HOWTO: Spend your investors’ money

I’ve invested in two startups and advise, officially and unofficially, a dozen or so other startups. Recently, a company that I’m involved with,, raised $500,000 from Foundry Group. Since their raise, the two cofounders, Ben and Jesse, have been on a tear adding features, solidifying the infrastructure, and ramping things up to a public beta. is a unique consumer service in that a single user could have gigabytes of data to crawl across multiple accounts. As a result of this unique challenge, Ben has been spending a great deal of time working out how the underlying infrastructure is going to scale. This, of course, involves spinning up a decent amount of servers on AWS. In doing so, Ben was extremely worried about keeping costs down. I had to laugh as the numbers he was worrying about was less than 1% of the total amount raised or, as Chris Lea said, “Your investors didn’t give you the money so you could look at the large balance in your bank account.”

But, it’s a good question, and I get asked it often. How should you spend all that money your investors just gave you? How should you spend that 15% employee option pool? So I set up a Google Form and asked a dozen or so of my favorite investors what they thought. I got six responses from four seed stage investors and two Series A investors. Here’s what they had to say…

  • If you took total monthly burn and divided it by total number of employees, how much would you expect the per-employee burn be? The average response was $12,000 per employee with the majority saying $15,000 was expected. This means if you have 10 employees you should be comfortable with a total monthly burn of between $120,000 and $150,000 per month.
  • What percent of a given round of funding do you expect will be spent on personnel? The average response was 73% of the total round with the majority saying 80% This would indicate that my friends at should feel comfortable spending $400,000 on building out the team.
  • What percent of a given round of funding do you expect will be spent on servers and infrastructure? The average response was 18% with the vast majority saying they expect a company to spend 15% of their total raise on servers and infrastructure. If you’re burning $150,000 a month, you should try to keep your AWS bills below $22,500 per month.
  • How much should rent be, roughly, per employee per month? The average response was $666 with the vast majority of investors saying $500. So a team of 10 shouldn’t be spending more than $5000/mo. on rent.
  • How much equity, on average, should early engineers get? Two investors recommended less than 0.5%, which seems extremely low for your first couple of engineers. One said 1.5% to 3%, which I think is fair for your first engineer, but on the high end for your third and fourth engineers. The other three said 0.5% to 1.5%, which seems to be the universal standard when I talk about this topic with other founders in Silicon Valley.
  • How much equity, on average, should an early executive hire get? The consensus, with four investors agreeing, was between 2% and 5% The other two investors thought 1% to 2% was appropriate. My personal recommendation, pre-Series A, would be 1% for a Director, 2-3% for VPs, and 6-9% for CEOs. This, of course, depends greatly on salary and other benefits offered. What I tell people is that I have two dials: salary and equity. Dial one up and the other gets dialed down.
  • How much, if any, of a premium would you expect there to be on burn for
    SaaS and PaaS companies?
    One investor said there should be no premium, one said 10%, one said 30%, and three said 20% The 20% number resonates with me as that’s about the premium SimpleGeo has spent on our per-employee burn. In other words, if an investor expects you to spend $15,000 per employee per month, they most likely will be okay with a platform company spending $18,000 per employee per month in total burn. The thinking here is that SaaS/PaaS companies require more infrastructure, better/higher quality infrastructure, more bandwidth, and more senior/seasoned engineers.

These are, of course, rules of thumb, but it should give you a good feeling of where you and your company stands. Your investors put money into your company under the expectation that it’s going to be spent so you shouldn’t feel bad about spending that money.

UPDATE: A lot of people have questioned the $12,000 per month, per employee number. Keep in mind that’s 100% of all burn for the entire company and not just their salary. This includes server costs, travel, rent, office supplies, etc. On average, an engineer in Silicon Valley will have a base salary of $100,000 a year. Add roughly 20% for benefits (healthcare, vacation, payroll taxes, etc.), $3k every two years for hardware, rent ($500/mo.), etc. and you’re at $10,800 per month just to pay for them to walk in the door. I doubt it’s too hard to imagine spending $1,200 per employee on travel, servers, office supplies, etc.