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How much can you pay yourself as a founder?

Submitted by admin on Mon, 2020/02/24 - 12:40pm

The answer is easier than you thought: Anything you want.

No, seriously—that’s the perk of running your own business. You select your salary.

Now, if you want to have investors and potentially maximize growth for the company, that’s a different story. Investors are going to want their investment dollars to be going towards growth than going directly into your pocket—but what does that mean for how much you can actually pay yourself.

If founder salaries are supposed to be no more than some set number, how does that work if a founder is a single mom with three kids and a mortgage. Clearly, they need more to live on than a 22 year old that is still living at home.

This is a great example of how what you’ve heard out there in the ecosystem probably isn’t true—and it’s most likely based on someone’s idea or company not being interesting enough for investors.

For example, if Katrina Lake, the founder of Stitch Fix, went off to start a new company, pretty much any investor would give her a blank check to do it.

What if she built a cashflow model that said her seed round gave her more than enough capital to blow through what most people would agree were Series A goals—but that included paying herself $250k a year.

Would you walk as an investor? Honestly, you’d be an idiot to—and she wouldn’t have any trouble raising even with this high salary.

Katrina is a rich woman. The idea that somehow squeezing her on salary as an “incentive” would be moronic. Frankly, I don’t really believe in most “skin in the game” arguments. The vast majority of startups are started by people who would have absolutely no problem getting a job elsewhere. Do you think the average straight white male Harvard MBA who can code or whatever is only working hard on this startup because of his equity to salary ratio?

On the other hand, do you think that same number is the primary motivating factor for the black female founder, weather she, too, went to Harvard and can code or not. I tend to think she’s going to have plenty of added motivation regardless of her comp.

What this should really come down to is a financial model. In most angel or seed funded companies, increased founder comp adds risk—because the company really doesn’t have a lot of “extra” capital to go around. The company probably has just enough runway to make it to a potential next round, not leaving a lot of room for any mistakes or mishaps, of which you know there are going to be some.

That’s why most investors balk at high founder salaries—because it feels like until the company starts making some real money or is seriously de-risked in some way, you’re adding additional risk that they don’t need to take. There’s some other deal they could invest in that has a much better chance of hitting its goals.

Now, if you want to make the argument that your company is de-risked because you’re a better founder than that 22 year old, so you should be paid more, I understand, but there are plenty of very smart senior people who have started companies that have failed. Your experience is probably the reason why you’re being backed in the first place—but once you get backed, in my experience, everyone’s pretty much starting out with a similar risk profile.

In other words, starting from scratch is very hard—for everyone.

Still, you’re looking for a number and I haven’t given you one yet. What I can tell you is that most founders in a seed round tend to max out around $120k in NYC. I haven’t seen more than that too often—and if that’s what it was, I wouldn’t ask any questions around why.

If that’s not a number that works for you, I would be more than happy to hear why.

Let’s say your situation of having kids in good private schools, an elderly parent at home and being the sole breadwinner as well as the payer down of medical school debt means your number needs to be $170k, or even $200k. You walk through your numbers and yup, you just happen to have a really high overhead.

Does that mean you can’t be a founder?

It shouldn’t at all—but, what I think investors would want to see is that your plan gives the company more than enough runway to hit its goals.

Few companies really ever failed or succeeded because of an extra $50-100k over the course of a year or two—but if you want to change the perception of the risk vs. return, here are a few things you can do:

  1. Raise a bit more money at a slightly lower valuation. If your 18 month plan calls for raising $1mm, raise $1.5mm at the same valuation. This way, you’re eating the cost of your own additional budget by selling more of the company—and the investor doesn’t have to feel like they’re paying you more directly.

  2. Focus on ideas that have near term revenue opportunities. Once you’re making money, all bets are off. The company has been de-risked significantly versus something that’s just a Powerpoint, and if you’re bringing in cash, you’re burning less. It’s easier to justify a higher salary when you’re making money.

  3. Don’t quit your job until you’ve raised. Sometimes, it’s not about having a high salary, but just having any salary that makes the difference for a founder. I can’t tell you how many times people quit their jobs first and then try to go fundraise, assuming you need to be full time on your company to raise. This is simply not true. You need to be full time on your company after the raise, that’s for sure, but there are plenty of teams that go nights and weekends to make some progress and get a term sheet based on that. I would never fault a team for needing to keep working until they get a paycheck post a raise.

  4. Set milestones. If you’re really confident in yourself, build in a step function of salary increases once you hit certain goals—a product launch, first revenue, etc. This way, you can address the motivation question and no one feels like the company is spending too much relative to the risk left on the table.

At the end of the day—you know the deal. The more money you spend on yourself, the less money you have for other things—and I would only back a founder that I thought understood this and could make wise choices given those constraints. I would only back a founder that was thoughtful about setting budget to begin with.

 

Read Complete Article Monday, February 24, 2020