episode, send an email to: go@todaysgreatidea.com or douglas@sparkclickgo.com. Glenn and I appreciate you and hope you find our uncut and unrehearsed stories, perspectives, and tips helpful. Speaking of helpful stuff-let’s pick up where we left off.
Doug Ross 9:44
Yeah, and it can make for a messy cap table if you’ve got a lot of people listed on there because you’ve given these small amounts of stock [away]. So I agree I would tend to limit that. Especially if it’s just here and there – little small amounts. And this theme that you mentioned about people giving away their stock for not enough money, I agree with that as well. I was listening today to another podcast and they were talking about an incubator, and this incubator takes 30 to 40% of the company. And it’s a million dollars that’s invested – close to a million dollars – most of it’s actually [non] dilutive funds anyway but this incubator’s putting in a little bit of money and taking 30 to 40% of the company. So if you do the math on that, it limits the value… you’re basically saying that the value of the company is 2.2 million, and you’re giving a ton of equity away right out of the gate. So I think you have to be very careful about that. Totally agree with you, Glenn.
Glenn Suart 10:48
The interesting point there, though – just before you leave that – I’ve heard about, you know, these… these companies – I’ve never had to deal with any of them before – but some of them have very good reputations, these accelerators. And so if the accelerator is… yeah, they’re taking 30% or something like that… but if they are vetting you in a sense, because they don’t just do that for everybody, they’re very selective, generally, the good ones on where they put that time and effort into. It’s sort of like a great stamp of approval that helps attract not only more investment but more customers and partners because they realize that there is somebody who is very well thought of in your corner. So it may be worth it. But not to any accelerator – you’ve got to weigh out these things to make sure it’s the right value that they’re delivering.
Doug Ross 11:44
Yeah and that’s… and that’s exactly how they would position themselves too – very exclusive and they really will be a springboard for you. So as a founder, you do need to weigh that out and perhaps you end up owning a smaller amount but it’s something that becomes bigger and more quickly. So that may be the case. Totally can see that point of view, Glenn. But back to your point about being careful about equity and not really using that exclusively as the way to pay people. Because if you look at it from the perspective – let’s talk about an early employee for a minute and we should, we should talk about co founders too [Yep] – let’s say you do that with an early employee, someone you’re trying to attract, you need to realize that that equity… it could take a while before the employee could get any liquidity – in other words – sell any of that stock. And you might be saying to them, oh, this could happen, you know, we’re going to have a Series A and maybe within a year or two after that [it] could be a good time to liquidate some stock, but you don’t have control over these timelines. And what you could end up with is frustrated employees who are sitting there eating into their savings to pay for their daily life because they’re only being paid in… in stock. So it can cause resentment if something goes wrong with your financing plan, or, in fact, with your traction.
Glenn Suart 13:09
Yep. No. Very good. I guess another issue that comes up with giving stock and salary is in attracting good people. And, you know, paying yourself is… What are you taking? And what is everybody else taking, you know?
Doug Ross 13:24
Cofounders, you mean?
Glenn Suart 13:25
Yeah, and they’re all like… they’re all going to be sitting there going: Well, if so and so took so much maybe I should have as much. And then it becomes this competitive thing. And to your point, if it’s not managed well, the resentment can build dramatically and, you know, affect the business. So you [‘ve] got to make sure everyone’s, sort of – especially with your co founders – everybody’s at the table and [they] know what makes sense at the end of the day.
Doug Ross 13:53
Yeah. And we hear about some of these simple arrangements – just do it 50/50, if there’s two of you – and that is the simplest and has some benefits. But it implies as well… you’re equally bringing commitment and skills and talents, etc to the business.
Glenn Suart 14:08
That’s right. And life… if life changes… [then] what happens?
Doug Ross 14:11
Exactly.
