Leadership · Fundraising

When should a CEO start paying themselves?

Anonymous

July 25th, 2015

From what I understand, startup CEOs pretty much expect not to pay themselves when starting a company. When you have no profit or much funding yet, and every extra penny is being invested back into the company, there really isn’t much left over for the CEO to pay themselves. Some CEOs have even paid employees from their personal bank accounts before funding or profit from the company was able to do so on its own. We are in year 2, have just received a few M in funding and still I’m uncomfortable giving myself a reasonable salary that is up to market value. At what point is it reasonable for a CEO to start paying themselves?


Lane Campbell Lifelong Entrepreneur

July 25th, 2015

Market rate for a startup CEO doesn't exist.  Take whatever you need to live a viable existence.  The business won't succeed unless you do.

Roger Wu co-founder at cooperatize, native advertising platform

July 25th, 2015

Everyone is in a different financial situation.  If you can pay yourself $1 like Jobs, Bloomberg, Google guys, Zuck, then awesome! If you find yourself thinking about paying your rent instead of growing your business, maybe its time to take a salary.

Jay Samit Author at Disrupt You! - Published 2015

July 25th, 2015

As a young entrepreneur in my twenties, I took great pride in the fact that I never once missed making payroll (even if that meant funding the business with my credit cards and not paying myself). Though my first company Jasmine Multimedia beat the odds and was successful, looking back on the experience decades later the pressure was too intense and actually counterproductive to my startup’s growth. Founders are by definition optimists who believe that their vision for the future will translate into financial rewards. But what many fail to realize is that even the best of ideas have to wait for market forces to catch-up. Get ahead of demand and the burn rate can quickly outstrip one’s financial resources. Startups shouldn’t fail because the founder couldn’t last financially, but all too often this is the leading cause of failure.

While just out of high school, Bill Gates and Paul Allen had a brilliant idea of improving traffic by using computers to measure traffic flow. The young geniuses were decades ahead of the market and Traf-o-Data went bust. If the guys that created Microsoft can get it wrong, so can you. To give your brainchild the best hope of survival, here are three simple rules to follow when the discussion of founder pay arises.

If your startup is far enough evolved to be raising capital, then it must also be able to pay the founder’s salary. This is important for two very distinct reasons. First, many startup entrepreneurs make the mistake of not paying themselves and then calculating their burn rate on a falsely deflated number. If your work is crucial to the company’s success, then that cost must be figured into the organization’s overhead. Otherwise you make the mistake of believing your profit margin is significantly higher than it actually is or worse yet, believing that the business will be profitable when it scales (without the proper level of staffing). Modeling out any business for the long-term must include all of the actual, costs needed to sustain the operation. I recommend calculating your budgets on the actual amount it would cost investors to replace you (even if you are working for a fraction of the actual competitive salary).

The second reason to pay yourself is to allow you to focus one hundred percent of your energy on the business. If you are worried about keeping your lights on or your car being repossessed as I was, you are not going to be thinking clearly and making the right long-term strategic decisions for your fledgling company. Short-term thinking to make ends meet leads too many entrepreneurs to undercharge for services, forego royalties in exchange for lump sum cash advances or commit the techie cardinal sin of not paying for patent filings. When I look back on my costliest mistakes as a first-time entrepreneur, most would have been avoided had I spent the money on proper legal and accounting advice.

Now that you have decided to pay yourself, don’t expect to get rich from it either. There is a big difference between not paying yourself and your fair-market value to an established corporation. No investor should be paying you what you could earn at a regular job. You are getting more than cash compensation with your startup. You are getting to pursue your dream, test your mettle, have creative autonomy and retain a sizable portion of equity. Your lifestyle should be frugal and as bootstrapped as your startup. Remember, as an entrepreneur you have to be willing to live a few years of your life like most people won’t in order to live the rest of your life in a manner that most people can’t.

As a rule of thumb, most seed stage founders going through the Y Combinator accelerator program for example pay themselves around $50,000 a year.   When revenues grow enough to pay many of your top employees six figures, then it is appropriate to increase your salary as well.

Most people are surprised to learn that startup CEO/Founders are usually not the highest paid people in their companies. I reserve that honor for top engineers and salespeople. Founders’ wealth comes from the delayed gratification of holding onto as much equity as possible. In the case of the Y Combinator founders behind Dropbox and Airbnb, waiting was worth over $6 billion. You can’t build a great company working for free, but you can build a great company by giving yourself enough time to succeed.  For more info, read my new book Disrupt You!

