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.