There are two major schools of thought on this important question for entrepreneurs. Which is right?
Maybe you hope your startup will change the world, but even so chances are pretty good that’s not the only reason you started your business. Most likely you’d like to make some money out of all your hard work too. But your company is still small and growing, so how much should you take out of it to pay yourself?
It’s a tough question that just about every founder wrestles with. Your first impulse may be to turn to the experts. Problem is: they’re totally divided.
Team Market Rate
Let’s call the first camp of commentators on this issue Team Market Rate. Research is what you need, they say. Use what you’d be worth as the starting point and make adjustments based on your business’ stage and particular situation. Victor Green, author of How to Succeed in Business by Really Trying, is among them. He’s quoted here on Inc.com as saying: "If you're not making more than you would at a job, I think you're a fool because of the additional responsibility and risk."
Hahaha, responds the opposing team. Do you also believe in the tooth fairy? The Easter Bunny? Because this market-based approach is as much of a fantasy. Bob Dorf has laid out this approach succinctly: |Genuine entrepreneurs have a very simple formula... they get what's left in the bank."
Just to emphasize how wide the gap is, check out the answers members of the Young Entrepreneur Council gave to the question ‘My business is finally starting to bring in some solid revenue. How do I determine how much/often to pay myself versus reinvesting money back into the business?’ Answers range from ‘“invest in personal fuel” to, and I quote, “ramen noodles and nothing more!” With experts this far apart, it’s probably too optimistic to think that anyone can arrive at a single, simple answer.
The perfect number may come down to not only your goals for the business -- are you going to take over the world or just raise a fat cash cow to happily milk while you enjoy life? -- and your circumstances -- Are you sitting on a pile of VC cash? Do you have three kids in private school? -- but also your personal philosophy of entrepreneurship, attitude to ascetic living and level of anxiety about the future of your business. Or to put it more bluntly: no one can make this call for your business but you.
JESSICA STILLMAN is a freelance writer based in London with interests in unconventional career paths, generational differences, and the future of work. She has blogged for CBS MoneyWatch, GigaOM, and Brazen Careerist. @EntryLevelRebel