So something quietly changed in the past few years. Maybe it was the investing craziness of late ‘20 through late ‘21. Maybe it was VCs not wanting to rock the boat. Maybe it was a lot of startups just plain not having real boards of directors.
What’s changed is the majority of startups that are venture-backed don’t seem to get the CEO’s and founders’ compensation packages approved by the board anymore. At least not through the early and even middle stages.
This less formal Twitter survey backs it up:
(Twitter surveys have their issues, but at least it illustrates the point, even if it doesn’t prove it)
- Most of the Seed / Series A / Series B founders I’ve invested in don’t get their comp approved by the board. Eventually, everyone does when the company adds a true CFO and outside directors and even a compensation committee pre-IPO. But so many founders skip it these days for years, even after raising VC capital. Until just a few years ago, though, almost every founder got their annual comp approved by the board, at least the CEO.
A few thoughts on getting the CEO’s compensation approved by the Board of Directors:
- It’s usually required in the Investor Rights Agreement or similar VC docs that the CEO’s salary be approved by the board.
- It may be required under state law in California and other places (not being a lawyer here), or at least arguably is. The Board itself has a fiduciary responsibility to supervise the CEO.
- Importantly, you’re sort of putting yourself at some small risk if your salary is outsized or nonstandard and it isn’t approved. You could be sued, believe it or not (very rare, but I’ve actually seen it happen). But more importantly, your investors may lose trust in you if your salary isn’t low and you never got it approved. They may think you are putting your own interests above the company if you don’t get an above-average salary approved.
Yes, VCs stopped caring about a lot of things when the public markets went crazy for SaaS. But they care again.
Do more things the standard way, the right way, and things will be less stressful. At least, as you scale, add VPs, add more investors, add more stakeholders. One important thing is to at least get the CEO’s comp approved annually by the board, and ideally, all founders and execs.
If you just pay yourself as CEO whatever you want without any board approval, it may or may not be OK. But it’s not what your larger investors will expect. It’s what everyone used to do, and what your governance and financing docs probably require anyway. At least do it as a CYA.
