Article
10 min read
Author
Shannon Hodgen
Last Update
June 26, 2024
Table of Contents
Setting a founder's salary: 5 most common methods
Understanding legal considerations and the financial health of your business
How much should you pay yourself as a startup founder?
Pay yourself and your entire global team with Deel
As a startup founder, you have many complex decisions to make—the trickiest one may be how to determine your salary.
As the driving force behind your venture, you're constantly juggling the desire for growth,your personal needs, and ongoing living expenses you need to cover. Assigning yourself a salary at an early-stage when your business still isn’t making enough money is just as difficult as determining your founder pay at a later round of funding.
CEO salaries range from $0 to over $300,000, according to Kruze Consulting’s data, confirming that there’s no simple answer to this question. This guide will help you navigate the factors that can impact your decision and make the best choice for both yourself and your startup.
Balancing between maintaining enough capital for business operations and ensuring fair compensation for the founder’s work isn’t easy and may require various approaches. Here are the five most common methods of paying yourself as a startup founder.
Paying yourself a salary means that you, as a founder, receive regular payments from the startup as compensation for your role in the company. This salary forms a part of your startup payroll and is subject to applicable tax and legal considerations.
You may consider assigning yourself a salary for the following reasons:
If you opt for a salary, you need to pay income taxes on the earnings just like any other employee. At the same time, your startup also pays its portion of payroll taxes (like FICA taxes in the US).
Paying oneself in dividends as a startup founder refers to the practice of distributing profits from the business to the founder(s) in the form of dividends. Dividends are a form of distribution of profits to the owners or shareholders of a company. Unlike a salary, dividends are not structured as regular payments but are paid out periodically when the business generates profits.
Startup founders may consider the following benefits of receiving compensation in dividends:
It's important to note that this type of payout may not be suitable for all startups or in all jurisdictions due to different tax implications compared to regular salary income.
Also, the amount of dividends you can pay yourself depends on the available profits and the proportion of ownership you hold in the company. Before opting to pay yourself in dividends, assess the financial health of the startup and ensure that it has sufficient profits to distribute.
Paying yourself in equity means that as a startup founder, you’re receiving compensation through granting yourself ownership in the company. Equity can take the form of preferred stock, common stock, or stock options, depending on the company's structure and stage of development.
There are several benefits of paying yourself this way:
As a founder, you’re granted a specific number of shares or stock options, which may be determined by different factors: the founder's contribution, experience, company valuation, and the overall capitalization structure of the company.
To ensure ongoing commitment and alignment, equity grants often come with a vesting schedule. This schedule specifies the time period over which the founder's ownership rights gradually "vest" or become fully theirs.
Common vesting periods range from three to four years, with a one-year cliff (a minimum period before any equity vests).
When your startup reaches a significant milestone like an IPO or acquisition, you may have an opportunity to sell equity and realize financial gains. The value of the equity depends on the terms of the deal and the company’s overall success.
When a startup founder pays themselves through the owner's draw, it means they withdraw funds from the company's profits for their personal use. Owner's draw is commonly used in small businesses and startups that are structured as sole proprietorships, partnerships, or limited liability companies (LLCs).
Here are a few reasons why you might want to use this method of paying yourself.
As the business owner, you need to establish if there are sufficient profits or retained earnings available for distribution by reviewing:
to understand the business's financial position.
The withdrawal should be accurately recorded in the company's financial records as a reduction in owner's equity and an increase in drawings or distributions. This ensures transparency in the company's financial statements and facilitates tracking personal income separate from business income.
Paying yourself through owner's draw is generally more suitable for small businesses and startups with a limited number of owners. As the business grows and additional stakeholders, investors, or employees are involved, other forms of compensation, such as salaries or equity grants, typically become more common.
Paying yourself by reinvesting profits means using the company's earnings to fund the growth and operations of the startup rather than taking personal compensation. The profits are retained within the company and reinvested into different operations, including:
There are many benefits of reinvesting profits into your business:
While reinvesting profits can contribute to the long-term success of a startup, it's important for founders to strike a balance between reinvestment and personal financial needs.
Reinvesting all profits may not be feasible or sustainable in all situations. If you opt for this payout method, you should identify areas within the business where reinvestment can drive growth and create value: analyze market trends, customer demands, and competitive landscape, as well as internal capabilities to determine the most strategic areas to allocate funds.
Regularly reviewing KPIs, financial metrics, and progress toward the growth objectives helps determine the effectiveness of the reinvestment strategy and make any necessary adjustments.
Before determining your salary as a startup founder, there are several factors to consider other than your personal financial needs.
It’s also key to separate your personal and business finances for three main reasons:
The legal implications of setting up a founder’s salary depend on the laws of the country where the business is founded and the chosen business structure.
For example, as a sole proprietor, you and your business are considered the same legal entity. You have full control over the business and receive all profits but are personally liable for any business obligations, so you might be able to draw money directly from your business.
In other business structures, like partnerships, you share liability and profits with partners, while in LLCs, profits and losses can be passed through to the owners’ personal tax returns.
Different business structures also have varying compliance obligations, such as registration, licenses, permits, and annual filings. Corporations generally have more extensive compliance requirements than other structures.
As mentioned above, many factors can affect your decision, from whether your startup is at the pre-Series A stage or already generating revenue, to whether you still have a day job and other streams of income.
The latest data shows that the global average salary of startup founders and cofounders or startup CEOs ranges from zero to $1M, with the median salary being $100k per year.
Source: Pilot.com
Founders backed by venture capital usually have a higher salary than startup founders who haven’t raised a seed round just yet, according to Pilot’s research.
Over 90% of founders with annual salaries between $100k and $200k run VC-funded startups. The data also varies based on geography, with the highest salaries being in the San Francisco Bay Area (Silicon Valley) and New York.
Startup founders increase their salaries after fundraising rounds, with around $130,000 for seed to around $250,000 for Series B founders, Kruze Consulting found. CTO salaries tend to be higher at early stages, and then CEO salaries take over at later funding stages.
Unsure which method you should choose to pay yourself as a startup founder? Don’t have time or expertise to manage the complex tax regulations involved in the decision making process? Need to find a way to streamline payments for the rest of your team, too?
Deel’s here to help.
With our in-house team of payroll experts, you will:
Book a 30-minute demo with our experts and learn all about Deel today.
Disclaimer: This post is provided for informational purposes and should not be considered legal and financial advice. Talk to a professional such as a financial advisor or accountant for more information about your specific case.
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