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Navigating the startup world with a family can be challenging, especially when determining your founder’s salary. As a startup founder, having “skin in the game” to demonstrate your commitment to the company’s success is crucial. Sacrificing salary in exchange for equity is a significant way to show your motivation and long-term commitment.
This article will explore how to determine your founder’s salary based on equity, incentivize your team, and how to set pay based on your company’s milestones. It will also discuss the importance of maintaining a healthy work-life balance while running a startup and caring for your family.
The Skin in the Game – Founders Sacrifice is Key
As a startup founder, you must have “skin in the game” to show your commitment to the company’s success. One of the most significant ways to demonstrate this is by sacrificing salary in exchange for equity in the early days of your startup. Taking little to no salary signals to your co-founders and investors that you are motivated by the potential long-term upside of equity rather than short-term compensation.
Many of the most successful tech founders paid themselves minimal, if anything, in the early days of their companies. Notable entrepreneur Mark Zuckerberg took a $1 salary as CEO of Facebook in 2012, and Larry Page and Sergey Brin took a $1 salary as co-founders of Google in 1998. Brian Chesky, Joe Gebbia, and Nathan Blecharczyk paid themselves just $600 monthly for two years while building Airbnb.
Startup Founders Must Take a Pay Cut in the Early Stages
While these are extreme examples, most startup founders should expect to take a pay cut relative to their previous jobs or offer to work at an established company. As a rule of thumb, in the earliest stages, before raising outside funding, aim for a salary of $40-70K to cover basic living expenses. This is enough to sustain yourself but still requires personal sacrifice.
Once you raise your first round of funding from angel investors or venture capitalists, you’ll have more resources to pay yourself but should keep your salary relatively low, around $80-120K. Your investors will want you to remain hungry and motivated, not complacent. They are betting on the potential of your equity, not your salary.
You need skin in the game to show your commitment as a startup founder. Take a pay cut relative to your market worth and prioritize equity over salary, especially in the early days. While the sacrifices will be difficult, if your company is successful, the potential upside from your equity stake will make the sacrifices worthwhile. Keep your motivation high by maintaining the mindset that you’re working to build equity in something you hope will be very valuable someday.
Incentives Through Equity, Not Just Salary
For founders, significant equity in the company is the key to real financial success and motivation. While a salary provides cash flow and economic security, equity can bring life-changing wealth if the company grows exponentially. Founders like Bill Gates and Mark Zuckerberg retained large equity stakes in Microsoft and Facebook, making them billionaires.
How to Split Equity Among Co-Founders
Initially, founders should aim for at least 50-75% equity in the company, split among co-founders. This ensures your incentives are strongly aligned with the company’s success. As funding is raised, equity will be diluted, but aim for at least 10-30% going into a Series A round. At a seed stage, consider allocating equity based on each founder’s contributions to the business, but be careful not to create resentment.
Rather than determining salaries, determine how much equity each founder will retain. Then allocate the remaining equity to critical hires and future funding rounds. Let your equity stake guide your salary. If you have a significant equity position, you can take a lower wage, and vice versa.
The Risk of Taking More Equity for Founders
Taking a lower salary in exchange for more equity is risky, but it can pay off hugely if the company grows. However, only go with compensation for a short time, as you need cash to live and show investors you can attract talent. And keep your equity private, or you’ll lose motivation and control of the company.
Equity, not salary, is the source of real wealth for startup founders. While a competitive salary is essential for attracting strong co-founders and employees, prioritize building equity in the company above all else. With a significant enough equity stake, a founder can become wealthy even with a below-market salary. But without enough equity, even an above-market wage will not lead to life-changing financial success. Align incentives for the long run by distributing equity thoughtfully at each funding stage.
How Founders Can Determine Salaries for Themselves
Once you’ve secured funding and your startup is on stable footing, it’s time to determine an appropriate salary for yourself as CEO. A good rule of thumb is to pay yourself what you would pay an outside executive in that role. You can benchmark startup CEO salaries through surveys like Glassdoor, PayScale, and Salary.com. According to recent surveys, the median salary for a startup CEO in the U.S. is between $150,000 to $200,000. However, there is significant variability based on location, experience, education, and company stage.
Salary for Founders at Early-Stage Startups
For an early-stage startup, you may pay yourself on the lower end of that range, around $150,000 to $175,000. While still a sacrifice, this allows you to focus on building the company while maintaining a reasonable standard of living. As your company achieves key milestones like Series A funding or $1M in revenue, you can increase your salary to the median or higher, around $200,000 to $250,000. Some founders pay themselves salaries on the higher end of these ranges or even above market to optimize quality of life and work-life balance.
The Challenge of Higher Salary vs. Equity for Startup Founders
However, higher salaries mean less equity upside and lower motivation for growth. Paying yourself too much too soon also risks signaling to investors that you need to be fully committed and willing to sacrifice for the company’s success. The ideal approach is to start with a below-market salary, around $125,000 to $150,000, then steadily increase it over time as your company achieves key milestones. This allows you to maintain strong equity incentives while your salary grows to a market rate.
As CEO, your salary and equity impact your company’s cash flow and tax situation. You’ll need to determine if your startup should be an S-Corp, C-Corp, or LLC based in part on how you plan to pay yourself. Some founders use bonus payments or distributions to optimize their tax burden when taking a salary. However, these tactics can be complex with profound legal implications, so consult a tax professional to determine the best approach based on your unique situation.
