Business Comes First
When you are starting a business, your first priority should be the health of your business. When it comes to discussing the ideal founder salary, where your business stand should be the main concern. In case you are amidst raising the first rounds of funding, then consider the burn rate. You may have already taken loans or are using your savings to run your business.
You have a better understanding of the cost required to run and grow a business in this case. Consider what is left after all your company needs are met. That amount can be divided among the founders based on their contribution or equally.
The Status Of Your Fundraising
If you lack the revenue to initially pay yourself, consider raising capital before choosing the ideal founder salary. But paying the founders should never be the only reason to raise money. Instead, it can be a factor to determine how much money to raise. Initially, it is challenging to decide the ideal founder salary, but this decision becomes easier with time. When the business becomes more stable, the founders and investors negotiate the salary and come to a figure that both parties feel is fair.
How much amount businesses should have before founders’ can afford salary?
According to Seed Legals, the size of the financing round determines the decision to take the salary. The more money you raise, the more chances founders have to secure a salary. When you raise a limited amount, the whole figure will go to the business needs. So there will be less room for founders to draw their salary.
The Flow Of Cash In The Business
A business cash flow signifies the following things:
- What are your business expenses?
- How much is the revenue?
- When do they occur?
- How often do they occur?
Answers to these questions are present in the different verticals of your business like capital, employees, legal responsibilities, accounting, etc. If you have been gaining revenue for over six months, there should be a cash flow statement. This document helps in determining the money you have available to be used as a founder salary.
But you do not want to be emptying your business savings by paying salaries to the founder. After successful fundraising, your business cash balance will increase. This will have a direct impact on your cash flow, providing a better view of financial health. Subsequently, this will make it easier for you to determine how much is the ideal founder salary for the time being.
What Is A Good Approach To Decide an ideal founder salary?
Cashing Out On a Liquidity Event
This is a standard approach for founders to get their compensation. It aligns its incentives with VC investors and LPs to optimise the company’s market value within a shorter time period. Moreover, it also allows the company to determine opportunities to convert the illiquid shares into cash.
An Effective Incremental Cash-Out Program
Founders should have the opportunity to sell their share over time instead of waiting until a liquidity event. They will be freeing up space for more capital. But this program should be performance-based so that only deserving founders have access to the opportunity. The metrics should be consistent and cater to the success of the company.
Milestone Vesting or Time-Based Vesting
Vesting prevents founders from walking away from the company with their shares. Time-based vesting accrues with time, typically in the yearly portion. You can choose milestone vesting wherein shares vest after achieving a certain milestone.
Keep The Need In Mind And Ignore The Want
A founder should be paid enough to work productively. They should be offered the salary that they need; instead of the salary, they want.
How Should Founders Salaries Not Be Paid?
Following are the approaches that you should never take when paying salaries to the founders:
Inadequate Incremental Cash-Out Program
Letting founders sell too many shares with this program can skew the incentive. Additionally, they will be encouraged to get big numbers at an early stage; instead of making efforts to generate adequate returns. And when this program rewards wrong efforts, it motivates founders to lose their focus on the business objectives.
Unplanned Equity Vesting
If founders are vesting their shares, then there needs to be a cliff. This will ensure that there will not be vesting up to a set time frame. The start stages of businesses are the most crucial. And when co-founders drop out, especially during rough patches, it makes the cap sheet more complex. Therefore, to protect the company, vesting should be restricted for a definite time period.
Paying Founders Beyond A Practical Limit
An ideal founder salary should be between $50000 and $75,000. The figure can be higher depending on the company’s growth. At an early stage, giving founders six figures is not practical. This will make them inflexible when they have to take smaller salaries in case of an exchange of equity.
Imbalance In Equity Of Founders And Employees
Paying your employees less while the founders enjoy high pay can never be good for your business. Depending on your option pools, you need to be generous with your employees. If your workforce is not motivated and productive, how will you achieve your business objectives?
The Bottom Line
At the initial stage, it isn’t very easy to decide the founder’s salary. In fact, during the first couple of years, founders pay for themselves. This is because they have to keep business needs at priority. Once the business becomes stable enough and starts generating revenue, they can cash out their salary. The ideal founder salary should be high enough to keep him or her motivated. But it should not be too high that other areas of the business are affecting. Good Luck !
