What is fair founder compensation?
How much should startup founders pay themselves?
This is a very potent question that a lot of founders and investors also grapple with. This becomes an essential question especially once founders have raised funds.
Few good rules of thumb-
- Unfunded, unprofitable - Usually founders should refrain from taking salaries. Since the business is unfunded and unprofitable, the founder usually ends up pumping the cash back into the startup. Rule of thumb salary- zero or sustenance.
- Unfunded, profitable - Here, it is the founders’ call. Do they want to take a sustenance salary and keep cash in the company to grow it? Or do they want to turn it into a lifestyle business? Rule of thumb salary- Rs 25k to 40k for monthly sustenance, or as desired for a lifestyle business.
- Funded, unprofitable - This is usually where the can of worms open. Are founders taking home market salaries from investor cash, or are they utilizing cash to grow the business? If it's the former, that's in bad faith. Rule of thumb salary- utilize investor funds as salary with an upper cap of 1%/month or Rs 1 lac/month whichever is lower.
- Funded, profitable - This is the best scenario possible where you have investor funds and also internally generated funds. Here, there is no cap on what the founders can take home. But good faith would be to be fair to every stakeholder. Rule of thumb salary- Maintain the base salary as in a funded, profitable business, and top it up with variable pay as a % of profits, or on certain predetermined milestones like revenue, operating margins, etc.
As investors, we do not want to tell founders what they should pay themselves. But we expect founders to be fair to us. We do not want founders to come into debt by not paying themselves, but we also expect investor money to be used to help the company grow.
In the end, we would like founders to create wealth not because they get a fat salary, but because their equity stake in the startup grows tremendously.
Wealth > Income
Additional reading-
Customer Support Guy at BookR
4 年Siddharth S. For a funded, unprofitable startup, I think it can be narrowed more to the stage of funding or startup. Only after Series A or Series B, founders should have take-home salary as much you mentioned.
Propagating OKRs. Building a Better B?X. Enhancing Executive Presence. Promoting 'Growth Mindset'.
4 年Great piece! I am for founders to focus on growing the value of their equity. That long term goal takes care of any short term desire to take unneeded salaries or booking unexplained expenses.
Entrepreneur | Neuro Marketing | Startup Mentor | helping businesses in Marketing
4 年Thanks for sharing Siddharth S. some founders just try to take every single penny out as salary.