At What Point Does A CEO’s Salary Raise Serious Red Flags With Investors?

We’ve all heard the expression that salaries should commensurate with experience. Well that’s all well and good when you’re working for someone else. But it can be problematic when you are hiring yourself as the CEO of a company that you founded, control, and is being capitalized by outside investors.  In that instance, a CEO’s salary should depend on a company’s capitalization, its revenues and the CEO’s success in amassing shareholder value.

Determining the appropriate salary for the CEO of a pre-revenue startup is particularly challenging.

According to Foundry Group venture capitalist, Seth Levine, a good rule of thumb is as follows:

• Companies that have raised less than $500K tend to top out at a salary of $75K per year.
• Companies that have raised $1M or less usually to pay their CEOs between $75K and $125K per year (tilted to the lower end of the scale).
• Companies that have raised between $1M and about $2.5M typically compensate their CEOs around $125K per annum.
• The amounts skew up from there as companies raise more capital.

David Rose, CEO of Gust and founder of NY Angels, suggests an approximate annual salary of $150K following a $5M Series A round.

I personally believe that it should all boil down to job performance. If a CEO is unable to raise sufficient capital, is not producing revenues and is failing to launch viable products, then he is not doing what he hired himself to do. The function of every CEO is to create shareholder value – not deplete it.

Shareholders are in the business of generating returns – not funding hopeless dreams, paying off a CEO’s mortgage or picking up her Peter Luger’s tab (see:http://www.crowdfundinsider.com/2015/05/68116-when-to-pivot-when-to-fold-what-every-ceo-investor-needs-to-know/).

Even investors in private companies have information rights. It would behoove you to request the compensation history of all key employees. It is the only way to conclusively confirm that a CEO you entrusted your money with is not raising salaries as the value of your investment diminishes.

This article can be summed up in the following two charts:

This article was originally published on LinkedIn Pulse