Founders and Salaries: Dos and Don’ts

How Much Should Founders Pay Themselves?
December 4, 2019
Interview with Nadiia Dvoinos
December 18, 2019

It is no secret that startups are expected to be profitable. When starting a company or a project, you naturally want it to be successful and to get a return on your investment. However, it is difficult to achieve these goals in the early stages of the company’s lifecycle. Patience and hard work are required.

This raises an interesting question regarding how you, as a founding member, will pay yourself and your founding team. Money is, invariably, the lifeblood of your company. Without it, you will be forced to shut your doors. So how you manage it is one of the most important factors at play.

The Unicorn Approach

According to Daniel Gutenberg, a highly successful and prolific investor who has backed 13 successful unicorn startups, founders should consider the following when attempting to build one:

  • The only rational course of action is to invest everything you have in your startup, as you will earn it all back and then some if your plans come to fruition.

This strategy demands that you analyse your living expenses and match them with an appropriate salary. That is, you should not pay yourself more than you strictly need. All your additional funds should be invested in the company to push it to the Unicorn level. The reasoning behind this is that, once you achieve that lofty level, your startup will eventually provide you with a big payday through an IPO or M&A deal. The billion-dollar company valuation will ensure that you recover everything you have invested.

However, it needs to be said that this is a high-risk approach, as 9 out of 10 startups usually fail. Thus, while the potential rewards may be very enticing, the risk should not be taken lightly. Because if you fail, you will be left with nothing.

From Gutenberg’s point of view, it is critical that founders become personally invested in the startups success by having a large amount of “skin in the game”, as this will further motivate you to give it your all. Thus, if your goal is to build a Unicorn and perhaps even win Daniel as an investor, you should be aware of the sacrifices that will be required of you.

The Founder’s Perspective

There is a lot that can be learned from how founders in Switzerland deal with this issue. Generally, most Swiss startup founders adhere to the following policy:

  • They focus on their living expenses, reducing their salary down to the bare minimum to cover them.
    • This can range anywhere from two to four thousand Francs if they have low expenses, or up to three to five thousand.
  • As a rule of thumb, the younger a founder is, the lower their expenses and salary will be.

When a startup has more than one founder, it is a good practice to take the highest living expense of the team as a base salary and pay everyone the same. This is not only fair, but also cuts down on distracting conversations and allows the founders more time and energy to focus on the company itself.

  • Of course, this only works if every founding member is working full time at the company, which they should be anyway. Side ventures can rob your startup of vital manpower.

One thing to consider is that while some founders pay themselves a regular market salary (eight to ten thousand Francs a month), this practice should be avoided in the company’s early days. That is, unless you personally invest a significant amount of money into it and buy your company’s shares at market price. In this case, a market salary makes sense.

However, if you are an early founder and got shares for virtually nothing, then such a salary will only serve to reduce your runway. This could develop into a death spiral, as you would have less time and funds to hit your next milestone, which could subsequently turn potential investors away. Without investments, you will go bankrupt.

Therefore, you will want to reduce your salary to only cover your living expenses. You can live comfortably and in luxury once you become successful.

A Matter of Scale

One last crucial thing to be aware of is that you need to grow your salary as your company scales up. Failing to do so could send investors and potential new hires the wrong message.

The recommended salary during the early phase of your startup would, at most, sit around the four to five thousand mark. Later, as you approach a potential Series A+ financing round, you should steadily increase your salary until it matches the regular market value. Why? Because Venture Capitalists will want to know how much money you’re making/burning during normal operations based on fair market terms.

If you are underpaying yourself and the rest of the team, you are effectively cheating in this respect, and from their perspective, this could be a red flag, making them look elsewhere.

To avoid this situation, you should think of your salary policy as you would when trying to find a product-market-fit:

  • Try to reduce everything to a minimum until you find something that works.
  • Once you find something that works, you improve it and focus exclusively on it.
  • As soon as you enter the scaling phase, at which point you will need to attract senior talent (and pay them appropriately), you should transition to paying yourself close to market standards.

This practice will send a strong signal to potential investors and new hires, showing them that the company can function and generate positive results, which will go a long way towards being taken seriously.

Leave a Reply

Your email address will not be published. Required fields are marked *