How much should I be paying myself as a startup CEO?
It’s a myth that investors expect founders to not pay themselves a salary. Anthony Rose, CEO and Co-founder of SeedLegals, explains why.
Many people think that startup founders are working for free - or that they should work for free. But at SeedLegals, this isn’t what we hear from investors. We’ve worked with thousands of UK startups and most investors want founders salaried early on. Being frugal with company money can be an attractive quality in a founder, but investors know that if you’re being paid a salary, you’ll be able to give it your 100% focus.
Getting paid means you don’t need to moonlight
Often founders have left a well-salaried, stable job elsewhere to go start their own business. Not only is there a sudden loss of income, but until you’ve raised investment for the new company, you’ll also be paying the running costs yourself.
In fact, SeedLegals data shows founders put in £26,000 of their own money into the business before the first funding round. Why? Because no investor invests just on a PowerPoint, they want to see something built, or at least designs, mockups or prototypes.
Bootstrapping founders often don’t pay themselves anything, with any early money raised going into making the business an initial success. You might think that makes you look more committed - but in fact, it leads to awkward discussions with investors. They’ll ask you, are you really serious about this business? How can you do it for free? How long will that be sustainable for you?
This is because investors know that founders have rent or a mortgage and bills to pay, and that money has to come from somewhere. Unless a founder is independently wealthy this means you’re probably moonlighting or working as a contractor on the side to maintain some personal income. The job which earns you money takes up your time & energy, and prevents you from putting as much energy as possible into your venture.
If you’re not taking a salary, investors are likely to think your startup is more of a side-project than a career move. Experienced investors will expect to discuss your salary early in negotiations, to make sure the venture is your sole focus and a top priority. Taking a salary early on shows your commitment - and it’s a move that will impress investors you meet down the line.
Settle on the right salary
When you’re negotiating the terms of your funding round, that’s the time to talk with your investors about how much you should take as a salary. Obviously your shares will be one source of compensation in the future (hopefully), but your salary should be appropriate compensation for now.
As a founder, it could take a while for your business to reach the point where you feel it’s right to take a salary - but paying yourself a salary early on should be part of your toolkit for attracting investors.
It’s important to find the right balance. For example, if you opt for a salary that’s too low, you won’t be able to live with it long-term. Many founders are over-optimistic about how quickly their company will grow. If you start out with a low salary, say £15,000, expecting it to double by the next round, this could be unrealistic if your company hasn’t grown at the rate you’d expected.
If you decide on a salary that’s too high, say £100,000, this could mean that there’s little money left to channel into developing your products or services, or to hire anyone else. And, while investors are generally happy that you pay yourself a salary, they expect that to be a modest salary - if they see you trying to pay yourself the same salary as the last one you had in finance, they may well suggest you return to that job…
Investors may also be looking for the founders to not be the best paid people in the company - after all you have most of the equity, that’s where you’ll make your pay-off later. So if you’re paying yourself much more than other execs in your team, this will rattle investors. Wait until the company is profitable, then you can reward yourself.
For many founders, the right solution for them and their investors is to settle on a realistic salary: a figure that’s live-able, rather than aspirational. Work out how much you can make do with while the business grows. The data from funding rounds on SeedLegals shows founders tend to start taking a salary when they’re raising £150,000 or more, when they take a median salary of £37,000. For companies raising over £150,000, our funding round data shows 75% of founders paying themselves a salary.
What’s important is that you do pay yourself a salary and that it scales with your company’s valuation and revenue. When your venture becomes profitable, that’s when you can start to reward yourself with a higher income.
Build confidence in investors
Your great idea for a business is only the first step of building a successful company. Next, you’ll need to fully understand your skills: what you bring to the business, your leadership style, your personal USPs. By taking a salary, you demonstrate confidence in yourself and in your business. Your salary proves you’re committed to your venture and you know your value - and reassures investors that their money is in safe hands.
To find out how SeedLegals can help you set up Founder Agreements, speed up funding rounds, qualify for SEIS/EIS and more, visit Seedlegals | Start