I read many business plans for early stage companies - most of whom are seeking some sort of seed or early round capital funding from private equity investors. One of the largest discrepancies I see in plans is in the expense models regarding allocation of salaries.
Post-revenue, most businesses will find salaries (including benefits) falling somewhere between 30% and 55% of their net revenue. But what about pre-revenue companies that are looking to use early capital to launch? I read a plan where a company was looking to raise $2.5MM while allocating $1.8MM to salaries. I've seen others where the officers are essentially taking nothing and eating ramen noodles until the company begins producing revenue. In a recent plan, a pre-rev company is using nearly 55% of a small seed stage raise on salaries over the first few months.
There are a few consideration for how much to put towards salaries. First, you want to consider sources and uses. There is a major difference on paying high executive salaries with early stage monies verses paying developers or sales force. When talking uses with private equity investors, most investors want their dollars to go towards growth and scaling - i.e., develop and sell. Paying high CEO salaries is troubling for most investors. A CEO who is instrumental in early sales may want to more clearly explain his/her role in the plan and show the expense as related to sales. Few seed stage companies should be paying salaries for a CFO, COO or CLO - unless they are also master sales people.
Second, officers who are taking a high equity stake need to consider the high stake as part of their overall package. The high salary should come when the company is successful, but the lower salary in the early days is intended to be offset by the equity position. Sorry - raising seed capital is not a get-rich-quick deal.
Third, consider tying non-equity employees salaries to incentive compensation. If they are successful, the company is successful, and they make higher wages. The common example of this is to tie a sales person's salary into commission or to give a developer a profit interest in the company. This will reduce the dedicated spend and will reduce the need for capital.
Of course there are other considerations - many depend on industry and supply/demand of employees with necessary skill sets, but a business owner seeking capital should know that this is a major area that investors look at with suspicion - especially when dealing with professional private equity firms or angel investor groups. In the early stage they want to see their dollars go to growth - not to pay you the big bucks while you work to make the company successful.
Post-revenue, most businesses will find salaries (including benefits) falling somewhere between 30% and 55% of their net revenue. But what about pre-revenue companies that are looking to use early capital to launch? I read a plan where a company was looking to raise $2.5MM while allocating $1.8MM to salaries. I've seen others where the officers are essentially taking nothing and eating ramen noodles until the company begins producing revenue. In a recent plan, a pre-rev company is using nearly 55% of a small seed stage raise on salaries over the first few months.
There are a few consideration for how much to put towards salaries. First, you want to consider sources and uses. There is a major difference on paying high executive salaries with early stage monies verses paying developers or sales force. When talking uses with private equity investors, most investors want their dollars to go towards growth and scaling - i.e., develop and sell. Paying high CEO salaries is troubling for most investors. A CEO who is instrumental in early sales may want to more clearly explain his/her role in the plan and show the expense as related to sales. Few seed stage companies should be paying salaries for a CFO, COO or CLO - unless they are also master sales people.
Second, officers who are taking a high equity stake need to consider the high stake as part of their overall package. The high salary should come when the company is successful, but the lower salary in the early days is intended to be offset by the equity position. Sorry - raising seed capital is not a get-rich-quick deal.
Third, consider tying non-equity employees salaries to incentive compensation. If they are successful, the company is successful, and they make higher wages. The common example of this is to tie a sales person's salary into commission or to give a developer a profit interest in the company. This will reduce the dedicated spend and will reduce the need for capital.
Of course there are other considerations - many depend on industry and supply/demand of employees with necessary skill sets, but a business owner seeking capital should know that this is a major area that investors look at with suspicion - especially when dealing with professional private equity firms or angel investor groups. In the early stage they want to see their dollars go to growth - not to pay you the big bucks while you work to make the company successful.
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