What Should A Startup Founder's Salary Be?
As an entrepreneur, managing a startup is a balance between risk and reward. The early days of any startup are often time consuming and unpredictable, meaning founders may have to leave behind any regular, steady employment they enjoyed elsewhere. Potentially, it might also mean sinking their savings into the business, and more besides if credit is available.
When a startup has capital available, post funding, a judgment has to be made on whether to pay founders a salary. This blog will cover some of the key considerations for a startup deciding when, and how much, founders salaries should be.
· Cashflow planning
· How much does it cost to employ someone?
· R&D Credits
· What does it look like?
· How much do you need?
What should a startup founder's salary be?
Startup founders are usually obsessive about their startups and prioritise the wellbeing of the company over everything else. This includes a salary. If taking a salary could be detrimental to the business, then founders will need to carefully consider whether it’s the right thing to do.
The overall health of the startup should be a primary concern when thinking about salaries. In most cases, founders will know their startups finances inside and out, having been involved in the valuation and capital raising up to that point, so it should be almost intuitive to know whether it’s the right time or not.
Cashflow planning is a straightforward way of knowing how much cash is available after expenses for things like salaries. By planning cashflows you can assess the current financial situation, including income and expenditure, and look at how changes may impact the finances of the company into the future.
This type of planning can help highlight the strengths and weaknesses of the business, and let you know if there’s enough cash available to be able to pay a salary to the founders. Cashflow planning can include capital injections from investors and revenue from normal courses of business. But if your salary decision is based on cash that is not certain to come in the future, it might not be the right time to commit to taking money out of the startup.
Raising capital from investors is part and parcel of the startup life cycle. It might be that salaries are not an option until fundraising has been completed. Up to that point, funding is likely to have come from the founders own cash and savings, as well as family and other lines of credit. Taking a salary would be counter productive under that capital structure. Although startups don’t pitch to venture capitalists with the sole aim of taking a salary, it is a consideration.
Investors will not want founders having to take other jobs and will want them focussed on the success of the startup, so taking a salary could form part of the pitch and subsequent negotiations.
It goes without saying that successful fundraising and the availability of cash for salaries goes hand in hand. The more money you raise, the more there is for a founder salary. If the funding secured is on the low side, a decision on salaries may have to be delayed until further rounds.
How much does it really cost to employ someone?
There are online calculators that can help you to understand the true cost of paying salaries, even if it’s paying yourself. The basic salary makes up only part of the cost to a business.
This is something that must be considered when thinking about granting salaries to the startup founders.
The costs vary depending on the level of the remuneration, which is why a calculator can be a useful tool to help, but employer National Insurance Contributions alone can add 10% on top of the basic salary. That’s before any pension or benefit costs are considered.
Having an understanding of these costs is vital to be able to make an informed choice on salary timings and levels. It’s vital that startups know that paying a salary of £50,000 means taking approximately £60,000 out of the business.
Research and development (R&D) tax credits are an initiative by the UK government to incentivise UK based companies to invest in innovation. They can provide a valuable resource (in terms of cash) to businesses looking to invest in and grow their R&D.
All companies that invest in developing new products, processes or services are eligible for R&D tax credits. Companies across all sectors qualify for R&D tax credits and nobody is excluded.
The definition of R&D has been made helpfully broad by the UK government. For companies of all sizes and across all industries, if they are making “an advance in science or technology”, they may be carrying out a qualifying activity. These activities include:
• Creating new products, processes or services.
• Changing or modifying an existing product, process or service.
If your startup is eligible then you may be able to offset the cost of founder salaries by claiming for R&D Credits.
Startup founders are often successful, high achieving and motivated individuals. It’s likely that previously founders have been in employment and may have attracted a high salary. It can be tempting to think that by founding a startup this level of salary can continue, but in practice it’s possible that no salary at all can be taken for an extended period of time. Managing founder expectations against the financial wellbeing of the startup is vital to be able to move on to success. The benefits of founding a startup often come much later on in the growth cycle, maybe not for many years, and this needs to be understood by all founders. Taking money out of the business prematurely could jeopardise the entire future of the company.
Startup founders should be comfortable with this information and not be in a rush to utilise cash on payroll that could be needed elsewhere. At least in the short term, clearly no viable business can go on forever not paying salaries.
What does it look like?
A final consideration to salary discussions is what will this look like to people outside the startup? Investors in particular, will they be happy coming onboard if they think their money is going to be utilised in part paying a salary that they consider to be too high?
Founder salaries can form part of investment round negotiations, as previously mentioned, there are benefits to investors to make sure founders are focussed on their investment. Venture capitalists won’t be investing in a startup if the founders are moonlighting in order to make ends-meet!
If money is going to be taken out before investors can form part of this discussion, you need to consider how this will look to people outside, as you’re likely going to have to justify salaries in the future to those joining your team and injecting capital.
How much do you need?
Founders may have spent a long time living off their wits and the goodwill of others. It can be a lean time for individuals having to wait for their startup time to mature and hit its milestones before taking a salary.
The founders will know how much they need to get by, finance credit lines, maintain their lifestyles. This is a really important consideration during the early stages of startups. Founders are the lifeblood of the company and they need to be able to keep turning up and dedicating adequate resources to ensure they are an eventual success.
Striking a balance between taking money out of the company and ensuring the founders can keep going is usually where a fair salary level lies.
There are some key considerations to take on while trying to understand whether your startup can or should pay founder salaries. By following the advice in this blog, you should come up with a well thought out and fair plan. There is no one size fits all right or wrong answer, but you should prioritise the health and survivability of the startup over taking money out too soon. Founders are usually best placed to understand the conflicting priorities and this blog can act as an aid to help in your reasoning.
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