Frustrated and Sad Cofounder

Our co-founder is a 40 yo grown-ass man who is a technical genius but manages money like a baby and claims he “cannot survive” on $8k/month. His unbelievable personal money mis-management is hampering our company’s growth.

We self-funded our startup with ample funds but my co-founder insisted that he be paid a salary of $8K/month (actually $10K/month, at first) or he wouldn’t be able “to survive.” We negotiated a salary of $6K instead. The salaries of the 2 other co-founders are $0 and $150/month for the first 15 months, and the the second co-founder was raised from $150/month to $1500/month a few months ago.  This $6K/month co-founder is a technical lead and does not do sales or business development. He does try to, when he is free.  He is, however, the designated CEO of the company, and he does take care of many day to day operations, for example, bank statements, withdrawals, forms, etc.  This is in addition to servers, other hardware, other infrastructure. We are not a SAAS player – there is no ongoing development.  However, the other two handle split duties like business applications, looking for office space, staffing and other day to day stuff. He does not take care of marketing or sales.   Many of our bigger customers and sales growth have come from the 2 non-6K co-founders, from our previous contacts from a previous similar company we founded, grew and raised funds for, that became a multi-million $ startup by the time we left.  18 months into this, we are doing well with revenues of > $250K annual, having reached operational profitability after the first 12 months, and generally plugging away with good prospects. our $6K/month co-founder’s costs were a substantial obstacle to our reaching profitability.

He now says  he needs a raise because he has depleted all his savings (of $50K) in the last 18 months because he was not covering his expenses on his salary. He has hit $0 and needs to have a raise or find another job.  We live in a country where healthcare and public services are very reasonable, and his mortgage and car payments are barely $2K currently.

We have come to the realization, only after asking in detail, that he has a very poor understanding of how to manage money. For example, he thought that expenses referred to the amount of outgoing checks written for bills, and he does not know how to track his monthly expenses (in a virtual personal budget he wrote up for us, he had an expense category called ATM, because that referred to how much money he withdrew from an ATM every month).  BTW, for our company we do have an accountant and a seperate person running daily accounts responsibly.

Our startup is technical and he forms the core engine of our team. We sat down with him and gave him some basic budgeting advice and links to online blogs about how to manage money. This was an extremely awkward series of conversations because it was personal, but also because he is practically a cretin in his money logic and for his age, he should be ashamed of himself.

Through this exchange, we found that he really “got it” and seemed to understand what managing money actually entailed. We decided to give him this raise (and nobody else got anything) and allow him to withdraw 10K from his initial investment into the company. Even with this, he claims he can only last 10 months because with his new salary, he is overdrawn by 1K every month.  The 10K will therefore form a buffer every month until it runs out – 10 months.  He has claimed that he will try to cut his expenses every month until he is truly spending within his means (something that we sense he does not understand as necessary until now ).  We are now in the 2nd month of this 10 month period . In the first month, he spent $500 into the 1K buffer, according to him.

With his salary raise, he has made no commitments to the company, even saying that he cannot guarantee staying if his money ran out (which could be any time, even before 10 months). His reasoning is that it’s logical that if he runs out of money, he has to find a higher paying job.  When we agreed to this, he volunteered no plan for growth, no product-based plan and no commitment to keeping to his normal work-based targets.

As a technical person, he is beyond valuable. But as a co-founder, we are all tasked (and understand that we are so tasked) with business development sales and outreach.

Once, during a tradeshow, a visitor to our tradeshow booth suggested to us that we could not compete with larger competitors in our space.  As the company rep (and CEO, remember), he agreed with the visitor and even added to his attack by saying that we have twice the number of competitors now, compared to last year.  Our product is good technically, but we do not grow from technical support, we grow from sales and sales relationships.  We have already established a pattern and know where our potential customers are, as well as the legwork it takes.  I felt stunned that day, during the tradeshow, that the CEO of our company could not be depended on to give a simple defense or a simple pitch to explain our company’s key USPs and advantages (which are distinct).  Although he sounds incompetent in this sub-description, he is a very competent (and maybe a bit of a genius in some aspects) in the technical component of the service we offer.

We have set no timeline, no check-in for progress, no update meeting, and no end point to determine where we are with this situation.  Once we agreed informally, this co-founder went straight to our accounts staff (someone who is also taking “startup level salary” of just $500/month, because she believes in the team) and told her to increase his salary.  If we do not ask again or bring this up again, we know that the next we hear of this will be the news that he needs to leave again, or needs an increase in salary.  This could be any time – 3, 7, 12,15 months from now. Any time.

