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I'm the co-founder of a bootstrapping startup, and I have incentive to prefer short-term compensation, like deferred salary, instead of equity. Would it be reasonable to apply a multiplier to the deferred salary to account for the risk & opportunity cost?

I think it could work using this equation:

  1. Market-rate for my position, $10k per month, minus $3k actual paid salary per month = $7k deferred per month.
  2. I work for 4 months at the startup, creating $7k * 4 months = $28k deferred.
  3. We apply a multiplier of 3 or 4 for the risk & opportunity cost ($28k * 3.5 multiplier = $98k).
  4. We set aside 15% of profits each month to pay the deferred salary until it's fully paid out.

My co-founder wants to maintain as much equity as possible, so finding a way to make this work could be better for him also.

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Can anyone comment on if 3-4 would be the reasonable multiplier to apply? – Ashton M. Jul 17 '11 at 18:29

2 Answers

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Be careful with the words "deferred salary". In some states, namely California, it's illegal.

The best way to deal with this is to setup a "bonus" structure when certain milestones are hit. Having a bonus plan is much better than calling it deferred salary.

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If you insist on going down this profit share path, remember your partner controls the equity he/she controls the business. They can control costs and effect profits thus effecting your arrangement. Try and find a revenue share that works for the business as opposed to a profit share. It can be less problematic and keep your incentives better aligned.

NOTE: You are taking a risk for your work and putting in sweat equity. However you are only getting compensated if the risk works out and in that case you dont have any equity in the business! Your biggest upside has been eliminated.

However, your down side is still there. If the business does not work out you wont see a dime of your "deferred" salary. Or if the business works out but not as good as yall thought your payout is going to be extended so it is no longer short-term compensation but very long term compensation.

My main suggestion would be to figure out an equity deal that works right now for both of you. (IF either side is unhappy it wont work out in the long run.) When the business blows up (in a good way:), as you are planning, work out a deal with your partner to sell some or all of your equity for a short term compensation.

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