Should a founder of a startup take a salary when first starting out?
I am wondering if other startup founders take a salary initially. What is common practice? Should the money go back into the business or is it typically for the founders to pay themselves?
Make sure in your business plan you, include a salary for you...if you don't u may not ever get your full value, as time goes on, it will be a problem. If you cannot be paid appropriately thing your customers will let you know ur value...*or you'll keep trying to make it up....
Ideally in first year or two, cash flow is a big challenge for start ups (I am assuming that there are no angel or mezzanine funding here).. In such a situation, it makes sense not to take a salary for the first year at least and plough everything back in to the business. If the idea is right and business is run efficiently, the take outs after 3 - 5 years for the founder will be far greater, irrespective of the choice of exit or continuing with business. It is delayed gratification - but that is one of the key and essential behavioral traits of an entreprenuer. :-)
So from my experience on both sides of the table, here is the key point: as a founder/senior team member you need to be 100% focused on building your business. That means you can't be distracted by the stress and worry of how you are going to pay your bills. The right way to think about it is to ask, how much money do you need to pay your bills (not to change your lifestyle or build your wealth). Consider your ability to draw down savings. Put that number into your business plan and raise money consistent with that expense. A savvy early stage investor will want to be sure that the founders don't have paying their bills stress as a distraction to building the business.
Yes. You are putting in time and energy in the startup. I firmly believe you are more likely to quit if you don't.
There is no right answer, and the experience will be across the map. The most common story is the start with a salary and then not be able to afford yourself. That's why the key is that you have a good, well counseled, business plan that accounts for anticipated expenses and potential income. Your compensation plan for a founder is whatever you need or want it to be provided it fits your true personal needs and serves the company's purpose now and with clear projections and plans into the future, 5 years out is a good target and revise it each year.
After figuring out the best structure for your business, you then need to figure out how much money you need to survive, i.e. pay your house loan, utilities and card/car repayments. This becomes your living wage and rest should be re-invested. Because if you are worried about paying your current bills, it will be difficult to concentrate on growing your new business. It also becomes part of the break even revenue for the business.
HI Barbara. This question comes up often with entrepreneurs. There are three key points to consider; structure, capital, and cashflow.
Structure. Depending upon your jurisdiction and the structure you have selected there are different obligations that are beholden upon the founders / governance structure of the entity. For the purposes of this discussion. I've assumed you are a company, which is a fairly standard global concept. My point is if you are a company it is a separate entity and any monies in the company belong to the company. The Directors, and I presume the founders are the directors, have a legal obligation to ensure the company remains solvent at all times.
Capital. When entrepreneurs receive funding they are over the moon because they are able to realise their dream. It's a wonderful time. However, what most entrepreneurs fail to realise is they have been given one of the rarest commodities on the planet - capital. What many entrepreneurs don't understand about capital is that it is easy to spend but incredibly difficult to raise. And if you have not provided a reasonable return to your investors on their capital they won't be stumping up more capital should you run out.
Cashflow. As a general rule, the entrepreneur pays themselves last. They pay themselves after they have paid their staff, suppliers (including suppliers of capital), taxation authorities, and the business (working capital). In tough times, entrepreneurs are paying the company rather than the other way around. In good times, the entrepreneur will pay themselves handsomely.
I've known some entrepreneurs to survive on baked beans on toast to ensure they realise their dream and today they are fabulously wealthy. I've also known other entrepreneurs who paid themselves well when they started out and now work for somebody else.
My tip is to determiner how long it will take your company to earn sufficient income so that it can afford to pay the entrepreneurs a salary, then double that period.
Happy to discuss further.
I think Maureen raises some really good questions for you to reflect upon.
There's another perspective; creating the right habits. In some startups that I've helped, I would create a 'clearing' account and put forth a portion of the budget to pay founders (and myself) into these accounts. Even if the amounts were nominal (ie: $10 biweekly or 10% of earnings), it created the right accounting habits. As the businesses matured, the Founder's mindset was set to respect the right accounts/budgets since that's how the mindset was blueprinted from earlier on.
An added positive was that since the Founder(s) was/were incentivized by performance-based salaries, it forced more diligence on financial reports and (in most cases) motivated the individual(s).
Hope this helps!
The best and the most transparent option is not to take anything during the operational year and decide on dividend distribution at the end of the fiscal year out of the profits made only. Treated and distributed as per the laws of the state.
However, due to certain tax incentives available in some countries on salaries and expenses of owners it is beneficial to take an appropriate amount which is the market value of the capacity you are working in the company.But this should be very transparent and justified in coordination with the responsible employees of the company.
