Do Startup Founders Pay Themselves?

Do Startup Founders Pay Themselves

As a business owner, you’ll surely agree with me that there are many things to worry about when starting up a business from scratch. One of them is how to run the business and keep it successfully over a specific timeframe. Apart from that, you’ll likely be worried about how much you get to pay yourself and when exactly you need to start paying it.

A startup founder is the number one member of a company. Since founders are also a working staff of the company, they need to get paid like the rest of the workers in their companies. However, the timing matters a lot, as your priority is to ensure that your business stays relevant and successful.

Do startup founders pay themselves? How much do startup founders pay themselves? When is the right time for startup founders to start paying themselves? Do startup founders pay themselves after raising millions from investors? You’ll find out everything you need to know about these frequently asked questions as you read through the rest of this article.

Do Startup Founders Pay Themselves?

Here’s one of the questions that people frequently ask regarding startups – do founders pay themselves?

To answer the question, I’ll say yes; startup founders often pay themselves. However, they don’t do that until they’re sure the company can afford it.

The first few years of starting up a business from scratch are usually the toughest and the most challenging for entrepreneurs. As a startup owner, you’ll want to do everything you can to ensure the company keeps growing. Your responsibility as a startup founder will be to put your company until it becomes successful.

Five factors, according to Bill Gross of Idealab, influence the success of every startup business. They are the idea, strong team, business model, funding, and timing.

If you’ve already started your business, it means you’ve already put your idea to work. The next thing is to gather your team. You need talents to work with you to push the business idea to success; finding skills isn’t easy, as you need money and other things to attract these types of people. Furthermore, funding is also essential to drive your startup business forward. Here’s where you need to attract investors to your company.

As you can see, your priority as a founder isn’t to get paid at the initial stage of your business. At that point, the truth is your company will most likely not be able to afford to pay your salary.

So, here’s the thing, if a company hasn’t yet reached the right stage, the company can pay half salary for founders while the other members should receive their total wages. But when the company has successfully raised investment, the founders can always pay themselves. Furthermore, as investments keep coming in, the pay can start increasing depending on a certain percentage.

Bootstrapped startups are companies that started from scratch with nothing but personal savings and pure luck. If that’s the type of business you run, you might not need to pay yourself any salary. Yes, taking money from your company at this stage is like taking from your investment.

Bottom line: startup founders can always pay themselves salaries. However, the best time to do that isn’t at the early stages of the business, as that’s the time you need funds to keep the business growing.

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It doesn’t matter how old you are or where you’re from; you can start a profitable business.

How Much Do Startup Founders Pay Themselves?

As earlier mentioned, the right time for startup founders to start paying themselves is when the company has started raising funds from investors. If you’re still finding it difficult to attract investors to your startup, you can check below to see some of the tricks to boost your chances.

That said, if you’ve started raising funds for your business and you’re wondering how much you should start paying yourself as a founder, you might have to stop worrying about it. Here’s what you need to know below:

According to Kruze Consulting, the average startup founder’s pay in 2021 is $146,000. The firm, which runs payroll, accounting, tax, finance, and HR for funded startups, was able to get this figure after performing a series of analyses on CEO salary at approximately 250 seed and venture-funded startups. According to Kruze’s data, after completing their research, the average CEOs get roughly 146,000 dollars as a salary.

You need to understand that how much you get to pay yourself as the founder of a startup business depends, to a considerable extent, how much funds the company has been able to generate. The more the funds, the higher the salary your company will pay you and vice versa.

Your salary as a startup founder depends on the amount of cash that flows into and out of your business. It’s also essential, when paying your salary, to understand where the investment is coming from. Is it coming from venture capitalists, your account, or the company’s revenue?

As a funded startup, you can start paying yourself a salary if you’re on the company’s payroll. However, it’s advisable to discuss with the board upfront regarding it before starting to pay yourself. The board and you should decide the correct percentage that should go to your account without affecting the growth of the business.

When Is The Right Time For Startup Founders To Start Paying Themselves?

As earlier mentioned, the best time for startup founders to start paying themselves is when the company has raised funds. Yes, that’s the truth! But you need to understand that there’s more to it than just that.

