Seattle entrepreneur Dan Price from Gravity Payments made headlines a few months ago when he announced that his employees would make $70,000 a year as minimum wage. In order to pay for this company-wide salary increase, he also slashed his own wage from $1M a year to $70,000.
While his decision seemed bold and admirable at the time, just a few months later his company is struggling and his decision to make this salary change has gotten a lot of criticism and backlash.
All of which begs the question: if you’re running a company (especially if the company is still in the early stages), how much should you pay yourself?
In the very early stages, founder salary is a non-issue. You might still have a day job while you build your product on the side. Or, if you do it full-time, you live off of your savings or your significant other. When there’s no revenue, there’s no paycheck. Pretty simple.
All that changes once you have your first investment money coming in. Suddenly, you need to weigh what’s in your best interest, what’s in the best interest of the company, and what you need to do to make ends meet.
Founders’ compensation has a huge equity component, which in VCs’ perspective, aligns better with their objective than a hefty cash salary would. Venture Capitalist Peter Thiel is known for his statement that the lower the CEO salary, the more likely the company is to succeed. He also said his VC, Founders Fund, won’t invest in any startup that pays its CEO more than $150K per year. In a recent survey of salary data from 11,000+ startups, 75% of the founders in Silicon Valley reported that they pay themselves less than $75,000 a year. 66% pay themselves less than $50,000 a year.
Here are three reasons why you should pay yourself below market-rate.
1. Early investment dollars are expensive
Especially in the early stages of your company, access to cash is expensive. You need to give away a lot of equity (typically 20–40% for Series A) and control for the money you raise. Therefore, the lower your expenses, the longer the run rate, and the better it is for both you (as a main equity-holder) and your company.
2. Your salary sets the tone for your company
As your startup grows, you’ll need to be attracting more talent. As a young company, you’ll be hard-pressed to compete for talent based on salary alone. That’s why you’ll have to sell potential new hires on your dream and vision—and your belief that the real payout will come later as a result of significant equity compensation. That’s a much harder sell if you’re paying yourself a higher salary—if you don’t believe in the possibility of a significant equity payout in the future, why should they?
3. Investors shy away from companies with high founder salaries
Peter Thiel’s view on founders’ salary is not uncommon in the VC community. When investors are deciding on which companies to invest in, they’re looking for founders who are highly motivated to build a strong company with a lucrative exit strategy. While investors don’t want the founders to get side-tracked by personal financial woes, they’re also concerned that well-compensated founders may be less motivated to work towards that highly lucrative exit.
In addition, relatively low founder salaries also suggest to investors that the founder has a high belief in the future success of the company. If you’re willing to forgo market-value compensation, you must truly think there will be a pay-off for your sacrifice.