Investors get pretty nervous when management teams are paid too much money in really young companies. Basically because there is a belief that the overpaid emerging company executive should be 'hungry'.
I often describe it as one pay lever that has 'equity' at one end and 'cash' at the other. If the lever is pushed toward cash then less equity should be available. If pulled towards more equity then less cash should be taken.
Any package should be generous, but it is the mix of equity and cash that is critical to get right.
The next issue is how much cash ? The point I often make is that this can always change over time - so the first award is not set in stone. I have seen 2 examples of start ups where investor indigestion has taken place.
The first was a few years ago when an inexperienced VC, but really successful property developer backed a venture where the CEO was on $500,000 package. Basically all money that was going into the venture went to the CEO. The VC became agitated and pushed for unrealistic results on an even more unrealistic timetable. All very disappointing as both individuals were talented and the business model had real legs. it all fell apart in my opinion because of the poor initial salary package which was unsustainable.
The second is more recent. A management team is on a good wicket ($300k packages) and have sought funding. Investors have pushed back on this as they want money to go into the development of the business - not the hip pockets of the executives running it. And there is a difference.
In my opinion the right level for executive pay in start up land (depending on size of company) is between $80,000 and $150,000. This assumes that equity grants will take place as well.
A tough issue, but these are my thoughts. For the executive the balance needs to be struck between what they will be paid, and how investors will view those pay packets. If the pay packet is seen as off balance then it may have bigger ramifications for funding going forward.