Here are some of the things you need to know regarding the right time to start paying yourself as a startup founder:

  1. Are you better than “break-even” for a year?

In business, the break-even point is when your company’s total cost and total revenue are equal. Depending on your firm’s overheads, the market industry, and a couple of other factors, your startup business is likely going to reach the break-even point within the first nine months of starting up your business.

After this point, you need to wait a year to see how your business is performing. After a year, ask yourself whether your startup company is better than break-even.

The trends and sales you get within the year make up your business history. Look into the past and start making decisions regarding how you can start driving your business forward. As soon as your company starts growing, you can always discuss your salary with the other board members.

  1. When the tax fee is lower

Bootstrapped startups, as earlier mentioned, are companies that started up with little or no funds but your money. As great as it feels to make money from the company as your salary, the timing matters, and picking money as salary at the wrong time may end up hurting your business.

Here’s a scenario; imagine starting up your company with no outside funds but your money – let’s say about 50,000 dollars. And you later decide to pick 10,000 dollars as your salary. This doesn’t seem right and could lead to a portion of your business being lost to tax.

Instead of doing that, it’s better to invest $40,000 into the business while the remaining $10,000 sits in your account. That said, the best time to start paying yourself is when your business has begun raising enough funds.

  1. Have you raised enough funds to keep your business growing?

As a startup founder, before starting paying yourself a salary, you need first to ask this question – has your startup raised enough funds to keep the business growing?

The answer to the question above should let you know whether or not it’s the right time to start paying yourself a salary. As long as getting venture capital is one of your top business goals, you need to focus on that first instead of thinking about your pay.

As soon as you’re able to attract the right investors to your business and have generated enough funds, then it might be the right time to start rewarding your efforts.

  1. Have you paid your team members?

As a startup founder, here’s another question you need to ask before starting to pay yourself salaries – is the company capable of producing the other company members comfortably?

Here’s the thing; before going ahead to pay yourself, ensure that everyone else on your team has been produced without stress. After that, you can look at what’s left and see whether it’s the right time to pay yourself.

There’s no denying that you’re the number one member of the company. And as the chief commander, you should be the first to get paid. But now might not be the right time if your employees are yet to get paid.

As you already know, your team is one of the factors that can influence the success of your startup. If you don’t make them happy first by paying them, it might affect the business, as they won’t be motivated to work.

How Do Startup Founders Raise Money For Their Startups?

 So far, I’ve talked about the need for your business to start raising funds before you go ahead and think about paying yourself. But here’s a quick question, what are the best ways for startups to begin raising money for their businesses?

One of the best options to raise funds for your business is through “crowdfunding.” If you don’t know, crowdfunding occurs when you put details regarding your interaction on specific platforms, called crowdfunding platforms.

On the platform, you’ll have to state the goals and objectives of your business. That’s not all; you’ll also highlight the plans you have to make the business successful. Members on the platform, so far they like your business idea, will come around and invest in it.

Getting Angel investment in your startup company is another excellent way to raise funds for the business. Angel investors are people that have enough capital and interest to fund startup companies. So far, you have what they are looking for; you can always attract them to invest in your startup.

Unfortunately, angel investors can ask for up to 30% equity to find your business. Also, they don’t always put more money into startups when you compare them to venture capitalists.

Getting venture capital to drive your business forward is, arguably, the best you can do for your startup company. However, this doesn’t always come easy as getting angel investments. That’s so because venture capitalists will only agree to invest in your startup when they understand that your company has the potential to grow and become successful.

This comes down to the question of what venture capitalists look for before deciding to invest in your startup? A strong team and good traction are the two factors they look for before deciding to invest in your company.

Speaking of your team, venture capitalists would want to know whether or not you have the right team to drive the startup to success in the short term. That’s so because they hardly invest in companies for a more extended period. They prefer investing in your company and getting back their investment as soon as possible – if possible within three to five years.

value of vc financing in california 2000 2020
Venture capital financing in California reached a 20-year high last year, despite the pandemic. In 2020 there were 84 billion USD worth of funds raised across all sectors for startups and established companies alike – more than ever before.

Conclusion

Do startup founders pay themselves? Yes, founders can’t always reward themselves with salaries. However, the best time to do that is when the company is ripe enough and capable of paying you and the rest of your employees.

