Compensation For Startup Founders – How To Pay Yourself

Compensation for startup founders is the last thing they think about when bootstrapping. You’ll likely forego a salary initially and roll incoming cash flow back into the company to keep it running. Usually, entrepreneurs start taking a salary after the company attracts its first investor.

Although focusing on equity ownership is good, you’ll need to cover basic living expenses depending on your financial situation. So, how would you structure the compensation? Reports suggest that the median startup founder salary in 2024 was $142K.

This figure is much higher than the median founder salary in 2023, which was $121K, a 17% raise. At the same time, statistics also report that more founders prefer to forego a salary. The percentage has increased from 7% in 2023 to 9% in 2024.

Several factors, such as your location and industry, can influence your decision to take a salary. The company’s growth stage can also be a significant factor. For instance, your startup is at the pre-seed stage. In that case, you might draw around $40K to $75K.

But, if you’ve already raised your series A round, you’ll take a higher salary ranging from $125K to $175K. Ultimately, your decision boils down to ensuring the company’s consistent growth while also maintaining a personal lifestyle.

At least 82% of companies fail because of cash flow issues. Understandably, compensation for your time is likely not high on your list of priorities. The startup’s stability and success are more significant concerns. Let’s dive into the factors influencing your decision in detail.

Key Factors Impacting Compensation for Startup Founders

Company’s Growth Stage and Investor Perception

Founders typically don’t pay themselves while the company is still in its nascent stages–seed or pre-seed. In 2023, at least 7% of founders didn’t pay themselves at all. Most preferred to use their savings as living expenses.

However, you could start drawing a regular salary once the startup raises its first funding round. Keep in mind that investors are likely to scrutinize founder salaries when evaluating a company. They may hesitate to offer capital if the founder draws a monthly salary of $10K and above.

Investors see it as a red flag if the founder sets a salary comparable to industry standards or a regular job. It indicates that they want to minimize the risk factor and are unwilling to have skin in the game. But once the company is stable and generating revenues and profits, your salary isn’t under scrutiny.

Even so, investors would expect you to prioritize building a founding team and paying their salaries. Your location and the average cost of living can also influence median salaries. For instance, startups located within tech hubs may have higher wages.

Company’s Available Runway

The company’s available runway will influence the compensation for startup founders. You’ll factor in the current cash balance, burn rate, and company’s growth stage. As it gradually gains traction, builds a consistent cash flow cycle, and has cash reserves, you’ll increase your salary.

The company’s stability will influence the percentage of the market rate you should take for your role. Accordingly, if the runway is short, you’ll take a lower salary equivalent to the minimal living wage. Rely on your savings during this time.

However, say, the company has a moderate runway. In that case, you can draw a salary of around 50% to 70% of the market average that founders in your role draw. Once the company builds a long runway, you can take a salary closer to the full market average.

Here’s how you can calculate approximate salaries based on the company’s runway. Let’s assume the company has a cash balance of $300K with a burn rate of $40K per month. You’ll calculate the runway by dividing $300K by $40K to arrive at a burn rate of 7.5 months.

Accordingly, your salary should be significantly lower than the industry standard. You’ll work on stabilizing the company and increasing its runway before considering paying yourself.

Company Funding Amount Raised

The amount of funding the company has successfully raised influences the compensation structure for startup founders. If the company is entirely bootstrapped, you’ll divert your savings and personal finances toward building it. At this point, you’ll draw a salary only if the company earns revenues.

Then again, your objective is to get the company off the ground, so you’ll likely forego paying yourself. At the next pre-seed funding stage, you’ll source capital from friends and family raising around $40K to $60K. If the company has yet to start earning revenues or profits, you’ll restrict the salary you draw.

Let’s assume you raised the next seed $500K to $1M funding round. In that case, a yearly salary ranging from $50K to $75K would be acceptable. But if the funding is higher and goes up to $2M, the salaries would also increase to $75K to $100K.

Similarly, a successful funding round of $2M to $4M could translate into average salaries ranging from $90K to $120K. Founders who have raised the series A may draw salaries ranging from $150K to $250K. This figure goes up and is closer to market standards after subsequent rounds.

Once the company has reached the growth stage and raised a series B round, your salary structure complements executive compensation. You can expect a salary of $175K to $225K annually. Also expect to draw performance bonuses and other benefits to match your status.

Series C and series D funding rounds bring higher compensations for the founder. For instance, series C has $200K to $275K along with long-term incentive programs. And, series D+ rounds come with $250K to $350K in compensation for startup founders. Additional equity sweetens the pot.

But always keep a close watch on the runway before claiming compensation. Again, several other factors come into play here. Think–the industry where you work, the cost of living in your location, and more.

Number of Co-Founders

Having more than one founder has both advantages and downsides. You will be able to divert more personal funds to kickstart the company, which is a huge upside. However, when it comes to salaries, you’ll work out a fair system based on several variables.

The main factors are always funding, runway, revenues, and profits. You’ll also calculate the expected compensation for startup founders based on the capital each has contributed and the growth stage.

