This article was originally going to be entitled a not so flattering, “No Wonder Why Startups Fail So Often.” But after thinking things through, I’ve come to realize that my previous assumptions on “The Startup Riches Myth: Sell Your Company For Millions And Still Not Be A Millionaire” were too pessimistic. We are in a raging bull market after all!
Buffer is a 3.5 year old startup that created an app to allow you to schedule and put a delay on your tweets and other social media posts. You know how you can put a delay on your washing machine so that your clothes don’t sit wet for too long when you come back? It’s the same concept with Buffer. Joe Gascoigne, the CEO wrote a very insightful post highlighting every single one of his employees wages, including his own.
Total compensation is based on a base salary and a variable salary depending on revenue performance.
Here’s a snapshot for your review:
ATTRACTIVE SALARIES FOR A STARTUP
To put these salaries in context, all the ~$100,000 and up salaried employees are in their mid-to-late 20’s having graduated college in 2008 or later. For all those who still doubt the article, “How To Make Six Figures At Almost Any Age,” please realize that making $100,000 a year is now very commonplace in big cities such as San Francisco and NYC. No longer do you need to get a graduate degree from a good university to command six figures. Inflation and a rip roaring economy is creating fantastic wage growth.
As a Wall St. guy for my entire career, I always look at startups from an investor’s point of view. You know how some think whenever they first meet someone whether they’d marry them? Well I always think when I first come across a company whether I’d invest in them.
My first instinct as an investor was, Wow! They sure have a hefty payroll for a company on a recently achieved $237,000 November run rate. If you add up the above 14 key employee figures ex-boot camp employees the payroll is roughly $1.38 million a year. I’m not sure how to add up the bootcamp employee pay, but let’s just assume these four employees find full-time jobs and add another $350,00 to the payroll which now totals $1.73 million a year on a $2 million annual revenue year.
Joe mentioned in a comment response that based on their current run rate, they don’t have to burn cash anymore. Makes sense given monthly salary cost is $144,000 compared to the $237,000 November revenue figure. Add on $50,000 a month for everything else and if Buffer can keep up a $200,000+ a month run rate, they should be all good.
But what about cash reserves? Buffer raised $450,000 from Angel investors in December 2011. They currently have around $311,000 in cash reserves, which is pretty thin for a ~$200,000 a month cost structure. If goodness forbid revenue halts, Buffer would be in the red in a matter of two months.
As a personal finance blogger and an investor, this frightens me because the world is always changing. Twitter could come out with their own Buffer-like app, Buffer’s product could break, or a new competitor could come out of the blue. Twitter could also buy Buffer for big bucks too since Twitter is now worth $30 billion + dollars. In personal finance, it’s good practice to have a minimum of 6-12 months of semi liquid reserves of cash and cash equivalents in case emergencies happen.
Buffer could always raise money if they started to seriously bleed cash, but that would lead to equity dilution and you never want to raise money when you are desperate for money. For these reasons, you’d think they’d be more conservative with their cash. Let’s hope they are at least flexible to slash salaries in times of need.
THE GET RICH FINANCE STRATEGY
I’ve always come under the assumption that founders should pay themselves as little as possible due to their equity stake. Founders want to preserve cash at all costs and demonstrate to their investors and their employees that they are willing to sacrifice everything for the good of the company. Engineers, the creators, should be the ones who get paid the most. Salary and equity generally are inversely correlated in startup land.
This isn’t the case at Buffer where the CEO and COO are making the most. Senior engineers are getting paid $200,000+ in the Bay Area. I’m a landlord and one senior engineer from Google who applied put down a $400,000 income after seven years at Google for example. Paying only $100,000 is a big outlier. If I was Buffer, I would be seriously worried about losing their engineers to competitors with their salaries now public. It doesn’t take much for someone to feel envy for another in the work place. Even being underpaid by $5,000 will tend to eat away at someone until they slack off way more than their $5,000 of underpayment, or they irrationally move to another shop just to feel whole again. I’d either increase their wages or give them more equity ASAP.
Everybody else’s salary looks pretty hefty for their work experience, and I’m pretty ecstatic for them. If they can pay the vast majority of their monthly revenue in salary and hold off long enough to get bought, then it’s a win-win! It’s like owning a 6% dividend yielding growth stock, an absolute rarity in today’s environment. Everybody knows that being able to monetize equity is hit or miss in startup land. But accepting below market rate pay is what a lot of people do to be able to one day strike it rich.
With my own online business, I pay myself enough to not draw any attention from the IRS because I don’t need much to survive due to my various passive income streams. Everything else, which is a majority of monthly revenue, gets saved as retained earnings. But I’ve always had a savings mentality all my life, whereas startup land is all about growth. If you can pay yourself all that cash and retain all your equity as Buffer is doing, then all you’ve got to do is wait for the big fish to pay you an obscene amount of money.
