Dear elizy: How much should I pay myself at my startup?

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Dear elizy: What’s reasonable for a founder salary?  For example: I’ve got 13 years of professional experience, an MBA and I have run several of my own businesses.

– Salary Concerns in LA

Dear Salary Concerns: Hmm…lots of thoughts here…

1) Your MBA doesn’t matter here

Sorry.  Your MBA is good for negotiating a salary at large companies or even possibly for jobs at other people’s startups but not with yourself and the company you own.  When you own such a large equity stake in your own company, you should be looking at the tradeoff between short term gains (your salary) and long term gains (the worth of your company and what it could be with the extra investment of cash that you are not taking as salary).

I understand that you may have paid a pretty penny for your MBA  (I certainly did), but hopefully you were able to recoup the cost of it prior to starting this company.

2) There are lots of other considerations

I’ll break these down here:

Location

Although I think you’re in LA, I’ll speak to this more generally.  The cost of living will influence your salary a lot.  The cost to get a startup up and running in the Bay Area will probably be about 2-5x higher than, say, in Las Vegas.  And if you are in Chiang Mai, starting up will probably be 5-10x better economics.  So a “reasonable salary” will depend a lot on location.

Your runway

This is tied to how much money you’ve raised and/or how much money you are profitably making.  If you have a long runway – say, 18+ months – then I think it’s OK to pay yourself better.  But if you are going to run out of money in, say, 3 months, you may not even want to pay yourself anything.  If you’ve raised money, you should aim to have at least 12 months of runway, preferably 18-24 months.

Venture backing 

If you’re not venture backed, you have more optionality.  If your company is set up as a partnership, for example, you may pass through all of your earnings as part of your partnership, effectively removing all cash from the entity.  But if you are venture backed, you’ll likely re-invest all profits into the business instead of issuing cash bonuses or higher salaries.

Your equity stake

If you’re a “founder” brought into a startup a bit later and are given, say, 5% of the company (on a vesting schedule), this is very different from being an “original founder” who likely owned 25-50% of the business starting out.

If your equity stake is much more akin to an early employee’s stock plan, then your salary should be what an early employee at a startup earns rather than a founder’s salary.

3) I get it — you really want me to put numbers on this… 

But everything I just wrote was vague.  It doesn’t help anyone figure out what their actual salary should be.  So, here are some rough ranges of founder salaries that are fairly common amongst ventured-backed, seed companies in the San Francisco Bay Area.  Unfortunately, I’m not aware of salaries in other markets, so if you’re outside the Bay Area, you’ll need to ask other founders.

Raised < $500k: In this range, a lot of startup founders pay themselves < $50k per year.  If you have a team of 4 people, aren’t making any money, and have minimal other expenses, then you can see how this raise can last you 1-2 years to get you to your next milestone.  Ramen, baby, ramen.

 

via GIPHY

Raised $500k-$1.5M: In this range, you probably have a slightly bigger team – say, 4-8 people – and some of these later hires are going to be commanding closer to market-rate salaries.  On the flip side, you may be generating some revenues to offset costs.  Again, shooting to have at least 12 months of runway, a typical founder who has raised in this range but is generating limited revenue is probably paying himself/herself $50k-$75k per year.  If you are generating a fair bit of revenue ($1m net runrate), then you might be paid a low 6-figure salary.

Raised $1.5M+: Lastly, if you’ve raised a large seed round, you’re probably a post-seed company indicating that you have significant revenues ($1m net runrate) coming in the door.  You are likely paying yourself $75k-$125k at this point.

4) Burn rate is a signal to investors 

Your overall burn rate is a signal to investors.  It gives them a sense of how seriously you want to invest in the longterm viability of the business as well as how well you manage cash.

If your burn is “too high” per your stage of the business, this could hurt your ability to raise money.  Some investors also ask about how much money you are paying yourself and will use that as an indicator of commitment.  Here are some other people’s thoughts on founder salaries that I think are spot-on.  Post-seed rounds are a bit more akin to series A rounds these days, and so you should adjust your definitions to reflect these responses, which are a couple of years old:

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