For many entrepreneurs, the idea of how much you can pay yourself has an ironic note. It's often what is left over after you pay everyone else and invest in the business. Founder frugality is a survival characteristic.
But things can change when you have some money to work with. And when they do, you might find that relaxing the purse strings too much can have the unintended consequence of putting off investors, as a recent discussion on Quora brought to light.
Someone from a pre-revenue company that had finished an A round of financing and making a chemically-related physical product asked if it was acceptable for the CEO to draw a $350,000 salary. The reaction--and a number of resources people offered--was swift and crushing.
"No!" was the general sense. If you've been in business for any length of time, you might see why. A $350,000 salary is big and, as one poster noted, might be understandable if the CEO had particular special circumstances, like he or she had invested heavily in the company or had a spouse who was dying from something that could drain a normal income. You want the CEO to be able to focus as best as possible, and if the company is self-funded, well, it's their money.
But the impact on potential investors could be enormous. Here are some notes that Blake Masters, co-author with investor Peter Thiel of the book Zero to One, made of points that Thiel made in a crash course on VC funding:
A categorical rule of thumb that Founders Fund has developed is that no CEO should be paid more than $150k per year. Experience has shown that there is great predictive power in a venture-backed CEO's salary: the lower it is, the better the company tends to do. Empirically, if you could reduce all your diligence to one question, you should ask how much the CEO of a prospective portfolio company draws in salary. If the answer is more than $150k, do not invest.
Think of it from the investors' viewpoint. They are putting money into your venture so they can eventually (hopefully) see a return. The investors badly want you to succeed and also realize that cash is a critical resource. Put the money into heavy salaries and they will rightly assume that you might be less than diligent about conserving money in other areas.
Your startup is in a race to reach a goal of sustainability before money runs out. It's such a difficult undertaking that most businesses will either fail within a few years or flop about, never becoming much of anything.
Business metrics company Compass put together some survey results with interesting information about founder compensation. The firm said that 73 percent of startup founders make less than $50,000 per year and that until the company breaks $10,000 a month in revenue, which seems to be a fairly hard limit. Another one: Founder salaries typically stay under $100,000 a year until the company hits $1 million in monthly revenue. Another variation is that average founder salaries are $108,654 for companies with more than 100 employees.
If you're stuffing your pockets, investors expect that you will be picking theirs. Starting a business is a bet on the future, with the real payoff in equity and growth over time. Remember that when you think about how many zeros should be on your paycheck. If you don't get the investment you need to grow, your salary won't last long anyway.