With entrepreneurship comes freedom, and along with that freedom comes interesting decisions you may have never faced before. One of those decisions is what to pay yourself as a startup owner.
There are a wide variety of opinions on this subject, and a lot of factors weigh in. Suddenly, being your own boss isn’t quite as easy as it originally seemed. It is possible to make a responsible decision, even if you’re new to the world of entrepreneurship. Rather than just throwing out numbers, let’s look at the factors you must consider to come up with a number that makes sense for your business.
Assess your personal life
The first thing to stop and take a look at is your personal life. Try to view yourself as you would any other employee and stay objective. What kind of income do you need to fuel your leadership capabilities and steer your startup toward sustainable growth? The answer to this question, of course, will vary greatly depending on where you live, whether you have children, your rent or mortgage, etc.
A founder who is fresh out of college and renting an apartment with friends will probably have far fewer expenses than a middle-aged founder with a large family and a suburban home. With that said, you may find that some of your expenses are simply not necessary and it might be the perfect time to cut back on luxury items. Some sacrifice is required to feed more money into your business, but at the same time, you won’t be able to lead effectively if you are deprived of your everyday needs.
Related: 5 Steps to Budget Smartly for Your Small Business
Does funding matter?
It goes without saying that the more funding you have, the more breathing room you have in your salary. However, if investors catch wind that you’re overpaying yourself, they’ll see it as money down the drain.
So the question is: is your salary warranted? Is it being put to good use to help you stay healthy and energetic to manage your business? If not, consider what other things that money might be funneled into.
As a rule of thumb, it is advised that founders pay themselves about 30 percent of market value.
Let this framework guide your decision, but don’t get too attached to a precise number. Every business is unique and you may need to tweak your salary to fit your specific circumstances. Once your revenue stream begins to rise, reassess your personal income and make adjustments as more funding flows in.
Set a balanced pay standard
Another important consideration is setting an example early on in your business. Even if you don’t have employees yet, the way in which you handle salaries sets a precedent for the future of your business. Founders that think this through carefully and consider all angles will have healthier relationships with employees down the road.
On the one hand, a founder who puts themselves first and their company/employees second will hurt the team dynamic. Employees and partners will have a hard time trusting in their leadership, especially if they are paying themselves market value and paying their employees much less. This can lead to a plethora of problems down the road, like low engagement rates and issues with employee retention.
On the other hand, a self-sacrificing founder who underpays themselves will experience another set of challenges. They’ll be depleted, uninspired and struggle to keep the business afloat. Operating from “survival mode,” they’ll have little ability to think toward the future. Instead, they’ll spend their days putting out fires instead of managing the business. This hinders a founder’s ability to make solid decisions for long-term growth.
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Early errors
If you’re off to a great start, well done! But don’t let early success give you the illusion of total stability. Oftentimes, founders who experience initial success will accidentally overpay themselves, which allows them to live a cushy lifestyle and forget that their startup is still new and vulnerable. Hope for the best, but manage your money for the worst case scenario.
Most experts agree that a new entrepreneur earning six figures with seed funding is way over market value. When investors see brand new founders swimming in cash, they consider it a red flag and a distraction from priorities. Establish the business first. Set a firm foundation, and only then should you consider giving yourself a raise.
Another common error for new founders is severely underpaying with the assumption that they are playing it safe. They assume that paying themselves very little will yield a low burn rate, but that’s not necessarily the case. Like overpaying, underpaying can also give a false sense of security, but in this case it causes founders to drag their feet and tolerate low revenue streams.
In conclusion, avoid the extremes of over and underpaying yourself. Prioritize growth and sustainability, getting yourself established before taking more money for yourself. Always remember: your salary isn’t just a personal decision; it sets a standard for your company culture and the salaries of future employees.