The wrong time to pay yourself salaries is when you’re yet to pay your employees, or your startup company is still struggling to get investment to drive the business forward.

Quick Answers To Frequently Asked Questions

Does CEO comp receive dividend payments?

Yes. The company’s actions are determined by the board of directors who elect the CEO. The board has a fiduciary responsibility to shareholders, not to CEOs.

Does an investor receive a startup founder’s salary?

Yes, a startup founder usually receives a salary, but not all companies offer one. Still, there are plenty of other opportunities for founders to be compensated. Employee stock options and common stock come with an equity percentage that can become established when the company is worth more than $1 billion.

Can you offset income tax with equity dilution?

Paid equity dilution is primarily used to compensate employees, not investors. Yes, there are some exceptions – like the founder who leaves the company and wants to share its success with all of their employees or investors that become active in running the business, but these are typically rare examples. It sounds like you’re trying to ask something else, though; if you don’t mind telling me what it was, I can try my best to answer it for you.

Is a small business owner also an entrepreneur?

Yes. An entrepreneur is just a small business owner or someone who invests their money for a return which can be financial or of a social quality – entrepreneurship is based more on the associations one has to make rather than on their occupation. And it’s also possible to be an entrepreneur without owning a company; you’d need buildings and implements.

Can a venture capitalist also be an employee?

Yes. Many venture capitalists are entrepreneurs that have already laid the groundwork for success, which is why they are qualified to be venture capitalists in the first place.

What is a sole proprietorship?

A sole proprietorship is the most basic type of legal business organization in which an individual or a family owns and operates the business.

Can an early stage startup reside in silicon valley?

Several startups do. It’s important to remember the innovation and startup tradition in Silicon Valley is closely tied to research at Stanford University and other collegiate institutions.

Does the founding team receive a company dividend?

The founders are not typically compensated with a dividend, and instead, the sale of company equity provides founding employees with cash. Founders can still receive bonuses if they purchase stock in their company outside of the vesting schedule. This is common among startups already generating revenue or have an initial investor who owns shares directly.

Can a startup CEO change the liquidation preference?

No, an individual does not have the authority to change a company’s existing class of shares. A startup CEO can’t singlehandedly modify a company’s share structure. The company would need to reach a consensus regarding the issue and have it approved by all shareholders or pass a Board vote at their general meeting. This modification is one of the agenda items.

What is dividend base salary?

Dividend base salary is a combination of your base pay and your company’s quarterly dividends.

How can you calculate cash flow with startup equity?

To calculate cash flow from startup equity, multiply the present value of expected cash flows from a business by the fractional ownership interest. For example, assume you have 40% ownership in a company that is expected to generate $10,000 per year in free cash flow. The present value is estimated at $20,000, so your share of the total NPV would be 20% or $4,000 every year. This would not include tax benefits, if any.

Can potential investors purchase preferred stock?

Yes. Preferred stock is a particular classification of stocks that gives its owner a set of rights, including the potential for a dividend and preferential treatment in the event of liquidation.

What is founder compensation during a funding round?

The founding team is often incentivized by the equity in the company, which may involve an allocation of stock options, purchase preferences, tax advantages, and royalty rates. Non-monetary compensation may also be given to founders, including loans or guarantees against loan defaults. For founder’s shares that vest over time, the founder will have the option to repurchase them at a specific price which is usually lower than their estimated value.

What is founder CEO cash compensation?

Founder CEO cash compensation is the total of all salary, bonuses, and equity that the founder receives.

What is an angel investor equity stake?

An angel investor equity stake is an investment from an angel investor in a company. Frequently, the investment takes the form of convertible debt or preferred shares.

What is sweat equity common stock?

Sweat equity is the investment of time, sweat, and energy in a company or enterprise. It can work “behind the scenes” or be more visible to customers. For example, someone researching on behalf of an organization for which they are not being compensated may call that person’s effort “sweat equity.” The term comes from the notion that some people are willing to invest their labor, skills, or money into a project without payment because they believe in it enough to think it will succeed.

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Wasim Jabbar

Hi, I'm Wasim - a startup founder and proud dad of two sons. With 15 years of experience building startups, I'd like to share my secret to achieving business success - quality marketing leads. Signup today to gain access to over 52 million leads worldwide.

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