Starting a business and making it profitable is much more painful than it is generally considered.It is ideal to keep personal financial status in mind before doing an investment and not to expect anything for the first few years.The transparency of the owner and the trust of employees on the owner are the biggest assets of any company.These are the essence of teamwork and shared vision.
Founder is a different aspect than owner because he can be or cannot be an owner of the company.In any case he should be justified and transparent in terms of his market value compared to size of the business.
At the end of the day the entire venture should be a profitable venture adding value to the society in various manners and moving forward. Otherwise it can also survive but will become a social liability for those who come in contact with it.
Whether owner or founder , initially it is advisable to stay transparent with finances and just focus on growth and sustainability.
Best Of Luck
It's important to fit into the company not to take things out of it. Use the company resources, even human resources, to get small amounts of help with food, laundry, newspapers, coffee, a place to catch a nap etc. but by all means keep out of the salary roll - it's good PR and you noticed it.
If not at start-up, then when?
After 6 months, 12 months, 10 years?
You gotta eat in the meanwhile :D
Like Mike said . . . The habit of not paying yourself can be a really hard one to break.
If a founder has another, reliable source of income, then they are less likely to take a salary from the start up and will leave the cash in the business to support its growth. If the start up is the only potential source of income for the founder then that tends to change things. If the start up's projected cash flow statement shows enough $ in the business to support a salary for the founder, then I'd recommend including a salary (even a modest one) for the founder as an incentive to drive the success of the business.
Ask yourself, did you set aside enough personal funds to live for a year or so. Did you put your money into business as a loan or as equity investment. If loaned, and you need money to live on, then have the co pay back the loan incrementally. If you invested and leave your investment in the company, and end up taking a salary - then you are paying income taxes, social security and medicare taxes on your own or someone else's invested money. Not a great.
Also not great is for co. to borrow and pay interest on a 20-yr. loan - with a lot of that loan representing your salary.
Ask yourself, if you invested in someone else's company, how would you feel if the owner used your investment to pay him/herself? Tiny salary - maybe ok. Generous salary - not so much.
Answer depends on multiple factors. Good Luck!
I advise my clients that the first rule when starting a business to remember that it is a business, not a hobby. Even though the business may result from personal experiences of the founder it is no longer a hobby and must be treated as a business. When the original business plan was developed if must include remuneration to its officers and employees, therefore the salary to the founder is part of the normal expenses that should have been considered in the original Business Plan. If the new company cannot afford the salary to be paid to all personal involved in its operation, is it a viable company?
RG Bud Phelps
Good question - my history on point varies but I'd stick to the axiom - everybody wins with equity on a start up success and everybody needs to eat while you're chasing that success.
What I mean by that is that you can't expect employees to buy into founder like aspirations and work ethic if they aren't sharing in the equity outcome and conversely you can't expect founders to stay the course if they are working for free to build up to that outcome.
I think it is fair for founders to initially bootstrap a company with $$$$ to provide initial capital, hire employees necessary to get business to 1.0 as far as clients, product etc but nobody should do that stage for free. When it comes to reinvestment - that comes with 1.0 results.....if you can't attract further funding based on product, client results - well best not double down founder investment or go into Kraft Dinner mode (where everybody takes a salary cut in an effort to reduce operating costs, extend runway in hopes of a more positive market response in the near future) - time to wind things up and try another venture. (IMHO)
If the founder is or the founders are actively involved in the day by day business they/he or she should be payed first before anyone else. Their/His or Her economic wellbeing is crucial for the existence and success of the business. Any economically distressed founder, usually also the owner, of any business is a bad asset to to the company. Don't hire more staff until you know that your company can pay first for the existing staff including the founder(s).
Hi Barbara, you have a startup because you think you can make more money in due course than a regular job, so getting paid is justified. However, that is done only after your expenses, taxes, contract payments, staff salaries and business investments are taken care of. What's left of the business' earnings may be shared amongst the owners.
In most cases your company won't have true value until you pay yourself. The one who starts it is the most important resource to its viability and if you cannot pay yourself then how could it afford to hire someone in your absence?
The common practice is to not take a salary. However, i believe you should pay yourself. Even if it means moving money from one bucket into another. We have a natural tendency to move ourselves to the end of the line, every single time. This is poor dad's thinking according to Robert Kiyosaki.
I personally cut myself a check to simply cover personal bills and that's it. My vehicle is leased through the company for a tax purposes and things like that I've worked out with our accountant. Do not plan on a salary until we have employees. Right now, we utilize subcontractors or 1099s. As a start up, it's tough to solidify yourself with a salary as there will be growing pains with some ups and downs. Once you're more stabilized then work in your salary and start paying employees. I do not want to put anyone in a position to where we'd have to lay them off just to maintain my salary at least in the beginning. Make sense?