Startups · Entrepreneurship

How much money should founder take from startup?

AKSHAY DUDANI Full Stack Web Developer

May 1st, 2016

I'll be building a startup in near future. Don't question my passion because of such question, I'm highly passionate about startups and making a difference. I just want to get knowledge of every aspect of it before going into it.

Here, there are great entrepreneurs that have experience in startups. I want to get advices from you, that whether the founder should take money from startups revenue(not investment)? (Also, if I prefer going for bootstrapping then how this change)
If yes then,
->How much money he should take(in terms of %)?
If no then,
->When he should take?


Consider, there are 2 co founders that have a startup idea, had researched about the market, people are willing to pay. We go for crowdfunding. We build mvp. And if we get good revenue, then when is the time we should take money and above questions.

For summarizing,
There are three cases of this question.
1. Whether or not to take money, when, how much we should take it?
2. How will taking crowdfunding alter the answer?
3. How will bootstrapping alter the answer?

Answers will be greatly appreciated for all the cases. I'm entering the startup world. And all of you have gone through it and have been successful. So you can guide me through whole process. Any other startup related idea would be a great bonus for new comer.

Thanks,
Akshay N. D.

EDIT :
I'm a 4th year CSE guy, I personally not in a need of money, but if I'll go for the startup instead of normal job, my parents will be expecting me to take minimum salary that I would have got if I'd take job. Also if founders don't take money unto certain period, then what should I tell to my parents.
A great idea is 1% of the work. Execution is the other 99%. In this course, we’ll teach you how to conduct market analysis, create an MVP and pivot (if needed), launch your business, survey customers, iterate your product/service based on feedback, and gain traction quickly.

Corey Schwartz President at Loanatik.com

May 2nd, 2016

I'm 18 months into our startup. We're outside of silicon valley and money doesn't flow nearly as freely as the tabloids report. Even if we were in SV, raising capital is about who you know, pedigree and what successful exits you've had. The vast majority of money for my company has come from myself and my co-founders.

During the pre-revenue stages we took miniscule amounts of money from the company - mostly to pay for emergencies like staving off a foreclosure or a hospital bill or a debt to a loan shark or paying for food. We are now operational and I still can't take a salary. On the contrary, I put every extra penny I find into the startup for overhead, marketing and lead generation.

When people talk about taking risk starting a venture, they usually don't have a deep understanding of what the words risk and commitment mean. You learn their meaning when faced with difficult decisions. You are putting everything on the line: your family, your health, your financial well-being, all of your current and future savings, your inheritance, your reputation. Everything. Borrowing a poker term, you're all in and failure is not an option.

As an aside, one of my co-founders had to resort to playing poker all night to have enough money to survive (he's quite good at it). And, then he comes in and works all day for the start up.

We work nights, like all night. We work weekends, like every weekend. We personally speak with customers all day. We will succeed, we will own the majority of the company and it will pay us back 100 fold. If you believe in what you're doing and have the skill & conviction to make it a reality, you won't have to worry about what you tell your parents.

Thomas Kaled Business Development Consultant @ thomas.kaled@gmail.com

May 1st, 2016

Since you are asking a general question allow me to give you a general answer. A Founder's pay is increasing valuation of equity. Having said that Venkateswaran Selvan provides some insight into a good rule of thumb 'pre investment capital'-take only what you need to live unless your venture is flush with cash in which you will require no outside investors nor any consultants to advise you...take all the cash you want if that is the case.

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

May 1st, 2016

For a bootstrap seed stage company, the general answer is the minimum you can without going crazy and burning out.  Passion is great, but it doesn't pay the rent or for food.

Unless you are really, really lucky, you will be making almost no revenue from your company at the beginning, and if no revenue is coming in, then what you pay yourself is something of a moot point.

At the very beginning, you will be relying on investors to fund the company.  Those investors may be either your own savings or friends, family, and fools.  One of the milestones would be to set up the company so that you are making some minimal salary so that you don't burn out.  If you don't take the money from the company, you'll be taking it from somewhere else, and that will become a de-facto investment.




