How do you know how much to pay yourself?
We are in the beginning stages of a tech start up. How can my partners and I decide on the amount to pay ourselves, while also factoring in the operational capital?
Congratulations! You are about to start on a wonderful journey!
Now for the harsh reality. As the entrepreneurs, you pay yourselves last! First make sure you can pay; your suppliers (including staff and their benefits), the Government (because every business is a collection agent for taxation authorities), the business (working capital, marketing, etc), and once everybody else is paid it is then that you can think about paying yourself.
Presuming you are making sufficient cash to cover your operating and expansion costs, and you can start drawing down a salary, I suggest you consider paying yourself in two parts; salary and an annual bonus.
The bonus component is not a reward for you, per se, at least not in the early days. Rather it is a way to ensure you maintain cash in your business to cover unforseen expenses. Only when you are big enough to withstand financial shocks can you pay yourself a real bonus.
As to the salary component, I suggest you start (really) low, and as the company grows so you can grow your salary too. For a successful company, a sensible target is a 20% premium over what a similar role would earn in a large corporation where there was job security. Be sensible, because the big money comes from the annual bonus and your equity in the business.
How you divide those amounts amongst yourselves can be tough also, but in my experience equal portions tends to work well.
I wish you well.
To name a few options:
•Ask around what other professionals make that do the same as you guys do.
•Take whatever you can spare and divide it (by stake or evenly or which ever way you deem fitting).
•Take only what you absolutely need and keep as much money in the company for further growth.
Short answer: As little as possible :) Many start-ups (even the well-funded ones) get stars in their eyes--and toys in the garage-- when the money start coming in. In the early days of your venture, every minute and every dollar you can spare should go back into the business.If the business takes off, there will be plenty of money in your future. This is your time to pay in -- not take out. Your business is going to need every bit you can give it at this stage.
With start ups, that's a tricky question. If you have funding, VC capital, loans, you may be able to agree on a set salary to start out with. If you don't have capital readily available yet, you may have to basically work for peanuts until you raise funding.
That primarily depends on what your goals are for your start up. Your strategy for traction/validation vs. your strategy for growth require various degree of capital. Most often the case, start ups are generally cash flow negative and the founders are in it for the equity until VC comes along to somewhat cash them out. No VC expects you and your team to work for free. However, your salary could be heavily dependent upon your negotiation skills, who the VC is, and how the overall deal is structured in your series A funding.
Of course, if the company doesn't necessarily have as big of an upside for VC to invest, but cash flow positive, then it is similar to running any brick and mortar store. You would allocate your financial resources in different buckets/departments (sales, marketing, creative, R&D, etc.) to make sure everything is paid for first. Then you can decide within your comfort zone of how much is left and how much the partners should be paid for the roles that each plays. Starting a company is the hardest job out there as you are the last to get paid while taking on all the risk. The good news is, in exchange, you get the greatest magnitude of the upside should the company takes off.
Ka Pang // Creative Director // VolumeSquared.com/
If your sales are taking off like a rocket -- and look like they'll stay that way -- theoretically you can afford to be generous in what you pay yourselves. With most tech startups that's not the case, so as Daniel said, better to take only the salary you absolutely need in the beginning.
In any event, I would suggest that the three of you sit down with a very good CPA and work through ALL your numbers, not just salary. Things will be less emotionally charged and probably fairer to everyone that way.
And (shameless plug coming) when you get around to marketing your business/products, which should be sooner rather than later, I wanted you to know that my agency specializes exclusively in technology marketing.
Al Shultz alshultz.com/
In my opinion a basic fixed compensation that never exceeds what you would pay someone else in you position, plus 2 variable compensation bonuses one monthly bonus based on how much you sell for the company every month and one yearly bonus based on how much profit you make during a fiscal year
A lot of entrepreneurs tend to pay themselves as little as possible to help minimize the payroll expenses in their business. With that said, it is important you enjoy what you're doing and feel compensated for the work and time you've put into your business.
The Business.com team recently published a guide to How Should Entrepreneurs Pay Themselves? which can help answer your question.
Depending on your business structure, how many partners there are, and each partner's role in the business, you can decide whether it makes sense to have each business partner on salary or have each business partner take an owner's draw.
You already received great feedback but I wanted to add one point. Your pay like and expense should be budgeted out in your business plan! Look at your sales projects and then you can budget your expenses.
Please, from a serial entrepreneur, create a business plan as detailed as possible. It is a great exercise and will give you a deeper insight into what it is going to take to succeed.
Best of luck and congratulations!
You are on the right track, yes you have to pay yourself but really you are not going to know how much. You stated you have partners.
How much does each of you need for living expenses?
Do not live off the company by expensing all you take outs and dine in.
You may for the first 6 months to year have no actual income other than covering your living expenses. Even then your partners and you may have to cut back to cover business expenses.
With a start up you may need to hold other jobs until the business gets off the ground...Have a good business plan, understand your costs, pricing structures, then se what you have left and need for capital 1st, then pay yourself a minimum starting salary and take more out as profits increase...
You would have to draw funds required for your maintenance, I think $2500 each is the minimum required for survival or fix certain percentage of the revenue to start with and keep on increasing on pro-rata basis as you start building profit. Location and paid up capital / size of business can help in suggesting more precisely.