Deciding what salary they should pay themselves can be one of the trickiest questions that founders face.
By Rebecca Irvine
While Emile Cubeisy, managing partner at venture capital firm Silicon Badia, believes there’s no clear cut answer to how big a founder’s pay packet should be, he’s certain the figure should be arrived at with care and attention.
One school of thought suggests that founders pay themselves a “market wage” salary, which is the amount they could earn as an employee in the same field. However, for startups and companies in their growth stages, this is something that Cubeisy thought was unrealistic. Venture capital is valuable, and the value potential it holds for the company is more important than a high salary in the vital early years, he said. When capital is used to fund unnecessarily steep wage bills, it simply eats into the money available for real investment and growth.
Similarly, while salary increases can be tempting after subsequent funding rounds are raised, founders need to keep in mind whether it would be a sensible and productive use of their capital. Cubeisy stressed that when the company can afford wage increases through its own growth, rather than with investment funds, then these changes could be made.
What, then, should founders be thinking about when it comes to considering their own financial compensation? While the prevailing consensus on the topic seems to be that founders should meet their own needs and not suffer any hardship, the reality of what this means in practice requires further unpacking.
One sensible approach to setting salaries acknowledges that what equates to a decent quality of life differs greatly among different people, and that needs of individuals also vary by age. A 40-year-old may have dependents and responsibilities they can’t cut back on, while a 20-year-old is perhaps more open to flexibility and living closer to the breadline.
There are also regional variations to consider. In western markets, Cubeisy noted, living on a lower salary is easier because public services tend to be far more prolific and effective. What this means is that while some level of sacrifice is important, it should go hand-in-hand with flexibility.
The situation is further complicated by the importance of the role that founders play within their business. “Founders are role models within their organizations,” Cubeisy explained. “It’s their sacrifice that allows startups to achieve.” In practice, this might mean that they take a lower salary than some other employees, especially if it’s necessary to hire individuals for specialist roles. A hierarchical model is often not the most appropriate one for a new business, and founders need to accept the limitations in their own salary for the good of the company.
Ultimately, Cubeisy said, founders need to ask themselves: “Am I investing in myself?” and keep in mind that they are planning for the future. This is a fundamental point for Cubeisy, who said founders should think about the value of “compensation not cash.” In other words, the value of the equity they hold in the business and the future potential they are working towards. If founders truly believe in the future of their startup, the equity they own and the value that they hope to instill in it as the company grows are worth more than a large cash-based salary in the present. It can be acceptable for there to be some level of hardship, to a degree, and part of being an entrepreneur is understanding the value of sacrifice, and having faith in their potential for growth.
In this complex arena, it seems the most important thing is ultimately a “culture fit” between a founder and their investors. Though the decision lies with the founder, as they set their budgets, and their board of directors who approves the budgets may guide them, it shouldn’t require a huge discussion. If there’s a disagreement on what is an appropriate salary for a founder to receive, it’s likely there are other deeper, unresolved issues at play in their relationship.