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At what point do founders get allowed a market salary?

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JASON LEMKIN

The right answer is: as soon as the company can afford it.

Taking a market salary when cash is very tight is, at best, penny wise and pound foolish. If you own 20%-30%–50% of a company, the last thing you want to do is take a single dollar out when the company truly needs it.

But a time will come when it doesn’t matter. When there’s enough revenue, THEN it’s OK. When taking that salary doesn’t really impact the runway of the start-up.

Make sure you pay yourself a market salary then. ASAP. It’s super important. Because it de-stresses things.

As an investor, the last thing I want is the CEO worrying about her salary. So as a rough rule, (x) as soon as we’ve raised > $4m, or (y) as soon as we are past $1m in ARR growing quickly and the burn is low, the CEO should have a “low market” salary at least. That’s one of the best uses of the $4m+.

But if the company has raised “only” $250k, $500k … even “only” $1.5m … and/or if the company isn’t past $1m in ARR and growing quickly … the CEO / founders taking a “market” salary is a flag.

A flag that he puts a few nickels in his own pocket (even if it’s just to make rent) … over the value of his equity.

Because every dollar that comes out at this phase damages the theoretical value of that high equity stake. Every dollar is precious. It’s one more engineer. It’s one more marketing campaign. And perhaps most importantly, 1 or 2 or 5 months more of runway.

That’s a company I usually don’t see doing something big.

View original question on quora

Published on May 26, 2017
  • Mark Nijhof

    This basically does mean only people who are rich enough to live on their savings for 1-2 years can start a startup? I myself have just started my second company and with 5 kids to feed I do need an income, not saying it is a market salary but more then what you probably would want me to spend. Atm I am bootstrapping it. Are those scenario’s completely non interesting to you?

    • PrasannaKrishnamoorthy

      Short answer. YES.

      Bootstrap into a market salary. At which point, investors won’t make you reduce your salary.
      Do check out effectuation.org for how expert entrepreneurs do things within their ‘affordable loss’.

      More soberingly, the worst outcome founder stories I’ve heard were people jumping with 6m runway in the hope of raising funding soon. Never works out. Many were MUCH worse off for the wear.

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