As a startup founder, you put all your waking hours into your beloved business. It’s your baby. So, how much should you pay yourself? When setting your pay, what factors must you consider? Employing a user-friendly salary calculator, how can you model the appearance of different salaries? Below, we introduce our own startup founder salary calculator to clarify the eagerly debated issue of startup founder salary.
You will want to compare many different scenarios as your company evolves. So, I recommend bookmarking this page to find it more easily when you want to come back.
HARD TRUTHS OF THE STARTUP FOUNDER
To the question of “What’s the optimum remuneration for a founder’s blood, sweat, and tears?”, any budding founder will likely answer “As much as possible”. Startup founders work harder than almost anyone, it’s true. But is it appropriate to extract as much money as possible from your business? It is time to acknowledge some hard truths.
THE RIGHT ATTITUDE
An alternative mindset to that stereotypical of the corporate world is necessary. In that environment, salaries are perceived as an “every man for himself, take as much as you can” free-for-all. Things are different when you own a piece of the company.
THE LONG GAME
It is important to understand that you are in it for the long game as a founder. Your goal is to build long-term value and be rewarded on a medium to long-term horizon. This occurs through the increasing value of your equity.
THE DRY SPELL
In the very early stages of a startup business, unless you’ve been fortunate enough to raise capital at the idea stage, taking any salary is almost always out of the question. Taking little to no salary ensures that your company has as much capital as possible. In such times, it may feel like you are receiving very little pay. And you are. But remember, in addition to any cash that you take in salary, you are also “getting paid” via a constantly increasing equity value. That’s if you’re growing your business, of course. Even though it will take a lot longer to liquidate that equity into spendable cash, and even though your wallet feels empty, you are still doing far better than you would have yourself believe.
THE BIG QUESTION
As your business gains traction and you start to generate revenue, you have an interesting decision to make: Should you continue to forfeit your founder salary, or should you start paying yourself a wage? Enter the salary calculator. You can use its power to assist you in figuring an optimal answer. Although to understand it, you need to have some knowledge of the unit economics of your business. This means that you need to have a grasp of what sort of returns you get from money spent on advertising to acquire customers. If your business is at the point where you are generating some revenue, you will already have some idea of what unit economics look like.
WHAT IS BEST FOR YOU?
If you have a good business model that generates high returns from money invested, you will want to continue to invest as much money as you can into further growth. The higher the percentage of the company that you own, the more relevant this is. However, if your business is seeing only mediocre returns, or if you own only a small amount of the overall equity pie, you may be better off angling for the highest possible salary for yourself. To better understand your personal situation, try our salary calculator below.
OUR SALARY CALCULATOR
STEP
1
I want to pay myself this much
Monthly salary
We see these revenue returns on our marketing spend
Assumed R.O.I %
It takes this long to see those returns
Time (months)
We are this profitable
Net profit %
The corporate rate in my country
Tax %
Companies like ours trade on this multiple
Pre-tax revenue multiple
I own this much of the company
Equity percentage
STEP
2
$x
$x
$x
$x
$x
$x
0
1
2
3
4
5
YEARS
How much worse off the company is
Impact it has on the value of your equity
How much you have paid yourself
$x
$x
$x
$x
$x
$x
0
1
2
3
4
5
YEARS
By paying yourself $0 Per month
The company is $0 Worse off after 1 year
The company is $0 Worse off after 2 years
The company is $0 Worse off after 3 years
The company is $0 Worse off after 4 years
The company is $0 Worse off after 5 years
Additionally
Your equity will be worth $0 Less after 1 year
Your equity will be worth $0 Less after 2 years
Your equity will be worth $0 Less after 3 years
Your equity will be worth $0 Less after 4 years
Your equity will be worth $0 Less after 5 years
HOW TO USE THE SALARY CALCULATOR
This salary calculator is designed to compare different salary levels and to assess the impact they have on the future value of your business. It’s not feasible for certain people to go without any salary at all (we’ve all gotta’ eat!), but it is intended that this calculator is used to compare a modest salary to something a bit “nicer”. This way you can see the different impact each of those salary alternatives have on the future value of your equity. Think at the margin when comparing results.
You should note that though this salary calculator is set to dollars by default, all of the inputs are still valid regardless of currency.
You will find the input fields for your personal situation in the top left-hand area of the salary calculator (boxes one to seven).
BOX ONE
You should enter the monthly salary you are considering paying yourself in the first box.
BOX TWO
The second box of the salary calculator is where you should enter the return on investment your business sees from marketing dollars spent. 100% return on investment, or ROI, means that for every dollar spent you get $2 back. 200% ROI means you get $3 back for every $1 spent. Some people might better know this metric as their LTV/CAC ratio.
Pro tip: You want your ROI to be a positive number!
BOX THREE
The third box in our calculator is the length of time in months that it takes your business to see the returns that you expect. Do you get paid a lump sum upfront from each customer or do you see revenue trickle in over many months like most SAAS businesses? Put that number in this box.
BOX FOUR
You should enter your profit margin percentage in the fourth box. The higher the percentage, the more profitable your business is.
BOX FIVE
The fifth input for our calculator is the corporate tax rate in your country. Taxes reduce the amount of profit that can be reinvested into the business.
BOX SIX
The sixth box of our salary calculator is the profit multiple that you think businesses like yours trade on. This can be difficult to assess for innovative early stage businesses. Although, you can usually point to a comparable business that has come before you as a yardstick. This calculator uses pre-tax net profits for equity valuation purposes.
BOX SEVEN
The seventh and final input field is simply the percentage of the business that you own.
INTERPRETATION OF THE SALARY CALCULATOR
What you likely saw in your results was that the better your business and the more of it that you own, the smaller the salary you should be taking. It seems simple, doesn’t it? If your business is growing rapidly and is very profitable, you will get a better return from investing more into the business than you will by taking cash out to spend today.
This salary calculator is also useful for people who are in the opposite situation; i.e. people in mediocre growth businesses who own a small amount of equity. Although you may not care about how much your salary is costing the company (the “hit”), you should certainly care about how much your salary is impacting the value of your equity. The equilibrium point will be different for everyone, but this salary calculator will help you to understand your own situation better.
NEED FURTHER PROOF?
Still not convinced that taking the lowest salary possible to allow yourself basic living expenses is advised? Take a look at what prolific Angel investor, Jason Calacanis has to say about the issue of high salary founders.
IN SUMMARY
You will want to pay yourself the bare minimum that you need to survive when building any kind of successful business. However, this is only until a later stage of growth and funding, when a slightly higher salary (still below market rates) can be justified without putting undue pressure on the business or harming its growth potential.
Paradoxically, if you are part of a failing business, you will want to pay yourself as much as you can. But don’t expect that gravy train to last too long!
