Strategies for CEOs who want to withdraw money from their start-up operations.
At first glance it may seem surprising to learn how little -- if anything -- entrepreneurs pay themselves during the start-up phases of their businesses. But James Blakey, a partner at the New York City law firm of Kronish, Lieb, Weiner & Hellman and a specialist in start-up issues, applauds the trend. "Anything an entrepreneur can do to delay taking cash out of the business will translate into lower cash pressures on the company and greater availability of capital to fund growth."
Blakey's thoughts on other commonly asked compensation questions:
* When should I start paying myself a salary? When your family's financial needs absolutely demand it and when you can justify drawing money from your company because current conditions are strong and you're meeting your projections.
* How much should I pay myself? While you're still in the start-up phase, salaries should be set at the lowest level that can meet founders' personal financial needs; once your company has reached profitability and is generating excess cash, monitor industry surveys.
* How should my pay adapt to tough times? During cash-flow squeezes, it may be smarter for owner-managers to reduce or defer their own salaries rather than borrow survival capital. But if you do defer, Blakey advises that you "document all sums the company owes you."
* Do venture capitalists really pay attention to an entrepreneur's salary history -- and if so, why? "If a venture capitalist looks at your company's financial records and concludes that you were a pig about drawing out cash, he'll conclude that, to some degree, you lacked long-term confidence and commitment," says Blakey.
* Are there any financial benefits for entrepreneurs that are simply too important to skip, regardless of growth stage? Absolutely, says Blakey: term life insurance and disability insurance. "People in start-up situations usually have invested all the funds they've got into their start-ups and used up all their credit," he notes. Term life and disability policies can provide relatively cheap protection against the risk of an entrepreneur's family being financially wiped out if something unexpectedly affects the entrepreneur's health and the future of the business.