The fair way to handle your payroll in times of crisis
Making decisions that impact the lives of your co-founders and your employees is not easy. But, as CEO of an early-stage startup, you have no one to look up to and no one to hide behind. When winter is coming, you are the only one in the position to act decisively and immediately to protect your company and to ensure its future.
Here is what you need to do today in order to survive the incoming economic downturn. (I trust that you have already put in place the measures to protect your company’s runway and reduce the negative impact of the new market conditions: cut marketing costs, kill travel, re-discuss suppliers’ contracts, reduce overhead, and so on).
1. Founders should take a loss
The first measure you should put in practice — as a conscious CEO of a tech startup — is to cut all founders’ salaries by 30%, yours included. This is the only way to prove your firm commitment to your team and your investors.
Founders not willing to temporarily accept a salary decrease for the good of their company should resign with immediate effect. Their unvested shares should go directly to the Options Pool and should be used for the purpose of step two described below.
Proceed to step two only after step one is put in practice and communicated across the entire organization.
2. Everyone else should take a risk
Secondly, cut all salaries by 20% and compensate everyone by granting options of the same value. A good CEO will be able to implement a 25% adjustment while the super-star CEO of a driven team will go as high as 30%. (In other words, start using the Options Pool as a savings account to extend your runway. Let’s say that your startup was recently valued at $3 million, you raised $250,000 and created an Options Pool of 10%. Practically, you have a runway of $250,000 in cash and a savings account worth 10% of your valuation, which is $300,000, that you never used. Start using it!).
This radical measure is not a payroll correction for the employees, but a value transfer: a conversion from cash rewards to equity.
It is not a penalty, but a risk distribution within the team: applying this measure will better align the interests of all team members, turning spectators into stakeholders who will benefit from the future success of the company.
Anyone not willing to accept the transfer is a tourist and should not be part of an early-stage startup. Fire those immediately — the best HR decision you will ever make.
Those that will embrace the measure are the true believers who will support the company in the long run, in good times and in bad times.
In any company, there is only a handful of people that have the power to change things and make the hard decisions. Failing to act is unforgivable.