Most entrepreneurs depend on outside investment in the startup phase. Knowing what is reasonable to pay yourself when you are running on somebody else's bankroll is a sensitive matter. Here are salary guidelines to consider for the different stages of your business.
Before outside investment: When you're just launching, prepare to forgo a salary. "If they can live on peanut butter and jelly sandwiches or baloney sandwiches until the big promise comes in and they can make their gazillion dollars, all the better for them,” says Harry Schum, senior consultant with Compensation Resources, Inc., a human resource consulting company headquartered in Upper Saddle River, N.J.
To get through this period, you should have saved up enough cash to cover living expenses for between 18 and 24 months, adds Lori Hoberman, chairwoman of law firm Chadbourne & Parke LLP's emerging companies/venture capital practice in New York.
Angel investors or friends and family pitch in: At a certain point, you'll need funding, perhaps to build a website or a product prototype, and those initial investment dollars usually come from either friends and family or an angel investor.
A typical salary to draw during this stage is between $40,000 and $70,000 a year, says Hoberman. Ideally, keep living off savings during this time, but if that's not an option then only take a salary to cover basic expenses, she adds.
Related: 3 Online Tools To Find Funding
Institutional investment dollars hit the bank: As you need larger amounts of capital, it's more likely a venture capital firm will enter the picture, offering funding for a portion of the company. While you should still keep monthly expenses to a minimum, a reasonable salary is expected at this point, especially since you've gone without one for some time. "Don't be a piggy about it. Figure out what you need. Build in a little bit of cushion,” says Hoberman. When presenting a business plan to a VC, under the expected expenses, list your preferred salary.
For example, a founder of a venture-funded tech startup in New York could be paid between $100,000 and $150,000 a year, says Hoberman. By the time the first round is over, the salary could go up to $200,000. If there's a second round of funding, it rises again to between $225,000 and $250,000. Keep in mind, these estimates are for New York, where the cost of living is very steep compared to other regions of the country. And in Silicon Valley, where the entrepreneurship culture is focused more on stock ownership than financial compensation, Hoberman says the salaries will be slightly lower, too.
Of course, as a company continues to grow, your salary is more dependent on projected revenue and what portion of the company you still own, says Schum. To see what other, similarly positioned entrepreneurs are making, check out the Securities and Exchange Commission filings of companies in your industry that recently went public, says Schum. The SEC filings disclose how the top five executives are paid in the company.
When did you start drawing a salary? Share your approach and respond to other readers in the comments below.