Only 2 in 5 founders of young scale-ups pay themselves a salary

The majority of all scale-ups in Belgium today were founded by a team, usually composed of two people who know one another well. Often, they hold a C-level position in which the directorship of the company is shared between the two. Their remuneration consists primarily of shares and cash, with shares as the primary form of remuneration, particularly in the first few years. Only two in five founders of young scale-ups actually pay themselves a salary, while only about half of all scale-ups conclude dynamic share purchase agreements from the start about the course of action to be taken should one of the founders leave the company or take up another position.

These are the main conclusions presented by the Rising Star Monitor. This unique study, conducted by Vlerick Business School in collaboration with Deloitte Belgium, for the first time gives us a picture of young Belgian companies with ambition and potential for growth. Professor Veroniek Collewaert, Professor Sophie Manigart and researcher Zoë Imhof investigated both the composition of the founding team behind these scale-ups and their remuneration policy.

When a company is founded, the first decision to be made is on the composition of the founding team. Are you looking for a co-founder? And if you are: where will you find this person? And how will you allocate roles and responsibilities?

1. Team composed of 2 founders as the foundation

The majority of young companies with growth potential (76%) are founded by a team, typically composed of two people. The advantages—diversity, knowledge, network and capital—tend to outweigh the costs. The founders of these companies are, on average, 37 years old. Of these, 85% are men and 61% are founding a company for the first time in their lives. When starting their company, they have an average of seven years of work experience, six of which are in management, in the same sector as their start-up.

2. No strangers to one another

91 per cent of all interviewed founding teams knew one another prior to starting their company. Apart from friends or family members, most of these are former colleagues (63%). ‘The fact that the founders generally know one another well creates a sense of basic trust, first and foremost’, explains Professor Veroniek Collewaert. ‘If you have worked with someone before, you have a clear picture of one another’s strengths and weaknesses and have probably already overcome several hurdles together in the course of your professional career. This results in a realistic and critical perspective on the company, which is important when you are about to embark on a risky adventure together’.

3. Solidarity at C level

The founders generally allocate themselves a C-level position. 64% of founding teams have a CEO, 15% a CTO, 6% a CFO and 5% a COO. Sometimes the position of CEO is taken up jointly by two co-CEOs. The idea of equality is also illustrated in the fact that strategic decisions are usually made on the basis of consensus.
Veroniek Collewaert explains: ‘Often, they see no reason to differentiate. They are, after all, in the same boat. On the other hand, this choice could also point to a reluctance to enter into discussions or make difficult decisions. Investors therefore also interpret the excessive use of C-level positions as a warning sign. Due to the many uncertainties facing a company in its start-up phase it is not always certain that a company will be able to continue growing. Additionally, it is very difficult to demote someone without causing frustration or discouragement’.

Aside from the composition and operation of the founding team, there is also the financial aspect to consider. How do you determine your level of remuneration and how do you divide the share capital? ‘These decisions are often based on intuition rather than on objective data. To bridge this gap, we investigated the various types of remuneration that founders allocate themselves. Shares and salary in cash comprise the two key forms of remuneration here’.

1. Particularly a basic salary, and not even that sometimes
  • Two out of every five scale-up founders did not allocate themselves any salary in the year of foundation, or during the first subsequent years.
  • Remuneration—if allocated at all—is usually granted as a set basic salary; variable remuneration (a cash bonus, a pension plan or dividends) is practically never allocated.
  • Additionally, this remuneration is often rather low.
  • The longer the company has been in existence and/or is growing, the amount of remuneration paid out in cash increases, while on the other hand the founders see their share percentage drop.

These observations stand in stark contrast to our stereotypical image of the prosperous entrepreneur. Considering that the emphasis in the first years is above all on a quest for funding, cash remuneration is often not built into the budget. Most founders rely on their shares as their primary form of remuneration in the future. It’s a good idea for starters to be realistic in this’, says Veroniek Collewaert.

2. Control over and allocation of the share capital
  • In more than the majority of cases, the members of the founding team retain full control over the share capital.
  • What is striking is that approximately half of all founders who participated in this study distribute this share capital equally, or almost equally. On average, a single founder will possess 42% of the share capital.
    Share allocation is typically based on the contribution of each founder in the start-up. Among the companies we interviewed that do allocate the shares according to this benchmark, we have seen that the owner of the concept behind the company generally acquires an average of 44% of the share capital, while the other founders obtain approximately 25%. Additionally, every 10,000 euro increment that a founder contributes as starting capital is equal to 1% more share capital on average. And CEOs possess an average of 50% of the share capital, as opposed to 26% for non-CEOs.
  • With regard to the allocation process, speed is of the essence. Forty-four per cent of the founding teams spend only one day or less negotiating the number of shares allocated to each member. ‘In other words, this allocation is not that well-thought-out’.
3. Better agreements could be made with regard to share capital
  • At the time of founding their company, only half of the founding teams have actually set down agreements on paper about what happens with the shares should one of the founders leave the company or take up another position within the company. Among those who have not done this, this topic has never even been discussed.
    When founding a company, it is crucial to focus not only on the past and present, but also the future. Often, the original idea and business model will change, new skills will be needed, and some skills become obsolete. Founders can also become ill, or leave the company. These are all aspects that can be addressed in dynamic agreements. The earlier you enter into a discussion about the application of a dynamic share agreement, the easier it is, as there is less at stake’.
  • A very small number of the teams we interviewed have signed agreements in which the entrepreneurs will earn their share interest over time. ‘Nevertheless, agreements like this can offer protection to the founders and provide them with a good incentive to continue dedicating themselves to the success of their company. The acquisition of the remaining shares can be linked to time-related provisions or attaining specific goals’, continues Veroniek Collewaert.

Nikolaas Tahon, Managing Partner for Accountancy at Deloitte Belgium concludes: ‘The study reveals that simply having a good idea is not enough to build a successful company. The founding team is crucial to the success of the company, as well as a realistic ambition for strong growth. This is why it is important to take due care when composing your team and to employ a clear and pragmatic decision-making process that will help you make fast and accurate decisions. In conclusion, it is also essential that founders be in agreement with regard to the allocation of shares and cash remuneration in order to avoid conflicts and guarantee a continued focus on growth’.

About the study
The
Rising Star Monitor is the result of a questionnaire in which 370 founders of 170 Belgian companies across all sectors of industry, none of which are were founded more than seven years ago, participated. This study is part of Entrepreneurship 2.0, an initiative of Vlerick Business School and Deloitte Belgium that aims to support young companies with growth potential. In addition to this study, several workshops were held examining the various challenges typically facing these companies.

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