Jaime Medina
How much should a founder pay themselves? It’s one of the most common questions in the startup world, and also one of the most sensitive. It’s a topic where you’ll find wildly different answers. We’ve seen startups at the same stage, with the same level of funding, where the CEO’s salary differed by a factor of three. After reviewing many cases, there’s no definitive solution, because this is ultimately a very personal decision. That said, we’ll share our perspective.
One of the most important points is to clearly separate the founder’s two hats: employee and shareholder. As an employee, a founder should not be struggling or making excessive personal or family sacrifices due to an overly low salary. They should be comfortable, earning a market-level salary that’s reasonably aligned with what they earned previously. At the end of the day, they are working for a company, and the compensation offered needs to make sense for them in that role.
That said, there’s another market-based analysis worth considering. How much would a company like this pay a CEO who wasn’t a founder? And, as a shareholder, how much would you be willing to pay someone with your profile to run the company? Ideally, these two numbers should be discussed, even though that’s not always easy, especially in early stages. In many cases, a middle ground is reasonable. In any case, this decision should be made together with the other investors, who are often better positioned to separate these two roles since they only wear the shareholder hat.
Another particularly sensitive topic in the early days is what’s often referred to as sweat equity: the money the founder doesn’t formally invest in the company, but effectively contributes by living off personal savings while building the product. From a tax perspective, in the case of a solo founder, it usually doesn’t make sense to inject money into the company only to later take it out as salary. However, when there are cofounders or other shareholders involved from the beginning, it’s important to do things properly: invest money as a shareholder and receive compensation as an employee, regardless of the tax impact, to keep the structure clean and incentives aligned. Even if this sweat equity doesn’t appear in the financial statements, the founder’s early sacrifice should still be acknowledged and valued.
As with all topics related to compensation, this is a sensitive one. And as with all sensitive topics, the key is open communication with all stakeholders, revisiting the discussion at each funding round, and quickly refocusing on the business itself. Because in the end, it’s the business that will pay the founder, both as an employee and as a shareholder.