Chicke Fitzgerald

May 2nd, 2016

Akshay, when I have done business plans for early stage companies, we insert a formula into the business model that essentially establishes the amount of cash that must be present for ongoing operations each month.  It ensures that the basics are covered before there is any hiring or any payment of officers.    

If the amount of available cash exceeds that, then you can take a distribution (no taxes deducted) or a salary (payroll with withholding of taxes).  You will need to check with a local CPA for advice on which you should do in your particular circumstances.  




Erick Calder Solutions Architect at Union Bank/MUFG

May 2nd, 2016

think of it this way: if the business requires capital to grow and you're taking the capital for yourself then you're denying the business the opportunity for growth, which only hurts you in the long run.  if the business has debts, manage them and take whatever you can for yourself.  if you have shareholders, they might have the power to regulate what you take home.  if they don't, there needs to be fairness since they purchased into your deal on good faith.  if you have no debts, no shareholders and your business model doesn't need capital to fund growth, then take everything home.  no need to leave it on the table

Ken Hollowell Ken Hollowell President/CEO at Profran

May 1st, 2016

My answer is very simple, how do you explain to your parents if by taking money as salary out of the company the company fails? A founder or principal is the LAST person to take any money. I've had clients that build their salaries into their budget but if the income isn't there, they don't take money. As I said before, a budget of 5 years is necessary. If you take $100,000 USD from an investor and you end of taking 50% of that as salary and only have $20,000 within the first year as income you have now doomed the company to failure. No salary can be taken until income is earned unless it is built into the budget. Ken

Venkateswaran Selvan

May 1st, 2016

Please take a look into the article http://www.paulgraham.com/ramenprofitable.html

Martin Omansky Independent Venture Capital & Private Equity Professional

May 2nd, 2016

Dear Newcomer: (1) You are entitled to take a salary in the early stages of a venture, but if I were you, I wouldn't take a market-rate salary. Discount your salary significantly. (2) Crowdfunding is usually an iffy proposition. I would treat any cash from a Crowdfunding source in the same way as any other source - that is, with respect and a realistic view that the available funds will be limited at best; and (3) bootstrapping would change the equation; that approach implies more sacrifice, less than full-time devotion to the start-up (one has to make a living, after all). The real incentive for founders, of course, is equity that can be converted to cash if and when the company either (a) declares dividends, or (b) gets sold. I suggest you have a serious talk with a corporate lawyer and an accountant before you go into this. Doing it wrong may punish you in the end (high taxes, limited freedom of action, etc.). Sent from my iPhone

Ken Hollowell Ken Hollowell President/CEO at Profran

May 1st, 2016

Ashay No one with any credibility can answer your question without knowledge of the actually business and your experience in the business you are entering into. For 45 years I've consulted with thousands of entrepreneurs in business startups including franchising. I've developed several thousand companies with my clients too. Some of the areas for consideration are: Funding your business Business formation (the entity) i.e. Corporation, LLC or sole proprietor Board of Directors Officers of the Company Advisory Committee Trade Marking Registration (TM or SM in the meantime) Logo Design Domain Registration & Web Site Design Printing Requirements Development of at least an Executive Summary Projected Budget for the first 5 years of Operation Location of the Business (Lease or Purchase) Build Out of the Business Structure Employees and qualifications and where to find them Banking Relationships Line of Credit Equipment, Fixtures & Displays Vendors Inventory Etc... As a consultant I am available for hire - Ken Hollowell

Nishith Gupta

May 2nd, 2016

Hi Akshay,

Not a standard rule. Just some learning and knowledge which I have gained over the years -
1. Have a thumb rule the difference between the lowest paid person and highest paid person is not beyond 40 fold. So if let's say being the founder, you want to take the maximum salary. use this rule to determine how much you should take home.
2. As per above advice, ensure that all expenses are taken care of before you take your cut.

Regards,
Nishith