Here is the thing: we have a good company product and team.  Our revenues went from being 5% OF HIS SALARY in the first month to now more than 350% his salary in about 18 months, and we have passed the uncertain stage and can clearly see the growth possibilities.  We just closed a sweet government deal for bulk services for a year. This has been very confidence-raising. Government bids are done through a closed system and we are a very small company compared to our competitors.  Raising his salary by 25% meant we couldn’t invest so quickly back in our infrastructure, in temp staffing that is now sorely needed, or other things that would allow the company to grow.  We did it out of loyalty to him, despite the fact that he did not even bother to acknowledge the fact, and that he outright said that the salary raise would keep him at the company for about 10 months more with no other guarantees.   While we know that it’s a possibility (although it’s questionable as to how high) that he could get higher salaries outside , maybe in MNCs, it’s also a fact that that it is possible to more-than-survive in our town and country with a salary of $6K – with a family of 3. Annual income tax for his bracket is $70/month.

We, the two other founders, are financially set currently, but a salary in our situation should be set fairly and also reflect the amount of work put in if the company can afford it.  We believe in putting the company first and having everyone share the rewards of success, where possible. We also firmly believe that we are building something that is interesting and we want to keep tweaking to optimize growth. Money comes second and is only a measure of how well the company is doing.  We are OK with sacrificing, but there is such lack of balance in our outlooks towards financial management. We know that if we were funded, this co-founder’s salary would not be very much higher than what it already is.  While founders are supposed to work for lower pay because they have ownership in a potentially valuable company (future rewards), and staff should be paid well or market rate, HE has equal share in a company we feel we have already established as having a valuable future, AND market rate (close to) salaries that the company cannot afford. We do not want to raise this person’s salary another even 10% in 10 months’ time, even if the company will be doing even better at that time (which we expect).   The company needs to invest in the rest of the core staff, in its infrastructure and other self-renewable aspects.  We do not want to look for his replacement now because of how tied up and integrated he is into all operational structures.  It is very difficult to find a co-founder of his particular background and experience.

My frustration is with how personal he has made this in connection with the company, and frankly how stupid he is in terms of the things he has said.  For example, he has actually said that he cannot survive on 8k/month – that is a totally beyond DOUCHEBAG thing to say considering the average salary in this country is $3.5K/month.  The average wage of a startup founder (pre-funding) is anywhere from nothing to $3-4K/month.  A funded startup CEO may draw average $6K or more/month, depending on the funding amount and board decision.

He has said that he has a young child and it costs $450/month just for diapers and formula.  A simple check at a supermarket shows that diapers are $50/month for a child his age and the formula brand he uses is the most expensive in the market – $80 for a 16kg tin.

Many cost-of-living staples are very reasonable here but there are varieties of value-added items. For example, normal formula or milk powder for babies is $15-35 a tin.  There are upmarket options for $80 a tin but these are not neccessities. In these two things, his stupidity and lack of self-management is clear. His more-than-twice-market-price diapers and more than 5-times-formula are extravagances that he dismisses as “essentials”, mocking people out there who are actually frugal and who respect the value of a dollar, as well as his other co-founders, who are fighting and sacrificing to grow the company and working to establish as sales and meetings as possible.

IN addition, we have wasted ridiculous amounts of time explaining to him how saving money actually works. He is an intelligent person with an IQ that is most likely higher than mine, but he cannot understand why buying expensive iphones or other branded phones for 2 of his pre-teen children (with 2-year contracts) is an “essential” that must be cut down. He says that because of all these “essentials” like a monthly storage locker (in which he is storing some unnecessary rubbish), inflated household budget that is spent on nothing, an eating-out expense of $1K/month,  he cannot afford to pay his children’s school fees and this is the company’s fault. If we explain these points to him, point by point, he shows the ability to understand, but these things form the tip of the iceberg in what clearly is an astronomical deficiency in the logic of being a grown-up about money.

Finally, above all else, I am fucking annoyed that these statements are made without any self-awareness, causing arguments unless “proof” is shown to the otherwise. E.g. simple google searches that he should do himself to show there are cheaper and better ways to cover his expenses (e.g. instead of buying a $80 tin of stupid formula, to look at the market comments on this overpriced brand and all the suggestions all over the internet for lower cost options or how to make real baby food- I am annoyed even just typing this part. )

Our team, including him, has synergy, and the synergy is built on familiarity with our systems, customers, product, and our growth process, something that took a long time to cement.  At this stage, we have seen a few nice successes along the way that allow us to be more and more confident each day that we are on the right track.  But the journey ahead is long.  Without a key co-founder, we know we will not grow as fast, and actually not at all.  However, I would really like to punch him sometimes. It may also be time that we find a high level technical engineer instead so we can have mental stability to move forward.  The problem is the mental bond that we have as a team is important to growth, as our team is still very small.

This summary is written out of frustration following a very long day in which multiple issues stemming from this core issue have erupted.  Thanks for listening.