Article formerly published by CarDash. The ideas and opinions presented in this article are solely those of CarDash and do not reflect the ideas and opinions of RepairSmith.
So you’re an entrepreneur and you’ve raised seed money for your startup. First, congratulations!
Second, whether you are funded by angels or a top tier VC, you probably worked extremely hard to earn your investors’ trust and you want to be a good steward of their capital.
You want to make the best use of that investment so that your startup can grow and become the big success you want it to be. So a natural financial question is: should you pay yourself a salary, and if so, how much?
This is likely the only time in your life where you will have to determine your own salary. If you worked at another company previously, your compensation was determined by the company, or was at least reached through a two way negotiation. As your startup grows, you will have a board of directors and they will have a compensation sub-committee to determine executive pay. As a seed stage founder, you are in a strange no-man’s land where you have funding but no typical governance to determine your salary. Your company is also almost certainly losing money every month, so what do you do?
The worst thing you can do is just pick some arbitrary number that “sounds” right. One step above that is deciding based on general compensation survey data. While it’s helpful to review that data, they should not be the primary driver of your decision. “Seed Stage Startup CEO” is far too variable of a position to establish proper comps. Factors include your experience, market traction, burn rate, capital raised, cost of living, and financial projections, which are not reflected in online data.
I could present you with lots of graphs and data on founder salaries, but if you are reading this to be given the right number, you should stop reading. If you want to learn how to make the decision based on first principles, please continue.
Establishing the floor: You should pay yourself enough so that you don’t need to be constantly worried about cash.
If you pay yourself so little that you have to literally work as an Uber driver on the side or are constantly worried about paying your rent then you are sabotaging the future success of your company and not doing your investors any favor. You should be completely focused on the startup and not distracted by where your next meal will come from.
Establishing the ceiling: You should not pay yourself so much that your bank account and/or retirement account is growing.
If you are paying yourself so much that you can afford to add to your savings account each month, wouldn’t that money be better used to build the business? Certainly any dollar you invest in your startup now should yield a greater return than putting that dollar into a mutual fund or public stock. And if you don’t believe this, then you probably shouldn’t be running a startup.
The above is a good start but for most people this floor and ceiling still leaves an ambiguously large range. So here are some more principles to consider:
- It’s true that you shouldn’t be constantly worried about your personal finances but you should be making a low enough salary that you are consciously aware of your sacrifice and feel some financial pain. Having a salary that yields a comfortable living is one of the fastest ways to find yourself complacent. Based on Peter Thiel’s experience, the lower the founder salary the more likely the startup is to succeed.
- You should be making materially less than you would on the open market if you weren’t an entrepreneur. You own a significant amount of equity and your vesting reflects the bulk of your compensation. You can’t expect to make market rates and vest significant equity at the same time.
- You shouldn’t afford the luxuries you could before, whatever that means to you.
- Your living situation should be basic, even minimal. Though that will differ whether you are a single 22 year old or 40 something married with children. One can be minimal in both situations, it just means different things.
The above should help you get within a reasonable range to where you are comfortable with the decision and certainly comfortable defending it if needed. Above all and if there is ever any doubt, the following principle rules them all:
If you put paid yourself less and put more money into the business, would that improve chance of business success?
If the answer is yes, then you should pay yourself less. As an entrepreneur, all your eggs are in one basket and you should optimize for the success of that basket. Keep in mind that if your financials are causing you to literally be hungry or to be worried about the well being of your family instead of your KPIs, then you should pay yourself more because that actually hurts the business.
Whatever you decide, it should be best for the business. As a startup founder, you owe that to your investors and to yourself.