Founder Salaries

When a startup founder is asked during his or her pitch what they plan on doing with the money raised, if one of the expense categories happens to be “founder salaries”, some investors may at best cringe, at worst lose interest altogether. There is a school of though in the entrepreneurial community that founders should be on the ramen diet, even after the company has been funded, until there’s some sort of liquidity even when the investors can cash out. (Of course, there are plenty of investors and other entrepreneurial commentators who believe the exact opposite). Arguments for little or no founder salary include a belief that the founder’s payoff comes from the increased value of the company and therefore a salary is unnecessary, a belief that a salary reduces the drive of founders to maximize the value of the company since the founder is getting paid regardless of the growth of the company rather than getting the payoff if and when the value of the company grows, a reticence on the part of investors to have their investment used for anything other than that which will increase the value of the company (e.g., more inventory, more marketing, more staff, etc. that lead to more sales), and even a belief from successful entrepreneurs who had to struggle that every entrepreneur has to go without until the cashout simply because they did. However, using part of a capital raise to pay founder salaries is a worthwhile use of the money. At the point that founders get investment they come to work on the company full time. Unless the founder has the benefit of a spouse or significant other with an income, or family willing and able to support the founder, or a good deal of money saved, without a salary from the company the founder has nothing to live off of. That founder cannot devote all of his or her time and energy to the company if they also have to worry about how their bills are getting paid. Of course, a founder’s salary demand should be commensurate with the market, the founder’s experience and skill, the size of the company, and the company’s financial resources. While a $200,000 salary for a first-time founder in a company that hasn’t hit millions in revenue or valuation is probably excessive, a salary that will allow the founder to meet his or her expenses is certainly more reasonable. Founders should feel comfortable including a salary expense for themselves when seeking investment so long as that salary can be backed up with figures that demonstrate it to be reasonable.

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