How Much Cash Should Founders Pay Themselves?
How much do you pay yourself, as a founder?
It can be a sensitive question, but it has major implications for your startup’s cashflow and your personal stress levels.
I was shocked to find that very little has been written about this online. It seems like a topic where experienced founders and investors could share best practices.
So I put together a quick guide (including some industry benchmarks and what I paid myself when I was running my last startup) 👇
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A Guide to Founder (Cash) Compensation
What Info Is Out There Today?
I assumed that most of the well known sources for founder info would have guides about this, but they don’t:
AngelList’s blog has nothing on the topic.
Carta’s annual startup compensation report only mentions the word “founder” twice, both times in the intro.
Even Pave, a compensation benchmarking platform for startups that puts together their own annual report, doesn’t mention founders.
As a result, much of this piece is based on 1:1 conversations and my own experience talking with hundreds of founders over the years.
However, I stumbled onto this extensive report by Kruze Consulting that has a helpful calculator. We’ll dive more into it shortly.
There’s also this newsletter post, but it exclusively discusses founders who’ve been at their startup for over 5 years already.
Two Philosophies
What I found is that there’s two main groups of opinions on founder compensation:
Pay yourself as little as possible for as long as possible
Pay yourself just enough to avoid personal financial stress
Advocates for the first approach claim it has strong incentive alignment between founders and investors. Founders only get wealthy if investors do too.
While that’s true, it doesn’t accurately reflect founder motivations.
Startup founders are typically ambitious and are either motivated by things other than money (changing the world, etc) or only satisfied with the amount of money they’d have if their startup becomes massively successful and their equity becomes valuable.
In either case, a base salary that’s a bit higher isn’t going to change how hard they work or how motivated they are to succeed.
Personal financial stress, on the other hand, can derail a startup. If a founder is distracted, they’ll be more likely to make bad decisions for the company. Sometimes, this can even result in bad financial behavior like expensing things to the company that should have been paid for personally.
In general, the second philosophy has become more accepted by investors over the last few years (even as markets have returned to pre-pandemic valuations).
Additional Factors
Founders should adjust their salaries further based on a few other factors:
Cost of Living → A founder living in San Francisco or another major city has higher personal fixed costs than founders in other locations.
Personal Circumstances → Founders with dependents or other financial responsibilities may have a minimum they’re able to accept.
Company Stage → Startups at later stages can afford to comfortably pay founders more without putting the company at risk. See the chart below for more detail.
Investor Expectations → Maintaining good investor relationships is essential. Be transparent with them if you plan to pay yourself an abnormally high salary for any reason.
Also, there are legitimate reasons why co-founders may take different salaries than each other. Maybe one of the founders has had a previous exit, or is otherwise in a significantly more comfortable financial position than the other(s), and they want to keep more money in the business.
Otherwise, founding teams should be paid the same (i.e. don’t default to paying your CTO less than your CEO or vice versa).
Compensation Benchmarks
Kruze’s report gives us some data to use as benchmarks.
What their data from this year says is similar to what I heard anecdotally from founders I spoke with, and my own experience:
Ok — a $450k founder salary with only $5M raised is insane
This data is a bit older, but shows just how much salaries can vary early on:
It’s interesting to see how salaries differ by industry in the early stages:
And here’s what I paid myself at my last startup while living in NYC:
We were fortunate to be able to self-fund a pre-seed so it’s sort of negative, actually
Other Types of Founder Comp
There are ways in both the early and late stages of a startup for founders to reduce their personal financial burden:
Expensing → At the early stages, founders can expense relevant items that they use for work, like a laptop and SaaS tools. Be thoughtful — I’ve seen founders go as far as to expense the rent for their apartment and their car payments before, even at the early stages of a startup. Big red flag.
Secondaries → Post-Series A, it’s acceptable for founders to begin directly selling a small portion of their shares to investors as part of fundraises. I’ll cover secondaries in more detail in a future issue.
When to Re-evaluate Founder Comp
Whether you’re venture-backed or bootstrapping, you’ll likely want to re-evaluate your cash compensation over time.
Here’s an oversimplified version of when to consider changing your cash comp:
The additional factors I mentioned above should still play into this too
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