PROPS TO BUFFER
Joe’s post on salary transparency is fascinating. I used to always wonder why don’t startups simply keep on going since it costs practically nothing to renew their domain name, keep the lights on, and collect revenue. I’ll never shut down my online business for these reasons. But now I completely understand why. Unlike me, not many people are willing to work for nothing!
A lot of people would be distraught if their company publicly announced the salaries of all employees. Imagine how much grief the engineers are getting from other engineers in the industry for getting paid less than the “Chief Happiness Officer” i.e. customer service head. But again, it’s not a problem of the CHO getting paid so much, it’s the issue of the engineers getting paid relatively so little.
The upside to complete transparency, especially using a detailed formula to determine wages, is that it eliminates discrimination. Women are instantly entitled to the exact same salaries as men, and there’s no questions about how seniority and performance impact total compensation. Although it would have been more telling if the CEO didn’t actually pay himself the most as that would create more confidence from investors and dedicated employees since the CEO would be putting others before himself.
Here’s hoping Buffer gets bought out for mega millions! In a world where tech companies are still in the red every month for the sake of growth, Buffer is able to pay themselves nice salaries without drawing down reserves. That’s impressive in my book. Let’s just hope their November monthly revenue decline was just a blip, and that the good times continue for a long, long time!
Readers, if you were an investor in Buffer, would you be concerned about their cash burn rate? Do you think their salaries are high, low, or about right? What are the pitfalls for publicly publishing all your employees salaries? Do you think Buffer will be bought? Or will Twitter just come up with its own app?
Note: If any Buffer folks want to get lunch some time, I’m based in SF as well. I’m looking forward to reading the equity stakes article next Joe!
Mel @ brokeGIRLrich says
I definitely wish I’d worked at Buffer during my brief stint in customer service. Golly.
Overall it seems like a very chancy investment, primarily because of their low amount of cash reserves. If it were to improve in a few months, I’d look more favorably upon it. It seems to be an improved HootSuite? That times your content at better times? I can see that having a good draw for businesses and freelancers.
On the flip side, no risk, no reward, right? Kind of the nature of investing.
Yeah Buffer is like HootSuite. I actually like Hoot’s app better than Buffers but I use both.
Wow very interesting.
Let’s face it comparing wages in some random start up to google wages is not comparing apples to apples. OK… the engineers here may well be the best about and have decided to take the risk of lower wages for a stake in the start up, but on the other hand, they could well just be not good enough to get into google. Who knows? Maybe Joe will write another article on that? 🙂
It’s also interesting (read… ridiculously frustrating) to see that what amount to junior developers get six figure salaries, compared to what is available over here in the UK. Junior level earn around £30k ~ $50K, mid to senior will be average £50K ~ $80K and a CTO around £100k ~ $165K. So it’s fair to say engineer wages over there are much higher I think.
I guess I need to quit whining, up my game and get a job at Google UK, or start my own start up! Or move to SF!
Financial Samurai says
Bingo! Complaining does one no good. Either do something about it or enjoy what you got!
The point of this article is that this start up IS paying market wages and burning through a lot of cash. But the engineers seem to be getting short changed if they truly are “Senior Engineers.” That said, they probably aren’t and wouldn’t qualify as a market determined Senior Engineer, hence their wages.
It’s a fun conversation!
Question: How come the UK hasn’t invented anything tech/internet related in a while?
Sam you are normally so lightning quick to reply… how do you do it?
I think you may have discovered a successful cloning technique? 🙂
Anyway back to the question… I didn’t want to reply quickly last night as it’s a good discussion as you say, so here is my well thought out (long winded) reply
There is a thriving start-up culture in London focused mainly around “The Silicon Roundabout” (How quaintly British eh… you lot get a whole fricking Valley and we get a roundabout ha ha. Have you ever even heard of it over there?). Anyway there is a lot going on round there and a it does attract talent and big companies. Although I have to admit I could not tell you which off hand, a quick google search reveals:
http://www.telegraph.co.uk/technology/technology-startup100/ – Spotify main offices now in London
http://www.wired.co.uk/magazine/archive/2013/11/european-startups/london – OK so I never heard of most of these but they are seemingly attracting some big investors.
Not to mention many big name companies setting up shop in Ireland – due to tax breaks mainly I think!
