As a startup founder, one of the most common questions you’ll face is how to pay yourself. This decision is crucial because it affects not only your personal finances but also your company’s cash flow, growth, and overall financial health. Paying yourself in the right way ensures that you are adequately compensated while still maintaining the resources needed to reinvest in your startup. Below, we explore various approaches to paying yourself as a startup founder.

1. Founder’s Salary vs. Equity Compensation

Startup founders have two primary ways to compensate themselves: through a salary or equity compensation. The decision between the two often depends on the company’s stage of growth, available funds, and long-term goals.

• Salary: This is the most straightforward way to pay yourself. A salary provides regular income but comes with payroll taxes and other obligations.

• Equity Compensation: In the early stages, many founders opt to pay themselves with equity, allowing them to avoid taking a salary. Instead, they own a stake in the company, which they hope will appreciate as the business grows. This approach is common when cash flow is limited but can be risky if the startup does not succeed.

2. When Should Founders Take a Salary?

In the early days of a startup, many founders forgo taking a salary to conserve cash and reinvest in the business. However, this is not always sustainable. As the business progresses, it becomes increasingly important to pay yourself a reasonable salary.

While there is no set rule, a general guideline is for founders to start paying themselves once the company has raised sufficient funds, secured revenue, or reached a growth milestone. Ideally, your salary should reflect the company's financial health—taking too much could deplete resources, while too little might affect your personal well-being and motivation.

3. Founder’s Salary Based on Market Rates

Many founders base their salary on industry standards or market rates for their role. Researching what other entrepreneurs in similar positions make can help you set a reasonable salary.

For example, a founder in a technology startup in Silicon Valley might earn more than a founder in a bootstrapped e-commerce company in a smaller market. Online resources like salary websites or talking to mentors can provide insights into what’s reasonable for your specific industry and location.

4. Bootstrapped Startups: Low or No Salary

For bootstrapped startups, founders often take little or no salary in the initial phases to ensure the company has enough cash flow to cover essential operational expenses. This is common for companies that are self-funded or haven’t yet secured significant external investment.

Some founders may instead take small stipends or minimal pay to cover living expenses. In such cases, it’s important to carefully manage personal finances and ensure you have the financial resources to stay afloat during the lean early days.

5. Paid vs. Unpaid Leave and Benefits

Many startup founders don’t initially provide themselves with traditional benefits, such as paid time off or health insurance. As the business grows, however, it becomes more feasible to implement these benefits. The key is to strike a balance between personal compensation and ensuring the company has enough resources to continue growing.

For early-stage founders, one strategy might be to use personal savings or external insurance plans until the startup is profitable enough to offer such benefits.

6. Draws or Distributions

In addition to a formal salary, some founders opt to take "draws" or distributions from the business. A draw is essentially a payment from the company’s profits to the owner, but it is not a salary in the traditional sense. It can be paid periodically or when the company has extra funds available.

This approach is more common in sole proprietorships or small businesses, where the founder is also the owner. However, it's important to note that draws should be planned carefully to ensure they do not negatively impact the company’s financial health.

7. Equity-Based Compensation Packages

Some founders compensate themselves through equity-based compensation packages. This means they receive stock options or shares as part of their total compensation, which can be highly valuable if the company grows and goes public or is acquired.

Equity compensation often involves vesting schedules, which means that founders will receive their equity over time. This can align the founder’s incentives with the success and longevity of the startup.

8. Paying Yourself in Profitable Phases

Once your startup becomes profitable, founders can afford to increase their salary or draw a larger percentage of profits. At this stage, it is important to evaluate the company’s financial health regularly and adjust your salary accordingly.

However, even in profitable times, it’s essential to strike a balance between paying yourself adequately and maintaining enough cash reserves for future growth, hiring, and operational expenses.

9. Investor Expectations and Founder’s Compensation

If your startup has raised money from investors, you need to consider their expectations regarding founder compensation. Investors often have strong opinions about how much a founder should earn and may expect that you are taking a reasonable salary in line with the stage and financial status of the company.

Having transparent discussions with investors about your compensation can help set expectations and avoid conflicts down the road. In some cases, investors might even have restrictions on founder salaries during the early stages.

10. Tax Considerations

The way you pay yourself can also have significant tax implications. Salaries are subject to payroll taxes, while equity-based compensation may trigger capital gains taxes when the company is sold or goes public. It’s essential to work with a tax advisor to understand the best way to structure your compensation to minimize tax liabilities.

Founders should also be aware of the potential for self-employment taxes if they are running a sole proprietorship or partnership. A tax professional can help you navigate these complex decisions and ensure that you comply with all tax regulations.

Conclusion

Deciding how to pay yourself as a startup founder is a balancing act. It involves finding a way to support yourself while also ensuring the business has enough resources to grow and thrive. Whether you choose to pay yourself a salary, take equity-based compensation, or use a combination of both, it’s important to adjust your approach based on the company’s financial status, investor expectations, and long-term goals.

By carefully managing your compensation and keeping a close eye on the financial health of your startup, you can set yourself up for success—both personally and professionally.