As a startup founder, you have a million and one priorities. Your paycheck is probably one of them but it might not be on the top of the list.
It seems like an obvious answer to determine how much you get paid by just paying yourself what you want, but there’s a couple of different factors to contemplate before signing off on that check. After all, you likely want what’s best for your startup.
How Much Should a Startup Founder Salary Be? (4 Things to Consider)
The Needs of the Business
First, you have to examine the needs of the business, which as a founder, you presumably think about 24/7. The biggest determination of figuring out your salary will be based upon how much cash the business actually has to operate and how much it needs to be able to pay you a reasonable salary.
Review Financial Projections
Start by developing a forecast if you don’t already have this. This is the best way to look at how much money you are likely to make and spend as time goes on. As with any of your expenses for a business, you need to ensure you are properly budgeting for them and a salary is a recurring expense that you’ll need to pay month over month. Determine these three measures using your cash flow projections in order to narrow down how much the business can afford to pay you.
- Profitability – Your projections will present what your profitability will look like in the short & long term. A big factor of calculating a salary is to think if the company can afford the salary and remain profitable in its own ventures. Many companies are not profitable on their own even after years upon incorporating. If your business isn’t showing enough money to spare, consider fundraising as an option to increase capital which we’ll touch on below. If you are profitable based on your projections, then take a look at how much the business can budget for another salary.
- Cash runway – Cash runway is the calculation of how long you can remain in business with what you have on hand i.e. how many months of operation are left before you run out of money? This metric is a helpful measure to determine if it’s the right time to even start paying yourself or if you should wait until you receive more capital (that is if you have the flexibility to wait for a salary). If there’s not enough cash in the business to operate for more than 6 months, it probably isn’t a good idea to use some of that money to start cutting yourself a paycheck. Instead, determine if raising capital from investors is a wise choice or not.
- Funding round – If your cash runway is looking low, determine whether or not the business can be viable on its own or if extra capital is needed. Fundraising is done in order to bring on investors and gain the extra capital needed to get the business to the next milestone. It should not be for the sole purpose of paying yourself. As you fundraise with each round, determining your salary will become a conversation with your investors and you’ll need to be able to justify the amount you’re allocating to your own paycheck vs. reinvesting it in the business.
The Living Situation of a Startup Founder
After you calculate out how much the company can afford to pay you, figure out how much of that can be allocated to your paycheck. If the company has $200,000 to spare based on your cash flow projections, this does not mean that the entire amount should be spent on a founder’s salary. Acknowledge the following two circumstances when deciding a number.
- Cost of living and basic needs – Factor in the cost of living based on your location and how much you need to not only cover your expenses, but also live comfortably. Most venture capitalists will want to make sure you are able to focus on the business and not stress about finances while handling the other responsibilities of being a founder.
- Burnout & financial stress – With any startup, most employees are typically taking a paycut to come work there because the idea of equity gives you something to work towards. However, do not set your salary so low that you create stress in other areas of your life. This causes burnout to occur quicker which leads to the company suffering when a founder stops working at his/her full potential.
Claiming Certain Tax Credits (e.g. Technical/Science Founders)
Depending on what your startup does, you might be eligible for some tax credits if you’re trying to develop something to create an advancement in science or technology. The company could receive a portion back of the amount you spend on your research and development efforts. This potentially helps recoup some money back that can be put towards your salary. Regardless of how the money is spent, adding your tax credits to your cash flow planning will at least give you a better picture of your runway to make better informed decisions.
Potential Issues with Founder Salary
Tread carefully when determining your salary as a startup founder. It’s very tempting just to match what you were previously making (often a higher paying job) or to match what a market salary would be for a CEO in a similar industry. There are a couple of different issues with this.
- High Salaries – If you have a high salary as a founder, the first question that stakeholders and employees are going to wonder is why isn’t that money being reinvested into the business to help grow the company? It’s hard to justify your salary when employees and investors alike don’t see the growth of the business moving along or don’t believe in your leadership. Another question to note is why that money isn’t being reinvested into new hires or other business needs. Every business will need more and more people as it scales and salaries will only become more expensive over time.
- No Salary – Opting to use the business to pay for your personal expenses, instead of taking a salary, is a big no-no and can get you in hot water with the IRS and investors. A business that’s running properly pays its employees, including the founder.
- Paid as a Contractor – Make sure you’re also paying yourself appropriately, as an employee of the company. It’s tempting to pay yourself as a contractor, in the early days of the business. It saves on payroll taxes and seemingly keeps things easier, on the business side of things. But a founder/CEO is not a contractor of the business and should not be treated as one.
Startup Founders: Work with Experts in Accounting and Payroll
It’s an intricate road to determine not only a founder’s salary but also any employee’s salary. Starting a business is already difficult and these types of questions will continue to arise as the business grows. Founder’s CPA understands the complex needs of startup ventures and is ready to help you figure out an appropriate salary and much more.
