What is founder compensation?
Most entrepreneurs put the needs and finances of their company ahead of their own. Putting in the hours and all their cash into building a viable company that can stand on its own. But there comes a time when you have to think about a salary, and what compensation you as founder are entitled to. Let’s dive in.
In the early stages of your entrepreneurial journey, you’ll probably only receive a very modest salary, if any. After all – you are building your business! Instead, you and your partners may rely on equity compensation, which gives you a share of ownership in the company. This can be especially important for startups that may not have a lot of cash on hand to pay high salaries at the outset.
As the company grows and becomes more successful, founders can begin to receive higher salaries and bonuses, as well as benefits such as healthcare, retirement plans, and stock options. The specific compensation package that you decide on can vary depending on a number of factors such as the size of your company, the industry you operate in, and the experience and skills of the founders themselves. In reality, each entrepreneurial set-up is unique, and these factors need to be considered individually.
It is also important to plan your compensation package carefully when the time comes, as it can have a significant impact on the financial success of the company and the well-being of the founders themselves.
Here are a few pointers for founders who want to ensure they’re being paid a fair salary relative to their peers and the market conditions of their specific industry sector:
- Do your research: Research the market rates for executive compensation in your industry sector. Look for benchmarks such as compensation surveys or reports, industry associations, or job boards.
- Consider your company’s stage and funding: Take into account the stage and funding of your company. Early-stage startups may not be able to pay high salaries, while later-stage companies with more funding may be able to offer more competitive compensation packages.
- Consider your role and responsibilities: Examine the scope of your role and responsibilities within the company. Are you a technical founder or a CEO with a broad set of responsibilities? Your compensation should reflect the value you bring to the company.
- Talk to your investors: Your investors want to ensure that you’re being compensated fairly so that you can focus on growing the company. Discuss your compensation package with them and get their feedback and input.
- Be transparent: Be upfront with your team and stakeholders about your compensation. Being open about your salary can help build trust and show that you’re committed to the success of the company.
- Get professional help: Consider seeking the help of a compensation consultant or advisor who can help you determine a fair compensation package based on your industry, stage, and role.
Ultimately, the key is to find a compensation package that aligns with your company’s goals, your role and responsibilities, and the market conditions of your industry sector. Nobody wants to deprive their company of operational capital, but a salary that reflects the time and effort that went into building the company is only fair.
How much should a startup CEO pay themselves?
Determining how much a startup CEO should pay themselves is a complex question that depends on a variety of factors, including the stage of the company, industry, location, and the CEO’s experience and role in the company. However, it’s important for the CEO to establish a fair and reasonable compensation package that reflects their contributions and responsibilities.
One approach to determining CEO pay is to benchmark it against similar-sized companies in the same industry and location. This can provide a general idea of what is considered a reasonable salary range for the CEO position. Other factors to consider when setting CEO pay include the CEO’s experience and skill set, their performance and contribution to the company’s growth, and the financial health of the company.
Ultimately, there is no one-size-fits-all answer to how much a startup CEO should pay themselves. It’s important for the CEO to consider all of the relevant factors and consult with other members of the leadership team, the board of directors, and external advisors to arrive at a fair and reasonable compensation package that aligns with the company’s goals and values.
Legal implications
Keep in mind that there are legal implications for how much a company pays its founders, such as laws and regulations that govern issues such as minimum wage requirements, tax implications, and equity compensation. Failure to comply with these laws and regulations can result in legal and financial consequences for both the company and the founders, which is why you should consult with a reputable firm on this.
For example, in the United States, the Fair Labor Standards Act (FLSA) establishes minimum wage and overtime pay requirements for employees. Founders who are also employees of the company must be paid at least the minimum wage, plus overtime if they work more than 40 hours per week. Additionally, the Internal Revenue Service (IRS) has rules and regulations regarding how founders are paid and taxed on their compensation.
Equity compensation, which is a common form of compensation for founders, is also subject to legal regulations. Companies must comply with securities laws and regulations when issuing equity to founders and other employees, including filing, required disclosures with the Securities and Exchange Commission (SEC) and obtaining necessary approvals from the board of directors and shareholders.
OCFO
Making sacrifices and keeping profit in the company in order to grow is how most companies start out. But as they scale, things need to change. We help founders figure out how to make their companies work for them – so that it is not only they who work for their companies.
If you leave profit up to the equation of revenue minus expenses, it’s likely that expenses will almost always end up eating all the profit. Our CFOs love helping founders put processes in place to make sure that profit is planned, set aside and paid out frequently and in a predictable manner.
Next to seeing their vision realized, few things are as inspiring to a founder team as a consistent, growing stream of dividends that serve as the reward for the risks they have taken and the blood, sweat and tears they have poured in over the years. Along with this, we make sure that founder salaries are market-related and secured, and that the tax man is always planned for. Sound like music to your ears? We’d love to show you how!
