A Guide To Founder Salary At Different Stages & Funding Levels
How to Set Your Salary Perfectly and Never Miss Out on What You Deserve!
As a founder, determining your salary at different startup stages can be tricky, especially in the ongoing funding winter phase. Evaluate whether to take a salary or reinvest profits based on your startup’s financial health, business needs, revenue, and investor interest. Learn more about how you can decide your salary as a startup founder.
Key Points
- Entrepreneurs should reinvest 30%-50% of their revenue while the rest can be used for different purposes, including paying the founder’s salary.
- The average salary of a startup founder in 2023 was $145,000 PA.
- In contrast, many startup founders do not get salaries due to financial instability.
Founder Salary VS Reinvesting: What’s right for your startup?
Initially, as a founder, you only care about nourishing your brainchild. You make substantial monetary sacrifices to grow your startup and reinvest as much revenue as you can. However, as your business grows, you should consider paying yourself a specific amount of the profit your business generates. In addition to handling your business finances, you must have personal responsibilities too, and it’s something that shouldn’t be overlooked.
But, before deciding on your salary, you need to ensure that you are on a high-profit margin and you are generating more profit than what you need to reinvest in your startup. Also, it is to be said that entrepreneurs should reinvest 30%-50% of their revenue while the rest can be used for different purposes, including paying the founder’s salary.
Startup Stages and Their Impact on the Founder's Salary
Your current startup stage plays a key role in determining how much compensation you should get. This is because there is a difference in revenue inflow at each startup stage, which brings distinct perks and challenges for the founders. You need to analyze various factors to calculate the right salary at different startup stages and funding levels. Here is what you should know:
1. Bootstrapping: During bootstrapping, founders rely on personal savings and minimal salaries to fund their startup. This stage requires a strong commitment and willingness to sacrifice personal income for the company’s growth. However, founders might compensate for lower salaries by receiving a larger share of equity, known as “sweat equity.” This aligns their interests with the company’s success while mitigating immediate financial strain. However, you can consider exploring alternative funding options to supplement your bootstrapping efforts and potentially increase your runway. In case you don’t know any, read here!
https://medium.com/startup-stash/crack-the-startup-funding-code-5-tricks-to-raise-money-b498192e59f5
2. Seed Funding: In the seed funding stage, founders can draw a reasonable salary while ensuring that a significant portion of funds is directed toward business development and growth. However, during this phase, founders should assess the startup’s financial needs and allocate funds judiciously between operational expenses and personal compensation.
3. Series A: Now that your startup has market validation, investors may expect founders to transition to more market-aligned salaries. This is how you will be able to compete with your competitors. It’s essential to demonstrate how increased founder compensation aligns with the startup’s growth plans and the value the founders bring to the company. Also, for business expansion, financial planning is a crucial aspect you should focus on. To know more about it, click here!
4. Expansion Stage: At the expansion stage, it’s crucial to tie founder compensation to performance metrics. Performance-linked bonuses can reward founders for achieving key milestones and driving the company’s success. Once your startup becomes a UNICRON, founder salaries can be quite decent according to the revenue your startup generates.
Other Factors Influencing Founder Salary
As the startup grows, utilizing profits, such as the founder’s salary, is quite common. The average salary of a startup founder in 2023 was $145,000 PA. However, during funding winters, many startup founders opt not to take salaries. Besides this, various factors play a role in determining your pay and safeguarding your startup from unnecessary expenses. These critical factors, beyond just startup stages, significantly influence founder salaries. These factors are as follows:
1. Your Startup Stage & Revenue (The Umbrella Factor): In different startup stages, founder salaries are shaped by factors such as revenue and profitability. Limited revenue often leads to founders taking lower salaries to preserve capital in the early stages. As the business becomes more profitable, founders can reassess and adjust their compensation accordingly. In the beginning, when revenue is low, founders might take smaller salaries to reinvest in the business. As the company grows, aiming for profitability becomes crucial to sustaining a higher founder salary. Balancing these factors helps meet personal needs while supporting the company’s growth.
2. Your Industry: Different industries have varying expectations regarding founder salaries. For instance, technology startups might have different benchmarks than healthcare or manufacturing companies. Researching and staying informed about industry standards helps founders set competitive yet realistic salary expectations.
3. Equity Vs. Salary: Founders often receive equity as a significant compensation package. It aligns with their interest in having control over their creation. It also is beneficial for the growth of the company. Balancing equity and salary is a delicate task. Founders need to assess their risk tolerance, the company’s valuation, and potential dilution of ownership.
4. Investor’s Expectations: Investors generally understand that founders must draw a salary to support themselves and their families. However, they also expect founders to demonstrate discipline and prioritization of resources, particularly in allocating funds toward growth initiatives. You must understand the investor’s expectations thoroughly and strive for a balance.
Navigating Legal And Tax Implications For Founder Salary
Consult financial advisors, accountants, and startup-specialized legal experts to decide your salary as per the legal and tax considerations. They can guide your compensation package to comply with relevant laws and regulations, minimize tax liabilities, and optimize your financial situation. You should also stay informed about changes in tax laws to ensure that your salary decisions are competitive and compliant.
Regularly reviewing and changing your compensation will help you make sound financial decisions for yourself and your startup. However, if you want to draw a big cheque every month, you should focus more on growing your startup. To make sure nothing stops you in your growth, connect with Exitfund. Here, you will get great opportunities for raising substantial funding at every round and the guidance of investors for efficient decision-making.
Conclusion
It’s time to resolve your confusion and make a perfect plan for your salary compensation. The smart decision involves taking a chunk of profit as salary while reinvesting enough for growth. Also, make sure to connect with investors and explore every possible way to grow your startup. In case you have more queries, comment down below!