In terms of wages… things are very much “Untransparent” over here unfortunately so my estimates are simply from a tech job website. I have no idea what a start up would pay now as the only one I’ve ever worked for is the one I still work for now, and it got sold off the year I joined, so I missed out on any of the cashing in as well. I graduated in 2003 so was just fairly pleased to have gotten a job in a sector I was interested in to be fair so did not complain… Which brings me onto another point… Could it just be that us Brits are too polite to complain about our wages? There is definitely a case for that I think… people just get on with it and don’t fight for a better compensation package, and just accept what the going rate is or even worse whatever their employer gives them. I’ve definitely been guilty of that myself, but then I’ve always said “Money isn’t everything to me” – maybe I’ve been mugging myself off over the years, or maybe I am shrewd and have stayed at a company where I’ve been relatively happy over the last decade. Again no regrets, and I’ve made some good progress over the last few years on the wages front anyway.
Another point to highlight from that second link:
“applications to IT-related degree courses have almost halved in the last decade. Meanwhile, 44 percent of digital employers report difficulty in finding team members with the right technical and practical skills.”
This is what I have noticed when trying to employ engineers. There is a dearth of talent out there but that should mean that wages are driven higher!
It’s a bit of a joke to be honest. Are the youngsters up and coming nowadays really just that lazy that they cannot be bothered to do a technical subject? Are they all busy getting a degree in travel and tourism? I don’t know but It would seem that way! Or is it a chicken and egg situation? Youngsters are looking at average wages for engineers and thinking… that looks like a lot of hard work for not much payback, I may as well do an easier subject… which then means the talent pool is then likely to be of an overall lower quality, and employers think… well I’m not paying top dollar for these low quality applicants.
I genuinely think a part of it is the instant gratification “X-Factor” get rich / get famous over night mentality that has been coming about for at least the last 15 years. I know you have that over there as well but you also have a big enough population to get a huge pool of ultra motivated and smart individuals, and the fact that the wages are there probably increases the pool. It seems like US is in an positive feedback loop and UK is a negative one in that regard.
Right… I’m going to stop now even though I could go on… hopefully that wasn’t too boring and once again thanks for the interesting points and discussion raised.
Buck Inspire says
Fascinating post Sam! Transparency is great for online entrepreneurs building their authority and showing their expertise, but I don’t see how it can benefit Buffer. Salaries are always a touchy subject and when you have a Google engineer making 4 times as much, I don’t know how the Buffer engineers can not think about it. Money isn’t everything, but that’s a lot left on the table. Maybe they know something we don’t? Hope someone from Buffer takes you up on your offer!
Pretty amazing a private company would give up their privacy by publishing every one of their employee’s salaries! As a manager at a firm, I can GUARANTEE you that at least a couple of them are NOT happy!
Transparency is one thing, but absolute transparency on salaries is a no, no. The engineers are definitely underpaid and the “Chief Happiness Officer’ is definitely overpaid to the point where you wonder whether there is some intimate relationship she has with the CEO. $100,000 for a customer servicer person? I don’t think so. Try $60,000.
The reason why they are paying themselves so much is probably because they realize they can’t grow as quickly anymore. This is as good as it gets. If there were great growth opportunities, they’d be plowing that money into the company and investments not trying to spend everything they make. It’s the symptom of being run by young people who don’t know management.
The November pause is very worrisome. I frankly wouldn’t invest. But good for them for getting paid while they can, and convincing their angel investors it’s OK to spend everything!
Financial Samurai says
Only time will tell how things go. Let’s see if the core group stocks around over the next six months.
Wow that is quite a shock that they would publish that much info in detail. Its definitely nice to have transparency on what goes into each person’s salary and that nobody can be descriminated against. I’ve seen a lot of unfair compensation figures at places I’ve worked that just didn’t make any sense.
A lot of things are moving towards more and more transparency so I’m curious to see if more companies esp startups start to follow in their footsteps. Not sure I’d want my own profile publicly associated with salary for anyone in the entire world to see. Companies could still have transparency but keep it within corporate walls.
Financial Samurai says
Fairness in compensation is definitely a positive. An employee can easily argue why they deserve more, but the manager can argue the opposite as well!
The people who love transparency the most are the ones who now realize they are being overpaid for what they do. They just need to hope other people don’t realize it too!
Engineer BA says
Very interesting article! I’m a “senior engineer” at a larger firm, so I couldn’t possibly make more than the CEO and CTOs. But, I am going to pull in about $275,000 this year.
Buffer’s senior engineers are still young, so $100,000 is probably in the ballpark as they are senior at their company, but not very senior in the market place if you know what I mean.
A less than two month operating cost coverage ratio is concerning. But they are a private company and can do what they want.
Financial Samurai says
That is the beauty of private companies, being able to do whatever they want. I guess the irony is that as a private company, publicly displaying your compensation for the world is not what a private company usually does. In fact, part of the benefit of being a private company is so that you can spend and strategize at your own pace at your own desire without prying eyes.
The upside for high wages is that if Buffer fails to get bought at a premium, then at least they weren’t leaving much on the table in terms of wages. Maybe they don’t need cash any more to invest in their product, so they are returning everything to shareholders in the form of high wages.