Determining how much to pay oneself as a startup founder is a complex and often tricky decision. Because it’s so personal, it’s often hard for this decision not to be highly emotional for founders. While there is no one-size-fits-all approach, founders should consider their personal financial situation, industry norms, business needs, and their own skills and experience. Hopefully, this article can help give founders some context for the decision.
In this post, we will delve into various methods for calculating a reasonable salary; strategies for adjusting compensation packages as the company grows and evolves; and emphasizing the importance of taking the time to establish fair and justifiable salaries to ensure the long-term growth and success of the business.
Startup CEO Salary as a Predictor of Success
Investor Peter Thiel notes that one of the most important factors he looks at before deciding to invest in a startup is how much the CEO is paying himself.
He says, “The lower the CEO salary, the more likely it is to succeed. The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money. It aligns his interest with the equity holders. [Beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks. In practice, we have found that if you only ask one question, ask that.”
So, does that mean that startup founders should be living off instant noodles until they exit their company? No. But it probably does mean that a high salary, say above $150,000 at seed stage, will raise some questions from investors. More practically, it will accelerate burn rate.
Factors to Consider When Deciding How Much to Pay Yourself as a Startup Founder
When deciding how much to pay yourself as a startup founder, there are several factors to consider. One important factor is the stage of your startup. If you’re in the early stages, it may be wise to take a lower salary or no salary at all to reinvest more money into the company.
Obviously, you need to consider your personal financial situation. If you have significant personal expenses or debts, you may need to take a higher salary to cover them. In fact, decreasing your personal financial stress may help you focus more on the business. However, if you can afford to take a lower salary for a while, that may be a smart move to invest more money back into the business.
It’s also important to consider industry norms and what other founders in similar positions are paying themselves. While you don’t want to base your entire salary on what others are doing, it can be helpful to get an idea of what is reasonable and expected within your industry.
Your own skills and experience play a role in determining how much you should pay yourself. If you have unique expertise or experience that is critical to the success of your startup, it may be appropriate for you to take a higher salary than someone with less experience or skills.
Methods for Calculating a Reasonable Salary as a Startup Founder
Determining a reasonable salary as a startup founder can be challenging, but there are several methods you can use to arrive at a fair and justifiable figure. Here are some strategies to consider:
- Market-Based Approach. Investigate comparable roles within your industry to understand the market rate. This can be accomplished by researching job listings or consulting compensation surveys. Ensuring your salary aligns with industry standards, even if you opt to reinvest it back into the company, helps maintain transparent and fair compensation practices across the organization.
- Business Needs Approach. Tailor your salary to your company’s financial needs. This requires projecting the company’s revenue and expenses, and gauging how much you need to cover your personal expenses while preserving business stability.
- Equity or Profit-Sharing Approach. Consider a lower base salary with potential equity or profit-sharing. This strategy can align your interests with the company’s, motivating you to strive for long-term growth.
The most suitable method depends on your personal financial circumstances, industry norms and your startup’s stage. It’s crucial to thoroughly weigh each option to determine the best fit for both you and your business.
Strategies for Adjusting Your Salary as Your Company Grows and Evolves
Reassessing your salary and compensation package as your startup matures is crucial to maintaining fairness and meeting the evolving business demands. Here are some strategies to consider:
- Performance-Based Adjustments. Link your salary to particular milestones or performance indicators. You could, for example, align a portion of your salary with revenue goals or customer acquisition rates. This can help align your motivations with the company’s, encouraging the pursuit of defined objectives.
- Industry Norms Review. Regularly check industry standards, and adjust your salary as needed. As your startup becomes more mature and you gain experience or expertise in your field, you may warrant a higher salary.
- Company’s Financial Health. The financial stability of your company should be factored into salary adjustment decisions. If the business is facing financial strain, it may not be prudent to increase your salary, regardless of industry standards. Conversely, if the company is flourishing, you might have more leeway to modify your compensation.
There’s no universal approach to adjusting a founder’s salary as a startup evolves. Therefore, it’s essential to consider all relevant factors, including personal financial needs, industry norms, performance metrics and the business’ financial health, to devise a fair and justifiable compensation package that fosters long-term growth and success.
In conclusion, determining how much startup founders should pay themselves is a complex decision that requires careful consideration of multiple factors. While there is no one-size-fits-all approach, founders should consider their personal financial situation, industry norms, business needs, and their own skills and experience. Reassess compensation packages as the company grows and evolves. By taking the time to establish a fair and justifiable salary, startup founders can help ensure the long-term growth and success of their business.