Peter Alberti CEO at Pet Cause Media / Founder at PetChance.org

July 25th, 2015

I see a few factors in play when making this decision:

1. If the founder can wait for a salary, then:  Can the company afford to pay the founder without putting the company's financial situation at risk?  If so, pay the founder!  Everyone deserves to be rewarded for their efforts. If the company will be at risk, then hold off until it's stable.  However...

2. As Roger said - if the founder is struggling financially on a personal level, the company should pay you as soon as possible, with less (but not zero) regard for financial risk to the company. You obviously don't want to put the company out of business by paying you. But perhaps you can pay yourself and grow more slowly or make other sacrifices that won't ultimately kill the company.

Having said all that, if you raised $M and IF the investors are OK with it, then you'd want to pay yourself if you need it.  If you burn out or end up being financially disabled from supporting the company, the company will suffer.

Patty DeDominic Chief Catalyst, Managing Partner at DeDominic & Associates (Also Chief Catalyst for Maui Mastermind and Exec Coach)

July 25th, 2015

Start now. You time as a volunteer needs to evolve to that of a real leader. Unless you are running a non profit for life, it's time to pay for value added and key roles. Include a budget and plan according to what you would have to pay someone else who would fulfill your functions. Investors are not inspired by unreal budgets. Free labor is not sustainable. Why would you think that it's good for your company to not pay any critical position once you have cash flow? Your budget becomes scaleable when your expenses and your income are properly planned. Patty DeDominic

John Balena EVP Worldwide Sales & Services at Trifectix

July 25th, 2015

I agree with the major thread in the discussion.  You must be compensated for your role adjusted for the size of the company.  If you have the ability not to be paid, get paid anyway to compensate you for your contribution and invest that salary in the next round of funding.  That demonstrates your commitment to the business while putting your salary back to work in exchange for preferred stock.

Lonnie Sciambi

July 28th, 2015

A lot of interesting opinions.  A while back I wrote a blog post on the subject, entitled - "Note to Self: If I'm not Getting Paid, I Really Don't Have a Business!"  - http://bit.ly/Y70CS5.  Basically, it comes down to whether or not you pay one of, if not the most valuable, employee in your company, yourself!  You can't/shouldn't do a breakeven analysis without that major consideration.  And you really don't have a viable company without a CEO, who is getting paid.  

OPOLOT EMMANUEL Biomedical Engineer

July 25th, 2015

I had the very same query sometime back and the best answer I got was; "Leaving cash in the business makes sense when your plan includes growth in some way shape or form, but if you’ve reached a point in your business’s life cycle where you can confidently sustain the desired revenue you want in light of your existing financial obligations, and there’s no investment or business-related reason not to be paid, it’s time to enjoy the fruits of your labor. Owning a business requires plenty of “sweat equity,” and initially often results in working far harder than you’re being compensated for-and earning less than if you worked for someone else! While that doesn’t mean you have to work for free for the duration of your entrepreneurial life, the best time to take a salary is a unique circumstance that you should determine based

J Moore Publisher: EV World. Founder & Interim CEO of QUIKBYKE

July 25th, 2015

Two observations:  I read recently in the Sunday NY Times that Tony Hsieh only takes a $36K annual salary. Also I've read that Warren Buffett's salary is $100K a year. His security detail runs Berkshire four times that figure though. Of course, both have sizable vested interests in their respective enterprises.  Still both are illustrative of what I consider socially responsible CEOs.

Jake Carlson Software Development Manager at Oracle

July 25th, 2015

I think it's largely a function of where you are financially. I wouldn't really put Warren Buffet or any other mega-rich individual up on a pedestal for their lack of salary; they live like kings regardless of which form they dispense their wealth to themselves. i.e., it's easy to live on $1 a year if literally all your expenses are paid and funneled back to you in other ways, or you have millions/billions in the bank so you are just living off of your savings. Obviously at one point or another those individuals paid themselves handsomely in order to get those savings in the first place.

So bottom line: there's nothing wrong with paying yourself the company the is doing well enough to support your compensation, but if your salary is the difference between the company's success or failure, and you don't need the salary to live -- then you might consider not doing so or giving yourself only modest compensation.

Also pay attention to the laws that govern reasonable salary for material participants in companies. I'll leave the details to the lawyers; just be aware that there may be legal reasons you must pay yourself a reasonable salary if the company can support it.