If you happen to be a founder of a startup, you would have certainly faced one big dilemma – how much salary to draw?
Well, there are no set answers to this question. As a rule, founders need to be cautious as to not burn into the company’s finances. At the same time, they have self and perhaps family dependents to fend for. A careful consideration is required to strike a perfect balance.
Balance between personal expenses Vs startup needs
A judicious balance needs to be maintained, that just about covers personal expenses. You can’t be drawing a salary that covers your luxurious vacations or swanky cars; at least not until you can justify it with reasonable profits from the venture.
It is true that a relaxed mind, which does not have to worry about personal day-to-day struggles with finances, will be able to focus with more dedication towards bettering his/her own venture. So it is important that your salary covers the essential personal expenses to keep you free to concentrate on your work.
It is also important not to take out too much, because funds are scarce. In fact, investors look at how much a CEO is withdrawing as salary as a factor while deciding to fund a startup.
The alternates
You can offset personal growth with a share in the equities of the company, since that is the perfect alignment of your growth with the company’s growth. Or you can set your salary as a percentage of revenues, so when the company grows, your salary grows. You could even settle for bonuses when important milestones are achieved. This is a fair and just way to grow along with the company. When there is more cash flow, you can make more! Also, it will ensure that your focus is on track and if you are able to achieve those milestones, you make personal gains as well.
Nurture diversity
All five fingers are not the same, yet the fist is powerful enough for a punch. All the co-founders need not draw similar salaries; rather it can depend upon the role and nature of each one’s contribution. You also need to hire and retain the right talent to fastrack your company’s success. There are many cases wherein the founders take home lesser than their own employees – it is your baby after all! Founders have the equity, the team may not.
Motivate by example
Leading by example is also very crucial to keep your team motivated. When you take less for your personal expenditures, your team gets a better chance to respect your dedication and align themselves to your goals. Chances are that your team will also agree on lower pay scales, thus reducing the burden on the company’s finances in the initial stages.
Some validations
Some surveys give interesting insights into the founders’ salaries for startups around the world and the trends in India. As per a report by Compass, around 66% founders in Silicon Valley pay themselves very low salaries (< US$ 50,000), which changes to 74% in London and to an unbeatable 92% in India. The survey revealed that Indian founders took home 40% less salary when compared to those in Silicon Valley.
Things will change
It is in the best interest of the startup to adopt a frugal approach in the early stage. Of course, once the investors get in, the game changes completely. There is more accountability, formal systems and pressures, perhaps clearly defined roles as well. You can then revisit your salary, in discussion with your co-founders and your investors, depending on how the business is faring at that point in time. But the basic understanding stays – you will have to settle for a fractional equivalent of your market value if you wish to see your startup flourish. After all, the startup’s success is yours to savor once the fruits have ripened!
Published on IamWire