[Matrix Moments] How do founders decide on their compensation
As a founder, how do you determine what your own compensation should be? And what is the right salary to be drawn across stages? It is a tough question, but Avnish Bajaj, Founder and Managing Director, Matrix Partners India spoke about a few things founders can keep in mind while looking for the right compensation.
Avnish explains that for founders, the opportunity cost is generally very high, and the company won't be repaying the net market. The company's real alignment with the founder’s interest comes because of their and the investor's equity ownership, while they put in the opportunity cost for the equity ownership.
"However, I believe founders should be compensated fairly. Now that fairness is a very subjective issue, what I’ve observed in the market practice is that when companies don’t have a lot of money, the founders will typically draw Rs 1.5 lakh to Rs 2 lakh a month each," said Avnish.
He added founders are setting up the tone for the entire organisation. Avnish says that there are companies likewhere people can join by at least taking a 40–50 percent cut, otherwise they don’t achieve a founder’s mindset.
"But more importantly than a number, I do believe that companies need to have a performance-driven culture. So I’m a strong believer in variable compensation, whatever be that number — Rs 2.5 lakh or Rs 5 lakh. I believe companies, as well as founders and senior management, should have 50 to 100 percent more as variable compensation, and in the process, it forces alignment between the board, the investors, and the founders," said Avnish.
He adds there is a rule of thumb that before 50 to 100 percent at the founder level, and each level below half of that — 25 to 50 percent at L minus one and so on — should be variable.
"It creates a performance-driven culture that aligns the whole organisation, the board, as well as the investors. The payout should typically be 80 to 120 percent of the targets of that company. We at Matrix Partners India also follow a similar structure," said Avnish.
Listen to the podcast here.