No, you're not rich personally. The money belongs to the company and any sane founder will put more money back into the company rather than taking substantial salaries.

You can upgrade from ramen to TV dinners though.

Closing a VC round is meant to HELP your company take off, not settle. There's a very good reason why it's often referred to as "runway."

The number one motivating factor for startups and the reason why they're able to operate more efficiently than larger competitors boils down to one thing: desperation. Having limited resources makes you desperate and hungry. Besides, living in a cramped apartment and eating ramen is a good reminder of what you get when you don't win (and having a roof over your head ain't too bad).

Paying yourselves $300K when you guys probably don't have revenue is a great way to mislead your investors, create politics amongst employees, and, most of all, make you complacent.

Now, (mis)using investors' money to live the life isn't unheard of. I once interned at a company that basically lost hundreds of millions of dollars every year and addressed this by systematic studio closures and layoffs. The company's misfortunes resulted from poor oversight by the management team and had almost nothing to do with those being laid off (they all went on the be headhunted by competing firms). Following suit, every year, product-producing employees were let go while executives maintained their $400K salaries. The management team basically did whatever they could to keep the company alive while they drew as much salary as possible. Interestingly enough, this behavior actually began when they got funded in the late 1980s.

On paper you're close to rich, in the sense that your stock in the company is worth a lot. But it's illiquid, and most of it may not legally be yours yet because of vesting. On the other hand, after a series A round you'll be able to pay yourself a decent salary-- maybe 1/2 or 2/3 of market rate, which will probably be a great improvement.

In a startup you generally want to make your salary as low as possible. You're not going to get rich from salary but from the company scoring, so why take money out of it?

Let's take Loopt as an example. Y combinator gives the founders $10,000. They code and live like animals for three months. Their hard work pays off... another VC gives them $5M.

At this point, do the founders still have to share a crappy 2 bedroom rental and eat ramen? Or, can they pay themselves $300K a year and use their salaries to put a down payment on a decent condo?

Rich is a subjective thing, but in a short answer: no.

You are not rich. The money comes with strings and it will almost certainly say what you can and cannot do with it. It is not your money, it is the companies money. The company which you no longer have full control over. As well, when and if a liquidity event occurs, conditions on the series A financing may have the VC's taking several times their listed percentage. On the chance that this doesn't happen and you go out of business, which you probably will if you give everyone a quarter million dollar salary and a cushy office downtown, the VC's will take several times their initial investment and this time... this time you get nothing.

VC funding is not an end. It is only a step. And it is a step that can, and in my mind should if possible, be skipped. Five million VC bucks in the bank isn't cash in your pocket, it's debt. Holding debt doesn't make you rich.

I beg to differ.

In the Bay Area, VCs expect and want the founder/CEO to make approximately $150K to $175K per year after the VC round (i.e. Seies A). I have confirmed this by asking VC panels here in Orange County during open-mike sessions.

What should be clearly understood is that you are actually financing a part of that compensation via your significant equity dilution that would result from the new vesting schedule put in place by the VC! You typically can't escape this new vesting if you want VC money...which is why PG's question about how much cash will you take to just walk away from it has real substance behind it.

As I said, rich is subjective. My last job paid just shy of your quoted salary and I would not consider that to be rich. Very well off, yes, but not rich. Rich, to me, is what you have behind you in your savings and investments, not what you have to look forward to in salary and the like.

I agree with everything else that you said though.

Ok:

This seems useful, but I don't fully understand it. Are you saying that the VCs will force you to take a high salary, so that they can take a bigger chunk of your company?

No. They will not do that. No good VC would not force you to take a high salary if you would rather the money went into the business. They'd probably even like that. A founder should be setting the vision and culture of the company. Compensation is one piece of that culture. You set a precedent by taking a big salary and you set a message by taking a small one (i.e. Jet Blue - CEO, COO, CFO each have a base salary of $200,000 / turned down bonuses during bad years).

It's not a question of forcing. It's the norm. All other things being equal, why should someone take a lower salary?

And there are other factors. If your compensation becomes a benchmark for the rest of the team, now your company is in real trouble. You can't expect to hire key team members at less than the norm. It just won't happen. VCs know that.

Also, a VC's main job is to put out as much of their committed capital as possible into good deals. Allocating a large part of a preferred equity tranche to fund the maintenance and creation of a solid team is the right thing to do.

And comparing with large companies is not apples to apples. That's a different world; here's an extreme example of that world: http://valleywag.com/tech/greed/the-grotesque-1-salary-251104.php

Why do you ask such a question? Getting VC money is validation that what your working on has the potential to solve a really big problem. Depending upon th liquidation preferences the angel investors can cash out or retain a new class of share. Its still ramen and hard work until you a) build a super sustainable company (recurring revenue, cash, employees, scalability) or exit (being bought by another company, trade sale, IPO etc) Then you've made it as an entrepreneur...

All -

This is an important question, and one that may have not been answered. To the people who say you can take a $150K salary: how sure are you? ($300K seems wildly excessive to me, as CEOs of 400M corporations don't make that much in salary, they usually get stocks + benefits to augment salary to the $500K range)

This would have been great to ask at startupschool.

Not at all, let me tell you ;)

And if you care about the business, you won't take a $300k salary either.

good question, most vc's will be ok with the CEO and a co-founders paying themselves $150k salary. They do not want you to starve and salaries are a component of every companies operating costs. $300k is a bit excessive. VC's love frugality.

So while you won't be rich, you will be able to upgrade from a 7-11 diet to Whole Foods.

Saying $300k is a bit excessive is like saying gas prices are only a bit excessive -- huge understatement. I don't know how plausible a $150k salary is after a Series A, but I can't imagine any good founder paying himself close to that amount.