Glenn Suart 14:11
The classic example in Canada, where that happened is in Hamilton, Ontario and in the ’60s a hockey player and a police officer who knew each other started a business together, named after the hockey player, Tim Horton. It worked really well for a couple of years. They had a dozen stores and they were… they were doing very well. And then Tim Horton [sadly] died in a car crash in Ontario. The partner then, you know – because Tim Horton obviously wasn’t doing much for the business anymore directly – he bought out the widow of Tim Horton. He gave her a million dollars I believe, which was a lot of money at the time. And then he just took the business and grew it himself. And it became a huge success. And Tim Horton’s widow, after the fact, felt like she’d been taken advantage of. Whether it’s true or not… there’s a whole court case and stuff like that but these kinds of things will pop up. So you have… life will happen. And you have to think about exit strategies that everyone feels comfortable [with], if possible, when they leave. You don’t want people to leave [necessarily] but you want to know that it makes sense [if they do]. So one business that we’ve got… we brought on some key employees early on… they’re part of the team, like right now, but they have… they have commitments in terms of options for five years, and we pay them a good salary at the moment too. And they earn their options over time. But we also have the option, you know, if they don’t perform for whatever reason well then they still have the options they have earn[ed] up to that point. If there’s an exit we have a formula to figure out what the value of those shares or options would be in future so that they know upfront that if they want to cash in this is how we’re going to value our shares. And so doing that has made it a little easier… that everyone sort of knows that the company is maybe going to be worth this much, or this is what I can get for my shares. It makes the conversation a little easier down the road, if necessary.
Doug Ross 16:21
Oh, I like that. And I think that having options that have to… you have to earn over time makes a lot of sense, too. Because if somebody leaves, and you don’t want what they call dead wood, [just] somebody’s earning as much as the people that are still working there. So that makes a whole ton of sense and also thinking about how to value the company – having some of those formulas built into contracts makes a lot of sense. Yeah, you know, I think it used to be everybody, if you’ve got partners, everyone gets an equal share. The way I’ve seen it work is… it’s calculated more based on the time commitment, what they bring to the business, maybe how long they’ve been working in there, are they bringing some capital… all of those sorts of things. I think it’s never perfect but there are ways to do it in an equitable way, not necessarily equal, per se. And then somebody might have a higher need for a salary. Let’s say one of your founders is a serial entrepreneur and they cashed out their previous business for a big chunk of money. They don’t need the monthly cash flow. Well, that person may want to have – and the situation may be appropriate – for that person to have more shares and taking out less cash. So I think the whole thing comes down to risk / reward. It’s really that calculation that everybody’s going to be making… risk / reward. And, if the business does well, everyone’s going to do pretty well. It’s just a question of how things get divvied out. And obviously [these decisions] can… can cause a lot of sore thinking, or feelings, if it doesn’t [go well]. Yeah.
Din 16:46
You’re listening to Conversations on Startups with Doug and Glenn, thanks for joining us, let’s get back to the show.
Glenn Suart 18:08
So the summary is – a little bit – you’re not going to get rich paying yourself a lot of money at the beginning for a startup, your rewards will come downstream. But you should pay yourself something. You should probably do the same thing with your employees so everyone’s rowing in the same direction and, you know, ensure that they… everyone shares in the upside. That makes good sense for a business from that perspective. But don’t put on the Pollyanna glasses – rose-colored glasses – and just assume everything’s going to be great. Think about what happens if things don’t go well with your compensation. Because that will help you temper what you’re doing at the end of the day.
Doug Ross 18:51
Yeah, nicely put, Glenn.
Glenn Suart 18:53
Awesome. Well, another good episode, Doug. What are we going to talk about the next time?
Doug Ross 18:58
How ’bout something – we’ve… we’ve not touched on – but where you should start your business. I think it’s topical given today’s world where you can work remotely. Theoretically, Glenn, we should all be working in our Tahiti shorts on the beach. We work a few hours and we’re hooked up to the web and we’re fine. You know. Theoretically. But anyway, that’s what we’re going to talk about, Where you should start your business.
Doug Ross 19:40
Conversations on Startups is a production of Glenn Suart and Douglas Ross. We hope you’re having fun listening but mostly that you take action on your business idea. For more inspiration visit our websites: todaysgreatidea.com and sparkclickgo.com. Another episode of Conversations on Startups will drop soon, or is already available to binge. Thanks for joining us, and remember to subscribe and invite your friends. See ya next time!
Transcribed by https://otter.ai