How much should founders of startups earn?
A question that has no specific answer, don't you think? It's a subjective question and more often than not, the answer would vary depending on what stage the startup is at, what funding or the kind of investments made, and the kind of valuation a company has.
Depending on the lifecycle of the startup, a founder should plan and choose to pay himself a salary in accordance to his needs versus how much the startup can afford to spend. And considering it's his own business, he should look at what he can do away with in profits versus how much overheads he wants to incur. In a recent article I read by Bob Dorf, co-author of The Startup Owner's Manual, he says genuine entrepreneurs have a simple formula. They get whatever's left in the bank after everyone's been paid.
It got me thinking. Gosh, entrepreneurship isn't a joke. Certainly we've heard of founders who've gone without salary for more than a year, used up their savings, lived out of cars, used co-working spaces, started up from coffee shops and taken up another job while coding their way to build that next revolutionary product. But yes, once you are funded, we might think founders should pay themselves a good salary. Right?
Not really as easy as you think. Another question also is whether your product is going to be generating revenue right from the get-go, or if you already have clients onboard who are able to cover your costs for development, design, and other resources.
Vijay Singh, CEO and managing director of Aaramshop, told me in an e-mail interview: "At initial stages, the founders need to support the organization by way of minimal withdrawals for self. However, as the company matures and becomes sustainable, it is important that the founders [peg] their remuneration to the market."
Well, it's all a juggling act if you ask me. Of course, being a founder, you certainly have a chunk in the equity, but it doesn't pay your ongoing bills and especially if you are married or have obligations you have to fulfill. Of course, though, that's something founders already know they signed up for when they decided to be an entrepreneur.
So, is it essential for founders to have a decent salary or should they still adopt the frugal way until the startup makes some decent progress? Do founders have to, and I mean have to cut their personal salaries while they keep paying their linchpins the desired salary for a startup to be really successful?
In a 2008 report by TechCrunch, PayPal co-founder and venture capitalist, Peter Thiel, once mentioned that one of the things he looks for before investing in a company is how much salary is the CEO taking. The lower the salary for CEOs, the better it is for a startup to succeed, he said.
Investors certainly would be amused looking at business plans with luxurious salaries for CEOs, but at the same time a question I'd like to ask is: "Is this a trivial question or something that makes fundamental sense and something that should be given utmost important when startups seek out funding?"
From an investors perspective, Mike Lebus, co-founder of Angel Investment Network, said to me in an e-mail: "Startup founders have enough to deal with without having to worry about their personal finances too, so their salary should be big enough to allow them to focus completely on building the company. If the founders are worried about whether they're going to be able to pay the rent, ultimately the startup will suffer. However, they also need to realize that their salary should be pretty modest until the company starts to become successful."
Factors that decide founder salaries
- Whether the founder has personal obligations, say, debt, mortgage, kids, or if he's single or married.
- The percentage of equity ownership is something that will keep changing and can make a difference to salaries.
- The amount of financing or seed funding and investment that happens at different stages. There are cases where founders would hike their salaries after their different rounds of funding.
- It's always a good idea to survive on minimum salaries for longer periods, but at the same time, a balance should be maintained so that there is no distraction from the founders' personal obligations and there is adequate motivation for the founders to work better for the company.
- Some suggest if there is a financial crunch, try and get yourself another job to cover those expenses, especially if you haven't launched yet. While this is a good idea, it also acts as a distraction to your startup. I'd say if you have the resources, pay yourself a little more and maybe recover that cost from your own startup later.
- It's always important that you pay yourself what's needed. Nothing less or nothing more. You always have the equity and your performance to drive your team, and that would help you determine your salary at every stage of the startup.
- Another important aspect is how you incentivize yourself at different stages of a startup, especially to drive your motivation levels as an entrepreneur.
This topic is certainly a much talked-about issue in the startup community and many have different views about this. What's important at the end of the day is how the translation of those funds happens in terms of measurable success, at any given stage of the startup.