Subscribe to Inc. magazine
WIRE

Most Startup Founders Pay Themselves This Totally Reasonable Salary

The question of how much startup founders should pay themselves has long been up for debate. Here's what the average founder earns.
Advertisement

How much do startup founders pay themselves? And how much should they pay themselves if they raise money from investors?

Career research company 80,000 Hours estimates that founders going through the Y Combinator accelerator program pay themselves about $50,000. If they go on to raise more money, that salary can double. If the startup flops, $50,000 could be the highest salary a founder makes.

"During the Y Combinator program, they use only a one-off seed investment from Y Combinator of US$120,000 to pay living and business expenses," 8,000 Hours' Ryan Carey writes. The investment is expected to cover everything, including a small salary for the founder. "If they go on to receive angel investment [they] can pay themselves about $50,000 per year. With venture capital funding, this tends to increase to about US$100,000 per year."

The most successful Y Combinator founders can make much, much more. Carey estimates that the founding teams of Dropbox and Airbnb are worth $6 billion combined, for example.

Carey's salary estimates for early-stage startups up with a Quora post on a similar topic. A founder who raised $500,000 used the Q&A site to ask, "Is a $100K salary too much for an angel/VC-backed startup co-founder?"

Foundry Group's Brad Feld thought a six-figure salary was too high for an early entrepreneur. Another person agreed, stating that while $100,000 is below what an engineer should make, it's "certainly above market for a seed-funded startup."  

"Salary should be sufficient to not create hardship -; no sense in losing productivity because you can barely eat," this person concluded.

The general consensus seemed to be that a $50-$75,000 salary was reasonable. "$50K/year is plenty. Some families live on that," says VC Sean Owen.

David Rose agrees. "In my experience, that fact pattern (a pair of founders, $500K seed round) would typically see them each taking $50-$75K, at least until they either start generating revenue, or raise a larger round."

When you're profitable, you can start paying yourself a more impressive salary.

"An adviser once told me to keep the total annual figure (including taxes) under $100k per year until you're profitable, and VCs have seemed to accept this," another says.

Here's the most voted up response by Michael Wolfe, a four-time entrepreneur:

Most people, especially high achievers, have spent their entire lives trying to please parents, teachers, and employers. This makes it very hard to make an abrupt switch from thinking like an employee to thinking like an owner.

You seem to have a sense of what it involves, and your co-founder may not. I'd recommend you slow down and think about the following:

  • You have a bigger issue here than worrying about a few investors - you may be founding a company with the wrong person. You have barely started, and you have an important disagreement on expectations. You sound a little annoyed already. What does "won't accept" mean? Accept from who? It is his company - does he not understand that he is negotiating with himself?
  • As you start to hire more people, you will not be able to ask them to accept below market salaries in exchange for equity (way less equity than you guys have) if you aren't setting an example. Having a founder at a market rate salary means that everyone else you hire will have one, too. This could cost you many hundreds of thousands of dollars over the next few years.
  • What salary will *you* take? Are you going to take a low salary because you want to set a good example? If so, you'll resent him since it isn't fair. Or will you ask him to take less equity? Now he resents you.
  • A "senior engineer/architect," especially one who is acting like an employee instead of an owner, probably isn't going to be the one who builds and runs a team. It is easy to justify $100K for an executive, but now you are going to have to go out and hire a $150K VP of Engineering to come manage your $100K a year (probably disgruntled) co-founder. If he wants to be the leader, he should act like one.
  • This issue has already put you into the "what do investors want to see?" mode, which is not where you want to spend your time. Don't look to investors to tell you what is right or wrong and settle arguments between you. Go to them with a united front and with a plan you are proud of and can defend.
  • It will make it harder to raise money. Not impossible, but harder. Not so much for the cash, but moreso because smart investors will, 1-see that he is not acting like an owner, and 2-sense the tension between you immediately.

I recommend you slow down and spend some time together and talk about your expectations on the company. Not just salary and equity but what kind of people you want to hire, how you want to make decisions, how long you will give it if it doesn't work out. It is OK to have disagreements on tactics, but not on culture.

If you walk away feeling good about working together but your co-founder is in a situation where, for personal and family reasons, he simply cannot take a pay cut, then you guys should agree on an uneven equity stake where he gets less than you.

His reaction to that may be, "why should I give up a chunk of the company that could be worth millions just for a few thousand dollars of cash this year?" Your answer to him should be:

"Yeah, now you're thinking like an owner."




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: