If you have any experience in the startup world, or even if you’ve just browsed through Quora.com, you know there are a variety of opinions on what startup founders should pay themselves. Before we lay out some digits, we’ll look at a few of the factors that founders would be wise to consider – like a startup’s age, location, size, and available funding.
A Founder’s Personal Life
The first and most obvious consideration should be a founder’s personal life. The question is: what do they need to sustain strong leadership and steer the startup toward growth? A founder who is in college and still living at home will have significantly different needs than a middle-aged founder with 4 kids and a mortgage.
More Funding, More Cash?
Of course, startups that receive more funding will have more breathing room for salaries. However, investors aren’t thrilled when they see what looks like money down the drain.
Essentially, a founder must decide whether their salaries are warranted, or whether a chunk of them could be put to better use. New founders are often advised to pay themselves 30% of market value. This is a good starting point to help you make a decision. Once revenue begins rolling in, founders can adjust accordingly and reassess their salaries after Series A or Series B funding.
You also need to consider the kind of investing you’re working with. Startups that secure venture capital funding may be able to afford double the amount of startups with angel investors.
Setting the Vibe
While it may not be the first factor that comes to mind, how a founder handles salaries early on sets a precedent for the future of the company. This should be done carefully instead of haphazardly, so that employees develop a healthy relationship with the founder.
For example, founders who appear self-centered and put the company second to themselves will hurt the staff dynamic, making it difficult to retain skilled employees. In the same way, a founder who pays him or herself a market salary, while giving capable employees much less, will set a poor precedent.
On the other side of the fence, you have founders who underpay themselves. They may be living on an extremely low budget, tired and overworked, while trying to get a company off the ground. In this survival state, it’s difficult to think in a future-oriented manner. This could hinder a founder’s ability to make the best decisions for long-term startup growth. A Business Insider interview summed this up well: “Salary should be sufficient to not create hardship — no sense in losing productivity because you can barely eat,” this person concluded.
(Side note: Along with fair salaries for founders, equity is another way you can set a positive precedent in a new startup. By giving employees a meaningful stake in the business, founders designate key team members and build trust).
When things are going well in the beginning, a founder may slip into the delusion of stability. Overpaying oneself can play a big part in that delusion because the income allows you to forget that your startup is not yet established.
For new entrepreneurs with seed-funding, most experts agree 6 figure salaries are way above market value. A new founder who is swimming in cash gives investors a red flag, and distracts from more important business priorities, like sustainability.
On the other hand, you have founders that mistakenly believe that underpaying (or not paying) themselves will ensure a low burn rate. This can give founders a false sense of security, causing them to drag their feet and tolerate low revenue.
Founders must calculate their personal expenses to determine what they can live comfortably on. Then, they must come together with investors and cofounders to determine what’s possible. Your salary won’t only determine your level of personal comfort, but also the precedent for compensation at the company.