VC-Backed Startup Chiefs Take Pay Cuts To Protect Working Capital

Startup founders and leaders are taking pay cuts to 'extend the runway' for their firms in hopes that the tech market will turnaround in a time period long enough for their funding not to be run out. 

While not unprecedented - this has happened during previous market downturns - it does signal the extent to which the declines in funding and deals has impacted startup companies. As the old VC adage goes, 'if we get cut, you bleed.' JL

Angus Loten reports in the Wall Street Journal:

Startup leaders are taking a pay cut to help their companies weather a prolonged slump in venture-capital investing, including fewer funding deals, falling valuations and unfavorable conditions for public-market debuts. So far this year, the average annual salary for CEOs at U.S. startups has fallen to $142,000, down from an average of $150,000 in 2022, and the lowest since 2020. Total funding for startups worldwide in the first quarter dropped to $58.6 billion, a 61% decline from the same period last year. The total number of first-quarter deals fell 37% from the year-earlier period.

Startup leaders are taking a pay cut to help their companies weather a prolonged slump in venture-capital investing, including fewer funding deals, falling valuations and unfavorable conditions for public-market debuts. 

The downturn even has some of these chief executives dropping their paychecks to zero, in an effort to preserve cash during wider gaps between funding rounds, financial managers and investors say. 

 

So far this year, the average annual salary for CEOs at U.S. startups has fallen to $142,000, down from an average of $150,000 in 2022, and the lowest since 2020, according to Kruze Consulting, an accounting firm for venture-backed companies. The salary figures are based on an analysis of financial data from more than 400 of the firm’s private venture-backed startup clients, Kruze said.

Most chief executives at early-stage startups—who often are also a founder or co-founder of the business—set their own salaries based on prevailing market rates. As startups mature, salaries for CEOs and other executives are more likely to be decided by the company’s corporate board.    

“When these companies start getting low on funding, founders will do whatever they can to extend runway,” said Healy Jones, Kruze’s vice president of financial strategy. “But some founders are clearly in a tougher spot than others.” 

Jones said this year’s average salary is being weighed down by a number of CEOs who are drawing no salary at all. At the same time, he said, a handful of outliers have raised their salaries, as indicated by a rising median salary. That suggests a smaller pool of healthy businesses are getting the bulk of available capital, limited as it is, while others are struggling, Jones said. 

When these companies start getting low on funding, founders will do whatever they can to extend runway.

— Healy Jones, Kruze’s vice president of financial strategy

Total funding for startups worldwide in the first quarter dropped to $58.6 billion, a 61% decline from the same period last year, according to market analytics firm CB Insights. The total number of first-quarter deals fell 37% from the year-earlier period to 7,024, the firm said. 

Mark Leahy, co-chair of startup and venture capital at law firm Fenwick & West, said to cope with the drop-off in deal making, executives are agreeing to cut their salaries to lower their company’s burn rate—the amount of capital a business spends over a given period. 

“Given the challenging current fundraising environment, many companies are seeking to extend their cash runway and to push towards cash flow break-even in their business,” Leahy said.

Steven Rosenblatt, co-founder of seed-stage investing firm Oceans, said most first-time startup CEOs—despite the popular image of highflying tech-sector millionaires—are no different than anybody else when it comes to compensation and will feel the pain of lower salaries. 

“You have a small few who can sacrifice taking a salary for an extended period of time, but for most they need some salary to live and pay their bills,” Rosenblatt said.

As a matter of sound business practice, he said, startup boards should offer deferred bonuses or stock grants to executives who forgo high salaries now, or stop drawing salaries altogether. “As an investor, I want to know that the CEO isn’t worried so much about their personal life that it forces them to make the wrong short-term decisions,” Rosenblatt said.

 

Startup CEOs often take below-market salaries to begin with since they tend to have a large share of equity in the business, said Mitchell Green, founding and managing partner at venture-investing firm Lead Edge Capital.

Some investors see startup chiefs cutting their own salary as admirable—even a positive sign that the business is in good hands. 

“I have a lot of respect for this instinct, which reflects a depth of commitment that is an essential ingredient in long-term company building,” said Peter Wagner, founding partner at early-stage investor Wing Venture Capital. He said it is telling that CEOs who are also a startup’s founder are more likely to take one for the team than recruited executives.

“The founders are naturally more bought into the vision and more dedicated to seeing it through—at least the good ones are,” Wagner said.