February 17th, 2021 | By: Wil Schroter
For some reason, Founders are incredibly "shy" about giving themselves a raise.
It's odd really because we are responsible for looking out for the futures of so many other people, yet we often shortchange ourselves when it comes to our own needs. The reality is, our raises tend to come last, and in many cases, not at all.
So when is the appropriate time to pull ourselves aside and award that long-overdue raise?
For many of us, the default answer on when our salary goes up (or down) is based on our ongoing Net Income. If we make more money, we take some home. If we lose a bunch, well, those credit card balances and Home Equity lines just keep growing... and growing...
That said, basing all of our "salary" on Net Income is a dangerous proposition because like everyone else, we have monthly bills to pay too. So the best approach is for us to strike a balance between a reasonable salary and distributions. What matters most about our salary isn't the size, it's the consistency. An ideal salary should be no less than what it takes to cover our baseline bills, with a little added so that we can actually eat. (Why are Founders the only people who consider "eating" a luxury line item?)
As Founders, we really don't have to be too concerned with overshooting the mark on our raises. Unlike everyone else, Founders have the option to dial their raises back down at any point, and even raise it back up if things recover. What we should shoot for is typically "more than we think we need" not because we're being greedy, but if there's one thing that's very consistent amongst Founders, it's that we're way too optimistic about what we think it will take to survive, especially personally.
Remember, we're the idiots who coined the term "Ramen Profitable"!
At the very least, our salary income should increase at the same annualized rate as everyone else, which typically reflects a combination of growth and inflation. If we let our salary lag behind, we're basically saying our contribution is worth less than everyone else.
For those who have taken on capital, this becomes an even trickier task, because we never really know if it's "OK" to ask investors for a raise. For most of our time with investors, we're losing money, not making it, so asking for a bigger salary seems counter-intuitive.
But that's just our silly Founder Brain telling us we're not worthy. As it happens, we're also employees of the startup, and if we leave, the person that replaces us will sure as hell expect not just a market salary, but annual raises. When it comes to working with investors, we need also be paid as employees, not just equity holders!
Investors aren't going to mention this! It's our job to keep them apprised of our needs and our market value. I've never heard of an investor saying "You know, Erica has been working here a long time — we should really ramp up her comp!"
The net of it is: if we don't hold fast to making sure our bite of the pie is taken, absolutely no one else will. There will never be a good time to take a raise, so in lieu of that, we need to put ourselves on a path of steady progress where no one else will!
How Much to Pay Yourself. 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.
My Startup is Worth Millions. Why am I Broke? It's not uncommon for Founders to have all of their net worth tied up in their company without a real dollar to show for it. Our startup might be worth millions on paper, but is there a way to turn it into real money?
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.
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.