As a startup founder, you must understand that entrepreneurship is not a bed of roses. It is 50-hours workweeks, endless sacrifices, and years of little or no income from a business that demands numerous resources. Because of this, startup founder salary is a highly debatable topic.
Is it wise to pay yourself when your startup demands this many resources?
The idealistic view says that startup founders must take risks and should not be rewarded unless their company starts making money. It believes in uncertainty being a key factor in entrepreneurship and that constant pay may damage the whole idea. Also, when founders’ salaries are scooped out of the treasury, the startup is left with fewer resources to function on. Therefore, paying founders doesn’t seem sensible.
This is somewhat true as well. Startup founders are not entitled to a salary; however, CEOs are.
In other words, although founders do not deserve salaries, whoever is on your startup’s payroll should be paid. So, if a founder or co-founder works as their startup’s CEO, COO, CTO, CMO, or in any other role, they deserve remuneration for their services.
This also implies that if your only contribution is money or some assistance during the ideation phase, you are not entitled to a salary and should get paid later in the form of dividend. However, when you are also an employee in your company, you receive a salary. Besides ensuring accountability in the future, this makes sure that you don’t get inclined to drop midway because of not being able to make both ends meet or because your ‘paying’ job makes it difficult to manage the startup. Remember that a startup takes years to become profitable; you cannot starve till then.
So, if you had any doubts about taking a salary, shed them now and start thinking about how much you want to pay yourself.
How Much Should You Pay Yourself As A Startup Founder?
Now that you know how important it is to draw a salary, you have to figure out the amount as well. The process is usually difficult for first-time founders, especially because of the complexity of the deciding factors.
The State of Cash Flows
The amount of cash that flows into a business determines how much flows out of it. So, your salary as a founder depends on the state of your startup’s cash flows and not on its profitability. Also, while deciding your pay, you need to account for the source of investment, that is, where the money is coming from: your personal account, investors’ pockets, or the revenue generated by the company.
Founders of bootstrapped startups don’t need to pay themselves. As great as it feels to receive money out of your own business, it is usually impractical and will just lead to a portion being lost in taxes.
Suppose you put $50K in a business and decide to carve $5K as salary, you effectively put $45K into the business, right? Wrong! A portion of that money goes to the government. So, it’s better to invest $45K and let the additional $5K stay in your bank account. You may start taking a salary when your business raises enough capital.
Founders of funded startups may start to pay themselves provided that they are on the payroll. However, you cannot expect it to be at par with the market standards. Remember that every dollar you receive could have been used for your company’s growth. So, ask only for the amount that you need.
Talk to your board upfront about the salary. Make sure that you don’t ask for too much or little. While a very small salary may lead you to starve and hamper your productivity, a huge sum will give the impression that you are more interested in filling your own pockets than working for the company.
Your salary also depends on the amount you have raised. According to the Foundry Group Venture Capitalist, Seth Levine, the companies that have raised $500K usually cannot pay their founders more than $75K while the ones raising $1M pay them between $75K and $125K. The businesses that are funded between $1M to $2.5M pay their founders above $125K. It seems that companies pay 8-12% of their funding to their founders.
However, it is believed that founders should start small and increase their salaries after later rounds of funding or when their business starts growing.
As your startup starts growing and generating revenue, you may start increasing your salary or decide on bonuses and perquisites for yourself. The best way is to tie your remuneration to achievable growth milestones and work accordingly. Keep in mind that these rewards are essential to incentivise you and keep you focused.
Profit-generating startups are a rare sight. Even giants like Google and Amazon took years before becoming profitable and even then, their founding workers take salaries. Just like it is mandatory to pay regular employees, it is mandatory to pay founding employees as well. Law enforces it in a few countries. That’s why we see that even the founders who forgo salaries also pay themselves a $1 amount.
The Stage and State of the Business
Have you just started developing your MVP, or is your business already in place? Are you still an early-stage venture, or have you matured? Have you reached the break-even point? Are you big enough to start on the expansion journey?
You need to assess the current state of your venture properly before determining your salary. Owners of mature companies can pay themselves more than growth-stage startup founders even when both generate good revenue.
It is typically seen and suggested that founders start small and raise their salaries after their business hits a few specified milestones or after each round of funding. Therefore, the assessment of your company’s present state is somewhat important when determining your salary.
The Industry Standards
One of the best ways to set a reasonable remuneration amount for yourself is to go by industry standards.
Look at your competitors and determine what they are paying an employee in a similar role. This benchmarking will help you figure out your opportunity cost, that is, the amount of salary money you have forgone to start your own company.
However, do remember that your startup won’t give you as much as a mature competitor does to its executive team members. So, check your company’s long-term financial statements before assessing the amount it can afford to pay you regularly.