Increase Your Salary as Revenue and Funding Grow
Once your startup achieves key milestones like raising a Series A round of funding or reaching $1 million in annual revenue, it’s reasonable to increase your founder’s salary accordingly. At this stage, your company is derisked enough that you can afford to pay yourself closer to a market rate for a CEO role without sacrificing equity incentives. However, you must still be mindful of your startup’s cash flow and signal to stakeholders and investors that you remain focused on aggressive growth, not personal enrichment.
For example, after raising a $10 million Series A, the CEO of Slack took a $250,000 salary, up from $175,000 before the round. The founders of Gusto, an HR and payroll startup, paid themselves $150,000 each after raising their Series A. Meanwhile, the founders of Stripe, a payments company, took a $200,000 salary after reaching $1 million in revenue and raising seed funding.
What to Pay Founders at Pre-IPO Stage
At this stage, it’s okay to pay yourself the lower range of what a CEO at a pre-IPO tech company would make, around $150,000 to $250,000. You want your salary to be high enough to afford a decent quality of life but not so high that it impacts your startup’s cash burn rate or signals to investors that your motivations have shifted. Equity should still make up most of your potential compensation at this point.
Creating Salary Milestones for Startup Founders
It’s also a good idea to create a salary framework that increases your pay over time based on revenue and funding milestones. For example, you might pay yourself $150,000 after Series A, $200,000 after $5 million in revenue, $250,000 after Series B, and so on. This helps ensure your salary keeps up with your company’s growth but in a controlled, milestone-based fashion. However, be very careful to keep your payment the same if crucial business metrics need improvement.
Use your Series A or initial revenue milestones as an opportunity to pay yourself a more livable wage as CEO, but do so cautiously and conservatively. Focus on aligning incentives through equity, not disproportionately high salaries. And create a salary framework that gradually increases your pay over time based on what is sustainable for your startup’s business growth.
Consider the Tax and Cash Flow Implications
When determining your founder’s salary, you must consider how it will impact your company’s cash flow and tax situation. Paying yourself a salary means less cash remaining to fund operations and growth. However, not paying yourself enough can also be problematic if you need income to support yourself and your family.
S-Corp vs. LLC
One option to consider is forming your company as an S-Corporation (S-Corp) or Limited Liability Company (LLC). With an S-Corp or LLC, your salary is subject to employment taxes like Medicare and Social Security. Still, the remaining profits can be distributed to shareholders (you) as tax-efficient dividends. This can allow you to take a smaller salary while receiving adequate compensation. However, there are restrictions on how much of your paycheck can come from dividends vs. salary to qualify for the tax benefits.
What is a C-Corp?
If you form a C-Corporation (C-Corp), your compensation will be subject to employment taxes. While C-Corps have their benefits, they may result in higher taxes for startup founders taking a salary. Some founders choose to start as an LLC or S-Corp and convert to a C-Corp later at an optimal time for tax and financing purposes.
How to Optimize Taxes as a Founder
Some strategies to consider for optimizing your taxes as a founder include:
- Choosing a salary that qualifies for the maximum Social Security tax base. For 2020, this is $137,700 – any compensation above this amount will not be subject to the 6.2% Social Security tax.
- Distributing profits as dividends from an S-Corp or LLC. Dividends are only subject to capital gains taxes (typically 15-20%) rather than income taxes (up to 37%). However, there are limits to how much you can distribute as dividends to get this tax treatment.
- Issuing equity such as stock options or restricted stock units (RSUs) which are only taxed during exercise or vesting. This allows you to receive the compensation you can appreciate without high taxes upfront.
- Contributing to tax-advantaged retirement plans like a 401(k) or SEP IRA. These plans allow you to contribute income on a pre-tax basis, reducing your taxable salary. Some plans also provide an employer match which can be an added benefit.
In summary, there are several options founders can use to balance the need to pay themselves a reasonable salary with optimizing cash flow and taxes. With the help of an accountant, you can determine an approach that fits your financial situation and company goals. Finding an option that keeps you motivated and committed for the long run is critical.
Make Personal Sacrifices But Avoid Burnout
As a founder, you have to be willing to make significant personal sacrifices to build your company. Late nights, long work hours, and less time with friends and family often come with the territory. However, there is a fine line between necessary sacrifice and being a “martyr” CEO who gives up too much in pursuit of an unrealistic vision.
Successful founders emphasize the importance of work-life balance and self-care. Mark Zuckerberg, CEO of Facebook, said, “The most important thing is to just take care of yourself – exercise, sleep well, eat healthy.” When you’re in a high-stress role, your health and relationships suffer if you don’t prioritize them. Make time for hobbies, socializing, and recharging to avoid burnout.
Determining if you’re sacrificing too much for your company’s vision is also critical. Ask yourself hard questions about whether key milestones or product deadlines are achievable. Be willing to reevaluate and make changes to your roadmap and priorities. Your company’s success depends on your well-being and sustainability as CEO.
Discuss expectations with your co-founders and get input on whether you’re being realistic. They have a valuable outside perspective on your workload and health. Be open to their feedback and make changes to avoid being the bottleneck in your company. Your co-founders and employees will appreciate your self-awareness and willingness to maintain a reasonable schedule.
Finally, feel free to ask for help when you need it. As a CEO, it’s easy to feel like you need to do everything yourself, but that mindset needs to be more practical and healthy. Learn to delegate responsibilities and trust your team. Bring on a COO or president to help share the management load. The most successful founders can return from day-to-day operations at the right time.
Building a startup requires hard work and sacrifice, but founders can take control and pay themselves properly while raising a family and taking care of themselves. Maintain self-care, be realistic in your goals, get input from others, learn to delegate, and don’t be afraid to ask for help. You can achieve personal and professional success with the right balance of sacrifice and sustainability.
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