How Much Should You Pay Yourself? A Founder’s Guide
We’ve all been there—no one knows what to pay themselves when they’re just starting out. There’s no rulebook for a founder, and everyone has a different view.
It’s even harder to know how to react to change—how much to increase your salary when you start making profit, or if you should significantly decrease your pay when your start-up runs into difficulty? There are investors who believe that CEO pay should be the single biggest factor in investment, and there are CEOs who believe that if you want to stay motivated through difficult times, reasonable pay is very important.
Salary is a measure of success—but not in the way you think
Peter Thiel, a significant investor in PayPal and Facebook, claims that the single greatest indicator of a startup’s success is when you find a CEO who is initially on low pay. He also claims that the average salary of a CEO of a funded startup is usually in the region of £100,000. His deciding factor on whether or not to invest in a company is always how much the founder has chosen to pay themself. He says that:
“The lower the CEO salary, the more likely it is to succeed.
The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money. It aligns his interest with the equity holders. But [beyond that], it goes to whether the mission of the company is to build something new or just collect paycheques.”
In practice we have found that if you only ask one question, ask that.
Therefore, even if a CEO does not wish to pay themself a low wage, there could be investment advantages to doing so. If investors are working off a theory like Peter Thiel’s, a CEO who initially pays themself less than they would like may find it easier to get their company off the ground if their approach to their own pay impresses their investors. Although nobody likes to be paid less than what they feel they deserve, it may be worth doing so in order to have a comparatively greater chance to be well paid further down the line.
Capital is for the business—you are (sometimes) not your business
There is also the fact that, generally, putting as much investment money into your startup at the earliest stage is undoubtedly a sound plan. In the long term, your wage – even having a wage at all – is predicated on whether your startup succeeds or fails. When your startup is in its infancy, the most sensible thing you can do is ensure that it does not fail. Therefore, as much seed money as possible should go to the company rather than you.
Of course, when a startup is in its infancy you are essentially the company. A CEO who is constantly worried about their personal finances may not focus as well or as efficiently on their startup as they perhaps should, and this could have unpleasant repercussions for the CEO as a consequence. In quite a real sense, in the very early stages of a start-up the CEO is the investment. Reflecting that financially does not seem unfair. It is also best to be honest with your investors, says Seth Levine, managing director of the Foundry Group:
“As part of this open conversation be clear about what your expectations are going forward and what milestones might trigger incremental compensation. (raising a larger round, getting product into the market, hitting a certain revenue target, etc.).”
But I don’t have any outside investors!
Of course, there are some whose startup is the result of bootstrapping, and the aforementioned factors are of little concern to them. You cannot irritate or scare off external investors when you do not have any, especially if you are the sole investor. However, even a founder who does not require outside funding at the start may require or deliberately seek outside investment later in the company’s life in order to help it expand. Therefore, an extravagant wage at the beginning of a startup’s life is not the recommended course of action, whether your startup has outside investment or not. It is imperative to be capital-conscious at the seed stage, and it is imperative to be capital-conscious even if – especially if, one might argue –your money is at risk. The best time to pay yourself more is when your startup is no longer a startup—a period Seth Levine defines as:
“Most founders tell me that around 30 employees is when their startup companies start to feel like real businesses (or at least feel “different” – I think largely stemming from the fact that around 30 employees is the time when a CEO no longer really feels like they know all of the people that work for them).”
A formula for success
Therefore, the best course of action to take is to pay yourself as little as possible as an actual wage, in order to cut down on the amount of personal tax you will need to pay. The formula, therefore, should reflect the current personal tax allowance, which is £9440. The founder should therefore pay themselves no more than £787 per calendar month, and make the rest of their money on dividends. When the company does not make a profit, the founder should loan their wage of £787 to the company. They can then take it out tax free later on when the company has more money.
There is, in a sense, no absolute formula for a salary. But there are a few clear indicators of what you should not do—not provoke your investors by paying a salary they will not think is justifiable, avoid plundering your capital, don’t pay unnecessary tax. There is no ‘magic’ formula, but these basic guidelines will provide some clarity.