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- Should founders get paid?
Should founders get paid?
Read time 1.8 minutes.
Recently, there has been significant controversy online about whether founders should take a salary while in the early stages of building their company. Today, I was to share a few perspectives:
What I did as a founder
What I believe is morally right
The impact of salaries on raising VC
What I did as a founder
When I started my company, I put $15k of my own money into the initial startup costs. We ended up making $10k in presales in our first month (for a product that didn’t need to be delivered for another year); that $25k was our “startup cost”.
Lucky for me, things went according to plan, and we raised our first round before burning through the $25k runway that we “started” with.
I personally did not take a salary while we were spending that $25k. That being said, I did live at the office, and we paid reduced salaries in exchange for bonuses like free meals for employees, which meant that my food/housing was covered by the company indirectly (without any real additional cost to the business). And spending I needed to make above food/housing I used my own savings for.
I loaned the $15k to the company, so once we raised our first round, I paid myself back that money. Once we raised, our management team did not take a salary even though we did have to pay staff.
We went about it in an unorthodox way. Each time someone on our management team needed money (for anything from rent to gifts for our partners), we’d put in a request and sit down with a management team to determine if it was worth it and how it would impact the company. Obviously, rent/food money was always quickly approved, but we did have long arguments over the cost of our co-founders’ anniversary gifts.
Once we raised enough to have a long runway and the salaries weren’t massively impacting our runway, we took salaries.
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What do I believe is morally right
Having been asked this question for years and dealt with it as a founder and investor, here is how I look at it now.
Founder Equity = Compensation for Idea/Risk/Founding
CEO/CTO Salary = Compensation for Work
As far as I am concerned when you raise a round of VC funding, you have a pre-money valuation, that is, the value of the business today based on everything you have done so far. That is what your equity stake in the company post-funding represents.
You go to VCs with a company they valued at $4M pre-money. A VC investment is you and the VC deciding to work together. You provide the $4M company, and they provide the $1M Cash. The end result is a company where you own 80%, and they own 20%. You’ve earned that equity; that equity is not something you need to keep working for free to grow.
So I believe morally, once you have a VC onboard, you should take a salary for your time commitment (something they aren’t bringing to the table post-funding).
The impact of salaries on raising VC
If you are a pre-seed company, many VCs will look down on you for taking a salary. This is a fact. If your company is default dead and you are drawing a salary, then you are bringing it closer to death with each paycheck that you take.
Seed and beyond, when you have raised $500k+, then you can start to take a salary that is reasonable to support yourself. I would say, as a rule of thumb, never take a salary that is more than 10% of what you raised. So if you raise $600k your max salary should be $60k a year.
Another consideration here is that investors know that founders often need salaries after a couple of years of full-time work without pay. So when you pitch your business from the Seed stage onwards, include your salary in the cost projections. If you don’t, then investors won’t trust that you’ve properly budgeted, and if you later need to take a salary, some may feel deceived that you didn’t mention that when raising.
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