The Founder Salary Question Nobody Answers Honestly
What to pay yourself, how to defend it in a pitch room, and the exact frameworks I use with my clients depending on how you are funding your business.
I have spoken with hundreds of founders and business owners and a popular question among many comes up regarding their compensation as the founder and owner of the business.
Most founders who are planning on fundraising put a modest salary in their projections. I’m talking modest as in: not enough to live on. Their rationale is that this level of modesty will be attractive to prospective investors.
This is utter bs.
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A prospective investor isn’t going to invest in you for this reason alone and in fact, they are going to question this rationale. The reasoning here is this: investors are investing in the founder(s) more so than the business idea.
Investors want to ensure they are going to receive some sort of ROI on their money and the only way that is going to happen is if the founder can drive this venture forward with undivided attention.
Running a company is no small feat; it’s tiring, an uphill battle consisting of long days and years (maybe even a decade or more) building the plane as you’re flying it. If the founder is paying themselves minimum wage without any other form of compensation (i.e. if you have a trust fund or a partner who can support you financially, or some other form of investment or capital that you can live off of) then this level of modesty isn’t going to be appreciated. It will most likely lead to someone not investing in your start up because it isn’t sustainable.
How can a you, as the founder, go all in on a business if you barely have enough money to live off of (especially in this economy)? The last thing any investor wants is to see a founder have to go out and get a second job or take on consulting clients in order to pay their bills. This approach leads to higher risks of burnout and split attention which are key indicators that will kill someone’s ROI.
Before You Pay Yourself, Read This
And if you read this and you start thinking to yourself, “oh I will hold off on paying myself until the profits start coming in and once that happens then I will determine how much I can afford to pay myself”. This isn’t a strategy either.
Paying yourself is not an afterthought, it is a line item that belongs in your pricing model from day one just like you would with any other expense.
Before we get into the frameworks and tips I provide my consulting clients, a quick but important note on compliance. How you pay yourself is not just a strategy decision, it is a legal one.
Your company structure determines what payment methods are available to you and what taxes you are on the hook for. If you are not clear on your structure or your tax obligations, I have two archived posts that break this down in plain english specifically for founders. These are among the most referenced posts in The Creative CFO library and worth bookmarking before you make any decisions about your compensation. These posts are U.S. specific but are helpful for international founders who might be planning on opening a legal entity in the U.S. in the future (some U.S. based investors might require this). Access the archived posts here: Choosing the Right Legal Entity & Taxes Made Simple.
The Two Salary Frameworks I Share With Every Client
Below I am breaking down the two salary frameworks I share with my clients depending on where you are in your business journey. Whether you are self-funded, planning to fundraise, or somewhere in between, these approaches will give you a starting point and the specific numbers to anchor your planning around.
It is also worth noting that in addition to company legal structure, geographical location is something to be considered when determining your salary especially in the early days. A founder in San Francisco is going to need a higher salary than a founder located in Austin, do your due diligence and take stock of your personal expenses and cost of living to see what is actually feasible. These are the benchmarks I start all of my clients with and we adapt depending on each individual use case. Use these numbers as your starting point, not your ceiling.
The framework you choose depends less on how long you have been in business and more on how you are funding it.
Framework One
Start with your income goal. Not the number you can afford to pay yourself now, but a comfortable wage that allows you to fund your lifestyle, contribute to savings and retirement, and then factor in your tax obligations. My baseline for my founders is $120,000 and we make adjustments as needed depending on their personal situation and geographical location.
(Goal Annual Salary + Annual Operating Expenses) X (100% + Target Profit Margin %) = Target Annual Revenue
Once you determine your ideal base salary, add in your operating expenses, then factor in your target profit margin (20-30% is a good starting point). That total becomes the revenue figure your business needs to generate and your pricing needs to reflect these numbers. If your business is just starting out, the revenue might not be there to support a six figure salary, which is okay and quite common. You can make the cash payments when your bank balance and cash projections support this (catch up on last week’s post where I share my top 5 tips for managing cash flow like a CFO).
The inputs will look different if you are a freelancer billing hourly versus a SaaS founder pricing a subscription, but the logic is the same: your salary is not what is left over. It is a line item you build the business around.
Appropriate salaries for founders who are fundraising and how to navigate those conversations in a pitch meeting are available to paid subscribers below.
