How Much Should a Startup Founder Pay Themselves?

Startup Founder

A look at the average income of startup founders.

According to the startup benchmarking firm Compass, 75% of the startup founders in the Silicon Valley pay themselves less than US$75,000 a year and 66% pay themselves less than US$50,000. The company studied the data collected from 11,160 startups. Around the world, the average salaries varied from as low as US$30,208 in India to as high as US$72,363 in Australia.

Budding entrepreneurs have hopes and dreams of making it big when starting their own business, but figuring out how to pay yourself for your efforts in the process may come as a challenge. Here are two key ways to make returns on your investments that might come in handy.

Distribution of equity

Equity is an essential factor in determining the salary of a founder. Equity refers to the total money earned by the company’s shareholders if the company is liquidated. As the company acquires value, the individual shares that are held between the founders also grow in value.

While in instances where a group of founders belongs to the same family, equity and salary may be evenly distributed, it is not always a good idea to do so. Equity can also be distributed unequally among other teams or co-founders based on each of the founder’s contributions and skills.

The distribution of equity can have long-term consequences besides determining how much a founder earns. An equal distribution of equity can make it harder for a startup to acquire venture capital. For venture capitalists, equal distribution is a sign that founders cannot negotiate among themselves.

Funding levels can change how much a founder earns. A startup with a funding of up to US$500,000 will pay its founder an average salary of US$35,529. However, a startup with a funding of over US$10 million will pay its founder an average salary of US$81,659.

Earning through exiting

As a company grows, founders get the opportunity to sell their stake and make a profit by exiting. For instance, in 2017, the founder of the ride-hailing company Uber, Travis Kalanick, made an exit. Kalanick stepped down from Uber’s board of directors and sold more than $2 billion of his shares.

Another possible way founders can add to their income is by moving on to other ventures. An example of this was the exit of the co-founder of the Indian food ordering and delivery service Swiggy.

Rahul Jaimini was both a co-founder and the chief technology officer (CTO) of Swiggy. While he has left his position as CTO, he continues to be a board member and a shareholder at the company. Jaimini has moved on to become the co-founder of the career accelerator startup, Pesto Tech.

Flexibility vs structure

How much a startup founder earns depends upon a wide number of factors. To succeed in the highly competitive startup economy, a startup founder needs to constantly adapt to changing circumstances. Often, failure can also facilitate growth.

A founder’s flexibility and faith in their idea reflect how much of their earnings they are willing to keep as their salary and how much they want to invest back into the company. It also prevents the founder from treating the company like a personal piggy bank to dip into whenever they may need it.

Having a specific monthly paycheck for your contributions also encourages fiscal responsibility. While you may not be able to afford a salary from day one, having a fiscal responsibility motivates you to work harder at the project thereby increasing the probability of success.

For example, Twitter’s CEO Jack Dorsey only paid himself US$1.40 for his contributions to his company in 2020. His example show us that no matter how little or how much you pay yourself as a startup founder, having a fixed salary is imperative. Taking a salary not only keeps you accountable to your project but also helps create fiscal discipline.

Header image courtesy of Unsplash

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