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When Should Start-Up CEOs Start Paying Themselves?
Striking the Balance Between Bootstrapping and Founder Wellbeing
The Founders
July 06, 2024
One of the most common questions budding entrepreneurs face is when they should start paying themselves. As a start-up CEO, navigating finances can be daunting, especially when balancing personal needs with the growth and sustainability of your company.
This dilemma confuses many startup CEOs. The answer isn't simple. It's about finding a balance: keeping the company's finances secure while ensuring you can afford to take care of yourself. Let's dive in and decide when it's right to start paying yourself.
"Chase the vision, not the money; the money will end up following you" — Tony Hsieh, Zappos CEO
1. The Early Days: Bootstrapping and Sacrifice
In the early stages of your start-up, every dollar counts towards fueling growth. It's not uncommon for CEOs to forgo a salary altogether and reinvest any profits back into the business. This approach, known as bootstrapping, demonstrates your commitment to the venture's success and aligns your interests with those of investors and stakeholders.
Key Considerations:
Financial Stability: Ensure you have alternate means to cover personal expenses, such as savings or part-time work.
Legal and Tax Implications: Consult with a financial advisor to understand the implications of not taking a salary and how it affects your personal finances.
2. Signs of Sustainability: When to Consider Paying Yourself
As your start-up gains traction and secures steady revenue streams, you may start contemplating paying yourself a salary. Here are some indicators that your company might be ready:
Indicators of Readiness:
Consistent Revenue: Stable income streams that exceed operational costs.
Validation: Positive feedback from customers, investors, or stakeholders indicating market acceptance.
Team Growth: Hiring key team members who contribute to the company's growth.
3. Determining a Reasonable Salary: Balancing Personal Needs and Business Growth
When deciding on a salary, it's essential to strike a balance between your personal financial needs and the financial health of your start-up. Here are steps to help you determine a reasonable salary:
Steps to Determine Salary:
Market Research: Benchmark salaries for CEOs in similar industries and stages of growth.
Budgeting: Factor in both personal living expenses and the financial needs of your company.
Long-Term Planning: Consider future funding rounds and potential impacts on your salary.
4. Alternative Compensation Strategies: Equity vs. Salary
In lieu of a salary, some start-up CEOs opt for equity compensation. This aligns your financial rewards with the long-term success of the company and demonstrates confidence in its potential.
Pros and Cons of Equity:
Pros: Aligns incentives with investors and long-term growth. Can defer personal income tax until shares are sold.
Cons: Doesn't address immediate personal financial needs. Dilutes ownership stake in the company.
How Much Should You Pay Yourself?
Determining the amount of your salary is another critical decision. Here are some guidelines:
Market Rates and Comparisons
Research salaries for similar roles in your industry and region. This can provide a benchmark for setting your compensation.
Startup Stage
In early stages, keep your salary modest. As the business grows and becomes more profitable, you can adjust accordingly.
Consult Your Board or Investors
If you have a board or investors, discuss your compensation with them. Their input can provide valuable perspective and help ensure alignment with the company’s goals.
Performance-Based Adjustments
Consider tying your salary to performance milestones. This aligns your compensation with the company's success and demonstrates your commitment to growth.
Stay driven, stay balanced, and here’s to your success!
Tools | Why You Must Use Them? |
Use a financial tool like Bench for bookkeeping to get accurate insights into your cash flow and runway. Accurate financial data is critical for informed decisions. | |
Manage your equity and funding rounds efficiently with Carta. This tool helps you track your cap table, making it easier to decide when to pay yourself. | |
Use QuickBooks to manage revenue and expenses. Regularly monitor financial reports to assess business stability. | |
Manage finances and understand living expenses with YNAB. Helps determine if a startup salary is necessary. | |
Research typical CEO salaries in your industry and region using Glassdoor. | |
Use an OKR tool like WorkBoard to set performance milestones and align salary adjustments with business goals. |
Making the Right Decision for You and Your Startup
Deciding when to start paying yourself as a startup CEO is a personal and strategic decision. It requires a thorough understanding of your business's financial health, growth stage, and your personal financial needs. By carefully evaluating these factors and maintaining open communication with your stakeholders, you can make an informed decision that supports both your well-being and the success of your startup.
Remember, your dedication and hard work are invaluable assets to your company. Ensuring you are financially stable will enable you to lead with clarity and confidence, ultimately driving your startup towards greater heights.
Stay driven, stay balanced, and here’s to your success!
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