April 5th, 2023 | By: Wil Schroter
Startups are an excellent way to make money — for everyone else.
We all love hearing the story about that super-successful Founder who made a billion dollars growing their startup. Those legends fuel the myth that we "rank and file" Founders must also be swimming in our Scrooge McDuck vaults of cash.
Yet, I speak to thousands of Founders and if there's one common thread when it comes to money — it's that most of them are beyond broke!
So how is it that we can spend so much time building a wealth engine that doesn't actually provide any wealth for us? Where is all that money going anyway?
The problem starts with us. When we launch our startup, we're wildly resource-constrained, so we start off by sacrificing our own needs for the good of our startup. We run up our credit cards, we personally guarantee loans, and use every penny we have to pay everyone but ourselves.
This initial requirement becomes a habit. We get used to being at the back of the line to getting paid, so we become willing to forgo our income for the benefit of our startup. Even if we successfully raise outside funding, we'll be told to defer a "market salary" in favor of our equity value. We agree because it sounds like the right thing to do.
Yet again, that initial behavior of putting ourselves at the back of the line persists. What we don't realize is that there is never going to be someone that grabs our arm and moves us to the front of the line, VIP-style.
There is rarely a point where our startup doesn't need capital or resources that we don't have. Yes, sometimes we actually become profitable and can make some cash (usually after we've already lost a ton), but it's rare. Most of the time, we're forever under-capitalized, so the idea of "dividing up some profit" sounds more like a dream than a reality.
Yet, occasionally, we have an opportunity to take a little money off the table. Maybe it's during a funding round (rarely), or maybe we had a good quarter or a good year. Whatever that little windfall might look like, what we need to do is recognize that this may be the last time we get to take a little cheddar home.
Most of the time, we won't! We'll forgo it to feed the business while starving our poor little bank account. What we miss in those moments is that every opportunity we forgo to take a little money off the table is an opportunity we may never get again. And that's where we mess this all up.
This isn't a matter of greed; it's a matter of prudence. If we don't recognize as Founders that taking money off the table whenever we can is a necessary step to maintain our own survival, we are going to regret it.
That may mean increasing our salary. That might mean taking a tiny quarterly distribution. It doesn't have to be crazy, it just can't be zero. We have to get in the habit of knowing that whatever we don't claim, the business will claim for us every time.
I've yet to meet a Founder in 30 years that said, "I have to say, I really wish I had never taken that money off the table." Not a single one. But I have a countless list of Founders who have said, "Damn, if I hadn't taken that money off the table when I had an opportunity, I'd have nothing to show for it."
It's your money. You've earned it. Take it off the table. You'll only regret NOT doing it.
How Much to Pay Yourself (podcast) As a Founder, how do you determine how much to pay yourself? How much is too much or too little? We’re breaking down the long-debated issue of Founder compensation to help you find the right balance.
How Do I Get More Equity Back? Giving equity away is easy. Getting it back is super hard. So while we can get some stock back into our coffers, we have to focus more on how quickly we give it away than how we get it back.
When do Founders Get a Raise? For some reason, Founders are incredibly "shy" about giving themselves a raise. So when is the appropriate time to pull ourselves aside and award that long-overdue raise?
Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes Bizplan, Clarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.
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