How much should a startup Founder pay themselves?
Should we show our commitment and work for nothing? Or should we try to at least match how much we made at our last jobs? How do we have a salary discussion with ourselves? What about our co-founders or investors?
The problem with negotiating a startup salary, even if it's with ourselves, is that we often compare this discussion to how we've thought about salaries in the past. We use the false comparison of a traditional company salary, or we go to the other extreme and assume we have to work for nothing but high fives.
Neither is true.
Startup Founders and their teams simply need to calibrate compensation to how startups themselves grow: dynamically and based on milestones.
At our last job, salaries were easy.
We negotiated a starting salary, then every year we got a raise. We could easily forecast how much we would make this year and the year after that. We had linear pay.
The reason we could have linear pay is because the company we worked for had predictable income. That's the big difference. We want a predictable salary, our company doesn't have predictable income — and probably won't anytime soon.
Therefore, we need to stop thinking about startup compensation, at least in the formative years, as a straight comparison to salaries. We need to think of a more dynamic plan that maps closer to the ebbs and flows of our startup, without putting us out of house and home in the process!
There's some false nobility we've assigned to taking little to no pay in order to provide as much growth to our startup as possible.
The thinking goes that if we believe so strongly in our startup, we'll want to make sure every new dollar goes toward its success. Meanwhile, our savings are disappearing faster than half the earth’s population after Thanos snapped his fingers in Infinity War.
In my experience, this false nobility leads to one thing: personal bankruptcy.
For every great story of an entrepreneur who risked everything and created a massive company, there are countless untold stories of Founders who risked everything, lost everything, and spent the rest of their lives trying to make up for a few years of horrible decision making.
From a probability standpoint, that's the likely outcome. So as smart Founders, we have to build a system to protect ourselves.
The best way to manage compensation in the formative years is to set a minimum threshold to cover our baseline expenses.
This includes things like:
This doesn't include any luxuries such as:
Anything that we can absolutely live without, even if it feels painful, doesn't make the cut. That's our base compensation — the minimum threshold.
We absolutely have to make that money. There's no option here. There also shouldn't be any kind of guilt over covering those costs, unless the costs themselves are extraordinary, like that sweet Porsche payment! Any extraordinary outlier costs need to become a separate conversation if others are involved.
When we ask, "How much should I be paying myself at a startup?” that's one half of the answer — which we should feel 100% good about because it really cannot be disputed.
Now, the part that most people overlook is that the minimum threshold is really only half of the compensation plan.
They assume, "Well, I guess that's my salary, so the compensation discussion must be over!" But as we just pointed out, a "salary" at a startup isn't really a "thing" since our company income is so wildly dynamic.
Instead, we'll want to set some revenue targets which would trigger additional compensation.
For example, we may decide that if our brand new startup generates $20,000 per month in revenue, we'll allocate $1,000 of that top line revenue toward variable compensation for the team (which may be one person!).
The ratios don't really matter, and each startup will adjust where needed, but the idea is that as the startup grows, a small percentage of the revenue is earmarked for additional team compensation to make up for the bare minimum threshold we set earlier.
I mean, we probably forgot to include "haircuts" in our original budget and now we're starting to look like an unkempt wookie!
The nice thing about variable comp is that we can issue it on good months and leave it in the kitty for bad months. What's important is that we make a deliberate claim to that income when it's available so that we know when to expect it and ideally plan around it.
Unlike a traditional job that has annual compensation adjustments, startup comp may need to be adjusted many times throughout the first few year — and that's perfectly fine.
So long as we recognize that our comp plans will require many iterations before they ever reach a consistent threshold, we won't be forced into torturing the traditional salary model into our startup plan.
So long as we can earmark enough money to keep us fed and plan our bonus cash around times where the startup itself has moved forward, we'll enjoy properly-aligned compensation that we don't have to second guess.
And let's face it, we have plenty of other things to worry about these days!
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.