Many founders say that the biggest hurdle they experienced in the startup phase was finance. You need money to start the business but you also need to be able to live. How does one get their dream business started and also take care of basic necessities like food, rent and health?
Some experts believe that you should plan ahead and be able to have a seperate savings to live off while still being able to bootstrap your business, others believe you need to pay others before paying yourself and going without for a while will pay off and the rest believe that you should take a salary no matter what (even if it’s a small amount).
In this week’s Let’s Talk founders discuss how much founders can avoid to pay themselves in the startup phase.
Emma Lo Russo, CEO, Digivizer:
As a founder, you need to be prepared to not earn anything or very little from the get-go. There is no guarantee when you start your business that you can sustainably earn until you have a proven model. At Digivizer, we set a rule at start-up that all key members would pay ourselves the same as each other with a view that we would split after hard costs (rent, technology, outgoings, other people etc) 50% back to us up until an agreed limit, and 50% into funding the future of the business. It kept me razor-focused on delivering revenue and a model to pay ourselves. Whilst you are increasing the value of your equity as a founder (now 8 years into our business) you do realise how much more you have sacrificed personally along the way with most of the financial risk sitting on the founder/CEO’s shoulders. What drives me is the desire to provide a liquidity event that returns some cash in exchange for equity, and/or a way to earn closer to market rates.
Adam Joy, CEO, ALNA:
Startup owners often sacrifice their salary to pay others and to grow the business. Without your salary, however, your business results are deceptive. Remunerate yourself for at least 38 of the hours you actually work each week to provide the right numbers, especially if a lender or angel investor is examining your business. They can then see the true EBIT value and predict how the business will handle the cost of hiring a manager later on. Build a schedule of remuneration. If the business revenue is $500,000, award yourself $50 per hour. If you have $1 million revenue, increase your earnings to $75 per hour – increase your hourly rate by $25 for every $500,000 your business earns. Valuing your skills and time helps you to make better decisions and encourages better time management growing the business. And it generates true profit, rather than misappropriating your salary as business profit.
Mick Spencer, Founder,OnTheGo:
It’s really important for founders to look at the first few years of their business as building blocks and definitely not in terms of salary. In the first few years, holding onto as much equity as possible is crucial for the survival of the business.
If you can afford it – pay yourself as little as possible – so that by the time you go out to raise capital, investors will really appreciate the sacrifices you have made for the business.
To this day, I am not the highest paid person in my company. I make sure of it as it keeps an even playing field amongst staff and it ensures I continue to hustle hard every day.
If you are not willing to sacrifice a few years of losing income and working your butt off for minimum wage, then you will never be able to build a multimillion dollar scalable business.
For me, running a business is not just a job – it’s a lifestyle. It is about connecting purpose, people, planet and profit together and the salary is just a bonus.
Terry Gold, Managing Director, Techstars Adelaide :
When I started my business, I only began taking a salary after I had exhausted my savings. My new salary was the total of the minimum payments due on all of my bills. I was at the point of either taking a salary or quitting “ a move that would have in turn killed the business, as I was the only software developer in a software business. I stayed at that salary for too long, but the idea of reinvesting in the business kept me from taking more out until my board of advisors insisted that I take more. It was the right thing to do because I was beginning to burn out. The lesson here is, take as much as you really need to keep going, but know that you will regret taking out too much too early if the revenue and profits don’t come in according to plan. Live below your means.
Dr Jay Spence, Founder, Uprise:
As a company approaches the start-up phase, there are varying perspectives on the amount that founders can afford to pay themselves. Two in three founders based in the Silicon Valley area set their salary at less than $50,000 per year and Australian VC firm Blackbird recommends less than $80,000. These lower starting salaries are to focus on long term success as opposed to short term gain for the founders.
General consensus is that founders limit personal financial incentives and rewards until the company is cash flow positive. Preserving these initial funds can give the business the chance to grow with compounded interest. Founders who have capital or alternative sources of income keep the entirety of funds within the business until revenue exceeds expenses.
However, when founders are worried or pre-occupied with finances it can limit their focus and be detrimental to the quality of their work. Therefore, a salary should relieve financial stress to make founders more productive and ultimately support the success of the start-up.
The rule of thumb is that founders in the start-up phase should pay themselves between $50-70k. This provides enough funds to limit hardship and excessive worry, while allowing the business optimal opportunity to grow. Ultimately, low pay helps founders to align strongly with the mission of the startup rather than the promise of reward… and it’s the mission not the money that will motivate best when the rubber hits the road.