On average, a solo founder could earn higher individual salary of an average of $125K in the later stages. Two co-founders would share earnings and settle for an average of $95K for each. However, if the startup has three or more co-founders, salaries usually stay at an average of $75K.

Prevailing Industry Standards

Compensation structures depend to a great extent on the industry in which you work and prevalent macroeconomic conditions. For instance, if the industry is experiencing a downturn, you’ll cut back on the salary you draw. Your objective is to conserve cash and resources until the economy improves.

Also, understand that different industries have unique salary structures since the founders bring in exceptional talent and skills. These capabilities could translate into developing IP and IA, which are core assets for the company. In that case, you could command a higher founder compensation.

Let’s try a few examples. Developers of enterprise SaaS solutions could earn $95K at the seed stage. But fintech and deep tech founders could draw $90K and $86K, respectively. Startups in the healthcare sector could earn their founders around $80K during the seed stage.

If you explore the climate tech sector, you would find that founders at the pre-seed stage earn around $50K. Having raised the series A round, the company can bring in $150K+ for its founders annually.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

Working Out Non-Salary Compensation for Startup Founders

Compensation for founders is not just about monetary salaries. You’ll also include an ownership stake in the form of equity and performance-based incentives payable when the company achieves certain milestones. Some founders also choose to include profit-sharing packages down the line.

Understand that when founders start building the company and it starts earning revenues, they may start off with a salary. This compensation could just be enough to cover basic living expenses. Many founders may restrict the base salary they pay themselves to conserve resources.

Other objectives can be attracting investors or rolling revenues back into the company to hire a team or purchase inventory. As a result, you might settle for a base salary much below industry standards or below the compensation offered to people you hire for executive positions.

For instance, if you’ve built a deep tech startup, you’d earn $86K annually after the seed stage. However, if you hire a CTO, this executive would expect a salary of at least $250K. This is why equity and other incentives are crucial to compensate the founder. Here’s what you need to know.

Equity-Based Compensation Structure

Aside from the base salary, equity is an excellent channel ensuring founders build wealth and get rewards. Equity allocation depends on several factors, such as:

• Financial contribution and the amount of capital the founder commits to the company
• Time commitment or the man hours the founder contributes to building the company
• Talent, skills, industry expertise, and professional know-how the founder brings to the company
• Access to networks, contacts, and business connections that will bring in funding and propel the company forward
• Any other resources the founder contributes that are crucial for building the company
• The roles and responsibilities founders will take on. For instance, a founder building the core product will deliver more value to the company and may expect higher compensation.

When allocating equity as compensation for startup founders, you can choose to split it equally. Alternatively, the co-founders can agree to a weighted split depending on their contributions. You’ll draw up a legally binding agreement that clarifies exactly how the equity stake is divided and why.

Most founders may agree to a 20% to 30% ownership stake, subject to vesting schedules.  Accordingly, each co-founder receives equity at regular intervals throughout the vesting period. Equity allocation usually starts with a one-year cliff period and then a four-year vesting until fully exercised.

The agreement specifies the terms and conditions in detail. Companies retain the services of expert advisors to create the document and manage equity ownership. The agreement also includes information about exit strategies and whether the company will buy back the equity when a founder leaves.

Also, discuss the option pools you’ll offer employees and C-Suite executives as part of their salaries.

Deferring Compensation for Startup Founders

Startup founders tend to overlook salaries and compensation when the company is still small. Then again, you may face challenges like sluggish cash flows, delayed product development, or even market downturns. You may choose to defer taking a salary until the company is stable.

Accordingly, you’ll work out a deferred compensation structure, which you’ll record as future payable wages. For instance, a deferred 50% salary of $150K in the initial 12 months. This amount will appear in the P&L statement as a future expense payable when the company earns specific revenues.

This strategy conserves cash and saves it for the company’s operations. At the same time, the P&L reflects the earned wages outstanding in the company accounts. Founders also pre-determine the specific milestones after which they’ll claim compensation.

This performance-based incentive approach is structured around milestones. For instance, target revenues, manufacturing a specific number of units, or closing the series A funding round. These company growth-centric milestones trigger an event where the founder receives a bonus.

Other than bonuses and incentives, it can include a fixed percentage share of profits. These distributions can help complement a low base salary the founder accepted.

When viewing the pitch deck, investors will have questions about the founder, the salary they’ll draw, and the skills they bring to the table. Check out this video in which I have explained in detail what startup investors look for in founders before investing. You’re sure to find it intereting.

How Founders Can Pay Themselves

Calculating compensation for startup founders can be tricky and complex since every available dollar is crucial for building it. However, you can work out a payment structure to pay yourself once the company is stable and generating revenues.

You’ll create the ideal balance between achieving the company’s objectives and goals and getting compensation for your time and efforts. Factor in other variables like industry standards, competitor salary structure, and company performance.

You can also choose to defer payment to match the company’s growth milestones–in equity, incentives, or profit shares.

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