When it comes to advice for founders & startups, I think a lot of information shared moves too quickly to tactical advice. You’re bombarded with specific lines to say when negotiating, the best adjectives for marketing headlines, optimal email subject lines to use with investors, etc.

While these tactical insights can be useful, they seldom aid in creative problem-solving, especially when the situation slightly deviates from the one the advice was initially intended for.

When considering startup compensation, many founders search for a table of salaries that show “If the startup is X, then the founder should get paid Y.” Although this can lead to fairly accurate conclusions, it doesn’t do a great job supporting a founder in thinking strategically about the question of how much to pay themselves and their co-founders.

How do I determine a fair salary for myself as a startup founder?

First you need to think about what your salary represents in the company. It's not too dissimilar from any other salary for an employee of the company. When you're thinking about compensating employees, you think about what sort of cash comp do they need in order to join and work hard for your company.

Their cash will likely be less than they could get paid elsewhere, and their equity represents some potential value that should more than cover the difference between the cash that they get paid at the startup and what they would get paid at some other large company. As a founder, one of the things that you should realize is that you're compensating yourself the same way. Because you have the most equity in the company, you have the greatest upside. That difference between how much salary you pay yourself and what you might be able to get paid at some larger company should be quite large.

Secondly, every dollar you pay yourself is a dollar not invested in growing the business. This is a critical trade-off.

Should this capital go towards your salary or towards business growth activities like marketing and sales? This is a complex decision influenced by many factors, including your stage of business and past successes. For instance, a founder who has previously sold a company for millions might be expected to take a lower salary, focusing investor funds on accelerating company growth. A high salary early on, especially for a well-off founder, might not be well-received.

How do you think about using capital in relation to salaries?

As you think about how you use capital, especially early on in a venture-backed startup, one way to think about things is: what is the next milestone that you're trying to reach with the capital that you have in the bank?

It could be: “What do I need to accomplish in order to have the metrics to raise my next round of capital?”

Or, it could be: “What do I need to accomplish to get the company to break even?”

In both of those cases, the calculus may involve how much you pay employees, including yourself, in order to get to that number. If by spending $X dollars on yourself you are hindering the company's ability to get to the next level, then that would be a good determining factor on why you should be making less money.

Now, none of that gives you specific numbers around what you should be paid as a founder. And one of the difficulties of that is inflation. Over the last five years, the cost of living in big cities, the amount people need to spend to make ends meet, and the amount of money that they would make at different jobs has been drastically changing. So it can be difficult to decide what those levels are at any given point in time.

I think founders should be extremely capital efficient and challenge how much they really need to take on as salary. But it doesn’t help anyone (including investors) if they are so severely underpaid that they spend more time worrying about their own day-to-day lives than they are about making the company successful.

How did you approach this at your last startup and what did you learn?

After we raised a reasonable seed round, my co-founders and I discussed our daily and monthly expenses. We agreed that we needed to be making $80,000 in order to cover the cost of living in Los Angeles. Wanting to set an example and send a message to the investors about how capital efficient I was, and what we would be doing as a company, I decided to keep my own salary lower. That difference had a big influence on the options for an individual paying rent in Los Angeles- but it didn’t have a huge impact on the overall ability of our company to get to the next level.

The point of that story is, do not try to set an example by the sacrificing the quality of your life. Investors should want their founders to be able to make ends meet without being overly anxious. Be capital efficient, but ensure that you cover your expenses in a way that allows you to be 100% focused on the main task at hand, which is making the equity in the company worth many times more than the amount that you're getting paid at the company.

When does the issue of salaries come up in conversations with investors?

Especially in the beginning when you don't have a board, you are the one making decisions; no one's telling you what to do. However, your decisions will impact your relationship with your investors. They’ll see the numbers and certainly question you if they're outside the norm. If the company needs more money and they find out you're paying yourself $200,000 a year after raising a million dollars, it's problematic. You could have hired at least one, if not two other people if you had allocated that money differently. It's really about making the best decisions for the company and convincing investors that you are a leader who is a good steward of capital. It’s essential to demonstrate that if you get more money, you will continue to make decisions based on the company's well-being versus a selfish focus. You want investors to keep wanting to back you.

As you progress to later stages, this will get further outside your control. The board will determine your salary, and you'll have a voice in that, but you won't be able to decide unilaterally how much you make.

Key Takeaways:

1. Founder Salary Reflects on Company Management: The salary a founder takes has implications beyond personal income. It reflects how resources within the company are allocated and can affect investor perceptions. Founders should consider the trade-off between their salary and the potential to invest that money back into the company to foster growth.
2. Investor Expectations and Use of Capital: Founders must navigate investor expectations, especially in venture-backed startups. The choice between using capital for founder compensation versus reinvestment in the company (marketing, sales, etc.) is crucial. Investors seek assurance that their capital is being used effectively to generate returns, not disproportionately on founder salaries.
3. Learning from Experience – The Importance of a Reasonable Living Wage: From personal experience, setting a salary that covers living expenses without being extravagant can set a positive example of capital efficiency for investors while ensuring founders are not overly burdened by financial worries. The goal is for founders to be 100% committed to increasing the company’s value.
4. Salary Discussions with Investors and Transition to Board Control: In the early stages of a startup, founders have more autonomy over their salaries. However, their decisions can affect investor relations and confidence. As the company matures and a board is established, founders won’t have as much control in determining the salaries they receive.

Be chased,
Jason