When Elizabeth Sopher and Caroline Portis decided to commit full time to their Denver-based bedding business, QuickZip, they knew pay cuts were in order. As established professionals in their 50s--Sopher was an environmental scientist and Portis was a chief financial officer for a large company--they settled on salaries of $125,000 each.
But eight months later, when they joined the MergeLane accelerator for women-led businesses in February 2015, they realized their salaries were way too high. As MergeLane CEO Sue Heilbronner told the founders, "You should be paying yourself enough that you can get by, but not enough that you're not freaking out--it's this balance," recalls Portis.
Since then, the QuickZip founders have reduced their salaries not once but twice. They're now making a bit more than half of their original pay, as they focus on growing sales of their zip-off fitted sheets for cribs and beds. "It was a matter of readjusting," Portis says.
Figuring out how much to pay yourself--and when--can feel like a guessing game. But it's crucial to master it: Take too much and you risk slowing growth and alienating potential investors. Take too little and your self-inflicted poverty can become a distraction. "It's definitely an uncertainty for business owners," says Brad Farris, principal adviser at Anchor Advisors, a Chicago-based small-business consultancy. Here, experts and founders offer their tips for setting your salary as you grow your business.
Be conservative at first
Experts suggest setting a wage for yourself once your business has gained its initial footing, such as when you're generating ongoing sales. But keep it within limits. Jerry Hum says he and his three co-founders at Touch of Modern, a San Francisco-based men's shopping site, worked for free for almost a year. Once their company began ringing up consistent revenue, the founders started paying themselves $50,000 each per year. "At that point, we may not have figured out the business mechanics or fully understood how it might grow, but we knew we had a business within our grasp," Hum says. "We needed some money to start living our lives."
Build a routine
Once you're bringing in revenue, look back at what you've earned over the past three to six months and see if you consistently have enough left over to pay yourself something like $2,500 per month, Farris advises. That works out to about $15 per hour (for a traditional 40-hour workweek, which you'll probably still exceed). Set up a formal payroll system for yourself, taking out applicable taxes to avoid trouble with the IRS, which expects business owners to pay themselves a reasonable salary that can be taxed. This sort of setup has the added benefit of instilling a sense of discipline, which you'll need once you start taking on employees. "That's a pressure you're putting on your company of 'I need to be able to pay myself this much,' " says Farris. "When you start hiring people, they're going to want to get paid every month." You can then take out additional funds as dividends or distributions on a monthly or quarterly basis.
Benchmark your own raises
It's good business--and motivating--to give yourself a pay boost when your business hits key milestones. Hum says he and his co-founders have tied their raises to growth points over the past five years--when their company hit revenue or profitability targets, for example. "Just on a philosophical level, when we've given ourselves pay increases, it's usually when we've felt like we've gotten the company to a more stable place," he says. "After a long period of time, if you continuously achieve things for the company but then don't recognize anything for it, it's very hard to keep fighting that battle."
Study the market
As you continue to grow your business, learn more about what other leaders in your field are making. Ellen Rudnick, an adviser to startups and an adjunct professor at the University of Chicago's Booth School of Business, says she's seen companies give founders salaries of $90,000 to $200,000 after Series A funding, at least for startups with "high growth potential" in tech and e-commerce. Farris adds that once your business stabilizes after several years, you should be talking to your peers and assessing what the heads of small companies are earning. "If you're five or six years in and you're not making $100,000, you probably need to think about that," he says--although your total could include a mix of salary and less frequent payouts or bonuses.
Set your startup-salary expectations long before launch
Rightsize your timeline
When you're getting your company off the ground, you may be squeezing in time at night and on weekends, beyond your regular 9 to 5. But even after you've quit your day job, don't expect to be making anything off the bat. "If someone is bootstrapping, they are going into their cash savings, their retirement savings, their investment accounts," says David Ehrenberg, CEO of Early Growth Financial Services, a consultancy for startups.
Build a cash cushion
Relying on sweat equity alone won't keep the lights on. Ehrenberg recommends having at least six months of savings on hand before quitting full-time work. The University of Chicago's Ellen Rudnick suggests socking away closer to a year's worth of savings to cover a half-year of work with a firm buffer intact, in case the business flops. And check in regularly: At a certain point, "if you haven't made any progress with the business, you might need to go out and look for a job," she says.
Don't become a martyr
While building up your business from scratch may require some sacrifices, you can't work for free indefinitely. "Business owners who want to be successful sometimes say, 'Hey, we're making money, but I haven't paid myself in three years.' Then you're not making money," says Farris. "Paying yourself a fair wage is a way of measuring your progress and making sure the business is providing for you adequately."