As a founder, you’re often told that you need to work for free to get started. After all, if you want to get your start-up off the ground, it makes sense to keep as much money as possible in the business to give yourself the best chance of success.
But working without a salary is not a long-term option for most people. Even if you can manage for a while, eventually the risks of not paying yourself will start to outweigh the benefits.
Getting a successful company established can take years – Amazon are said to have taken four to five years to become profitable. In the meantime, your productivity, focus and wellbeing are business essentials that need to be taken care of just like any other assets. Eventually, it will make sense to put yourself on the payroll so you can do that effectively.
However, the stage you choose to start paying yourself and the amount you decide to pay will vary for every start-up, which can make it a challenging issue to address.
Here are some helpful ways to approach deciding whether it’s time to start paying yourself a salary, and if so, how much.
Sacrificing your own financial wellbeing to give a little more money to the company can put you on rocky ground. You might find yourself under increased pressure and unable to give the best to your start-up. You may have to prioritise other, paid work in order to survive. None of this is ideal if you’re trying to grow a business. However, if you can afford it, working those first critical few months for free can be a good investment – it will extend your runway and is likely to appeal to potential investors.
If you’re tempted to forgo a salary, it’s worth thinking about how long you will be able to manage without. Schedule a future date when you will review your position – the first round of funding is a good time to start factoring in founder pay.
Remember, a salary doesn’t have to be huge to start with. It can and will change with subsequent funding rounds. As your company grows it will get easier to decide on your salary as you’ll have a longer, stronger performance history to base it on.
More established companies will be able to pay themselves a higher salary than a very early stage start-up – they’re likely to be bigger, and will have a proven track record. But if you’re still small, it doesn’t mean you have to go without.
Consider the financial health of your start-up. While you don’t need to be making a profit to take a salary, you do need to make sure you have sufficient cash flow. Work out how much money you have available and where it’s coming from: is it revenue from the business, capital from investors or money from your own pocket? Is there enough to consider paying yourself a salary, however small? Will this salary allow you to focus more on the business, reach those critical goals more quickly and access investment more easily?
If the answer is no because your start-up is at pre-fund stage and the capital you have is better used within the business, it may be worth factoring in a realistic salary when deciding how much to raise in your first round.
If there is enough money, the next thing you need to think about is tax.
If you draw a salary, you’ll need to pay tax on it. This is worth considering in the early days when funds may be tight. Further down the line, if you become profitable, your business profits may be taxed more highly than any remuneration you receive. Check your local tax laws to see what will work best for your business right now.
You will also need to factor in additional state-required payments such as social security or national insurance, depending on where you are based. These extras can come as a surprise if you’re not ready for them – so make sure you research how much you’ll need to pay and factor it into your calculations.
As well as exploring what you’ll need to pay out, it’s also worth seeing if you qualify for any tax incentives. Many countries have R&D initiatives to support young businesses in getting off the ground, particularly in science and technology related fields. These could boost your cash flow and mean you’re able to support yourself better than you expected.
Entrepreneurs are often very successful, driven people who may be leaving behind well-paid, stable careers to branch out on their own. But trying to match your salary as a founder to the role you’ve left behind may not be the smartest use of your start-up’s money.
Paying yourself too much, especially early on, will drain your resources, potentially hamper your start-up’s growth, and send the wrong message to potential investors about where your priorities lie.
As a founder, you have equity – your salary is simply there to help you survive while you focus on growing the business. Finding a sensible balance is key.
Look at how much competitors in similar industries at the same stage of growth pay their founder/CEOs. A recent survey of start-up CEO pay by Kruze Consulting suggests that mature spaces like biotech and hardware, along with newer “hot” sectors such as fintech and SaaS are among the top payers for founder salaries.
You’ll also need to take into account your individual circumstances. If you have a family to support and a mortgage, you will need more money to live than if you’re single with no dependents and living in a house share.
There are no hard and fast rules for deciding when, or how much to pay yourself as a working founder. Every business and every individual is different, and your circumstances will change over time.
But, even at an early stage, it’s worth setting aside some time to work out whether your current financial set-up can sustain you for the long haul, so you can focus and give your best work to your company.
That forward planning will not only stand you in good stead with your investors, it will give your business the best possible chance of success.
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