Other Factors Determining Salary of Entrepreneurs
As you would have figured out by now, entrepreneurs don’t always earn big bucks. Even Amazon’s founder, Jeff Bezos earned around $81,840 as a salary in 2020. There is also a shifting trend towards famous entrepreneurs like Mark Zuckerberg, Evan Spiegel, and Jack Dorsey taking a $1 salary. On the other hand, Mukesh Ambani paid himself INR 4.36 crores in the financial year 2019-2020, that is, around $596,000.
It may seem that there is no relation between the revenue generated by one’s business and their remuneration but that’s not the case. There is a strong positive correlation between the two. However, there are also various other factors into play.
Your Current Financial Condition
The reason why a few big corporate founders and CEOs don’t take a huge salary is that it isn’t their only source of income. They earn through their investments and other personal revenue-generating activities.
Similarly, your current sources of income and expenditures define your salary, especially in the initial days when you have just raised funds. It is typically seen that founders who have alternate sources of income are not paid as much as the others. Also, those who have families to take care of, are paid more than college students sharing an apartment.
So, you need to make a fair assessment of your current financial situation before talking to investors about salary. List down all your sources of income and expenditure; don’t forget to consider loans and taxes. Also, see if you can cut down on unnecessary expenditures. No need to stifle reasonable human aspirations but also don’t expect a lavish lifestyle when you own a growing company. Know that your early-stage startup will pay you less than the MNC you used to work for.
Anyway, even when the business starts growing, it won’t pay you much in the form of salary. Capital gains is what you should strive for and this will happen only if you invest enough time and resources in the company.
The Work You Do
Founders are paid only when they work as employees. Non-working founders do deserve equity and dividends, but it does not entitle them to a fixed remuneration each month or week. So, if your only contribution is money and/or some assistance during the ideation phase, you don’t get a salary. You need to be on the business’s payroll for that.
This makes it important to account for the duration that you work when calculating your salary. Track the average number of hours you work and then compute your salary. You can also fix an hourly wage rate if you want to.
Your Preferred Employee Compensation Rate
As already mentioned, founders are paid only when they work as employees, not because they started the company. So, a high founder salary sets a high baseline for others as well.
Suppose you have just raised capital and are using it for the development of business. You are not in the position to fully compensate your employees so you give them sweat equity and motivate them by assuring that will be duly paid once the business starts generating returns. Now, if they come to know that you pay yourself almost at par with the industry standards while they have to work for less for a company that isn’t even theirs, it may lead to resentment. They might lose faith in you and your company.
Therefore, you need to set a lower salary baseline. Also, you may have to pay more when hiring more experienced people.
Understand that being a founder doesn’t entitle you to a higher salary than everyone; growing your business by being a better employee does.
The Tax Factor
Tax is one of the most crucial factors to consider when drawing founder salary, especially in mature companies. The salary amount, frequency, and the way you withdraw that money affect your tax amount. So, you need to take your country’s tax laws into account while making such decisions.
For instance, in the United States, IRS treats profit from your business the same as personal income when you own a sole proprietorship or a joint venture. However, it doesn’t want you to take a modest salary and extract the leftover amount as dividends as the latter are taxed lower. Sometimes, too much profit on the balance sheet stirs gossip so it becomes mandatory for founders to take a decent remuneration even when they have enough money to live without it.
Some Startup Founders and their Salaries
The following table represents the salaries of a few of the most notable tech companies’ CEOs during their IPOs.
Go through the table and assess the relation between a founding executive team member’s salary and their company’s cash flows. Although a huge inflow of cash means that the founding employees can take more money home, other discussed factors also come into play. Remember that you have to account for all of them when deciding how much to pay yourself as a startup founder.
How to Calculate Your Startup Founder Salary?
The following steps will give you a broad idea of how to go about it.
- Assess the state of your startup and its finances. See if you are eligible for a salary or not.
- Calculate your budget by accounting for all your sources of income and expenditure. Do account for tax.
- Compute the amount you need each month, week or probably every two weeks to get by and that will be your salary.
- Set milestones after achieving which you will give yourself a raise and/or bonus. This is a crucial incentive; so, outline realistic checkpoints and track them.
- If you are the founder of a mature company, remember that your remuneration should be a healthy mix of salary, work-based bonus, equity, and additional options. Do account for salary baseline and tax here. You may hire an accountant for assistance.
Also, make sure that you consider all the factors mentioned above before deciding on your salary. This will help you avoid future hassles.
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A finance enthusiast, literature beau and lifelong learner. Working her way up the success ladder and her personal philosophy textbook, Kavvya believes that a good conversation is worth more than a good book. When not working, she can be found reading, writing and engaging in long walks.