Why Startup Founders Should Pay Themselves

Starting a business is a potentially risky and challenging endeavor, and many startup founders often find themselves working long hours for little to no pay. In fact, a common question among startup founders is whether or not they should even pay themselves a salary.

The answer is yes, startup founders should pay themselves. In this article, we’ll explore the reasons why startup founders should pay themselves and how to determine a fair salary.

Do Founders Get a Salary?

First off, let’s address the elephant in the room: do startup founders even get a salary? Well, the short answer is: it depends!  In the early stages, most founders are so focused on keeping the lights on and the dream alive that they might not take a paycheck. It’s all about reinvesting every penny into the business. But as your startup grows and starts generating revenue, it’s time to start thinking about paying yourself. Ultimately, the decision to pay yourself a salary is up to the founder and should be based on the needs of the business.

Why Should Founders Pay Themselves?

Fair Compensation for Hard Work

Being a founder is a full-time job, and founders often work long hours and make significant sacrifices to get their business off the ground. They are responsible for the success of the company and often wear multiple hats. 

During our International Women’s Day Panel, CEO and Founder of The Vendry, Daphne Hoppenot shared her thoughts on why being a financially stressed founder doesn't make you a better founder. Does this situation sound familiar?

Paying yourself a salary acknowledges the hard work and dedication that you’ll put into your growing business, as well as alleviating financial burdens.

Attracting Top Talent

In the early stages of a startup, founders may not have the resources to hire a full team of employees. In this case, they may rely on co-founders or early employees to help build the business. Paying yourself a salary sets a precedent for future employees and shows that the company values and compensates its employees fairly. 

Personal Financial Stability

Let’s face it, living off ramen noodles and sleeping on your friend’s couch might have been fine in your college days, but now you’ve got bills to pay and maybe even a family to support. Starting a business can be a risky endeavor, and founders often invest their personal savings and take on debt to fund their startup. Paying yourself a salary can help to provide some financial stability and alleviate some of the financial stress that comes with starting a business.

It also allows founders to cover their personal expenses and maintain a decent standard of living while they work to grow their business. This can be especially important for founders who have families or other financial obligations.

Tax Benefits

Paying yourself a salary can also have tax benefits for founders. By paying yourself a salary, founders can reduce their taxable income and potentially lower their tax liability. Additionally, paying yourself a salary can help to establish a paper trail and provide evidence of a legitimate business expense, which can be beneficial during tax season.

How Much Should Founders Pay Themselves?

Ah, the million-dollar question (literally). There’s no one-size-fits-all answer to this, but a good rule of thumb is to pay yourself enough to cover your basic living expenses without negatively impacting the business. You can always adjust your salary as your startup grows and becomes more profitable.

Consider the Stage of the Startup

The stage of the startup is an essential factor to consider when determining a founder’s salary. In the early stages, when the business is not yet profitable, founders may need to take a smaller salary or no salary at all.

As the business grows and becomes more financially stable, founders can increase their salary to a more reasonable amount. Ask yourself questions like: 

• How much revenue is coming in every month? 

• What are your expenses?

• Are you consistently turning a profit?

• Will you need to hire additional team members? 

• Do you need to invest in technology or other equipment?

• What are my long-term goals for the business?

• What are my financial obligations outside of this company?

It’s important to regularly reassess and adjust the salary as the business evolves.

Look at Industry Standards

Another way to determine a fair salary for startup founders is to look at industry standards. Research the average salary for founders in your industry and use that as a benchmark for your own salary.

Keep in mind that this is just a starting point and may not be a realistic salary for your specific business. It’s essential to consider the financial needs of your business and adjust the salary accordingly.

Consider the Financial Needs of the Business

As mentioned earlier, it’s crucial to consider the financial needs of the business when determining a founder’s salary. The business must have enough funds to operate and grow, and the salary should not put a strain on the company’s finances. It’s a good idea to work with a financial advisor or accountant to determine a reasonable salary that takes into account the financial needs of the business.

How to Pay Yourself as a Founder

Now that we’ve established why founders should pay themselves and how to determine a fair salary, let’s explore the different ways that founders can pay themselves.

Salary

The most common way for founders to pay themselves is through a salary. This is a set amount that is paid on a regular basis, such as monthly or bi-weekly. A salary is a reliable and consistent form of income and can help founders to budget and plan for their personal expenses. It also helps to establish a paper trail and provide evidence of a legitimate business expense.

Dividends

Dividends are a form of profit distribution that is paid to shareholders of a company. As a founder, you are also a shareholder of your company and can receive dividends as a form of compensation. Dividends are typically paid out on a quarterly or annual basis and are based on the company’s profits. This means that if the company is not profitable, you may not receive any dividends.

Equity

Equity is another form of compensation that founders can receive. It is a percentage of ownership in the company and can be a valuable asset if the company is successful. Equity can be a great way to compensate founders who are willing to take a lower salary in the early stages of the business. It also aligns the interests of the founder with the success of the company.

How Justworks Can Help

If you're feeling a bit overwhelmed trying to navigate the ins and outs of paying yourself as a founder, there's no shame in seeking a little help. That's where a Professional Employer Organization (PEO) like Justworks can really come in handy. Justworks takes care of all the nitty-gritty details of payroll, benefits administration, and compliance, freeing you up to focus on what you do best: building your business. So don't be afraid to reach out and get the support you need. After all, you've got big dreams to chase, and Justworks can help you get there faster and smoother. Cheers to paying yourself and paving the way to success!