What to Pay Yourself When You’re CEO of A Startup

There’s no real hard and fast rule for how to compensate yourself as the CEO of your own startup, but it’s safe to say you shouldn’t count on a six-figure salary, at least initially.

In fact nearly three-quarters of startup founders make less than $50,000 per year, according to a survey last year from benchmarking and analytics company Compass.

It’s important to keep in mind that whatever salary you choose, it sets the tone for the rest of the company and sends a message about financial discipline. Silicon Valley investor (and a cofounder of PayPal) Peter Thiel has said that no matter how promising a startup looks, if the CEO’s salary is inflated, the company is less likely to succeed. “The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money,” said Thiel.

With startups the goal is generally to have a great exit, where everyone does well financially. But in the meantime, CEOs and founders need to be smart about how they pay themselves, adjusting compensation to match their company’s growth. Ryan Holmes, the founder of Hootsuite, a social media management system, said when he started the company he paid himself nothing. Like many founders, Holmes bootstrapped his company using his own funds and the profits went back into the business. It may have meant some lean years, he wrote recently in the Wall Street Journal, but it also “helped instill a company-wide, cash-conscious culture.”

As startups grow and secure funding—especially million or multi-million dollar investments—it’s not uncommon for founders to want to reward themselves and their founding teams with bigger salaries or bonuses. That bump still needs to be in line with the capital demands of the growing business. There’s no one right way to determine the correct compensation for a founder or CEO, but here are a few smart approaches:

• Slow and steady. The Compass salary survey found that monthly revenue is the greatest predictor of a founder’s salary, but until a company is exceeding $10,000 per month in revenue, the average founder’s salary doesn’t exceed $50,000. When a startup reaches more than $1 million per month in revenue, then a founder’s salary breaks the $100,000 mark. During the earliest stages of your startup money is tight so compensation is either low or nonexistent. As your company progresses and revenue increases, you can increase compensation incrementally. Keep in mind that with that growth comes more hiring, and what you pay yourself will affect is seen as far and adequate by your employees
• Determine your living wage. One way to determine salary is to look at the amount you need to meet your basic living requirements. Depending on variables like whether or not you’re single, have children or own property, combined with your fixed costs like food, the mortgage and health insurance, you can determine your monthly living requirements. As a startup founder you should be prepared to pare down your life to the necessities for a while, ditching discretionary spending (no fine dining or ski vacations for a while…). Create a personal budget that lists your expenses and debts and use that to determine the minimum you need to keep afloat.
• Defer compensation. Some startups pick a market-rate salary for principals as if the company were profitable and then defer those salaries for a while, until there is funding or substantial revenue (or both). Those founders don’t immediately raise themselves up to that “official” salary—they go up incrementally, for example, first agreeing to take 25 percent of it and then, as funding and revenue grow, going to 50 percent, then 75 percent and so on. They key here is not to choose sky-high salaries, but a fair, market-rate salary that makes sense for you, your company and the industry and work up to it.
• Reevaluate. Every time you hit a milestone, whether that’s a revenue milestone, a product launch, or completion of a fundraising round, you’ll want to revisit your salary to make sure the company is using its resources wisely. And that may mean giving yourself–the CEO that has guided and grown the company—as well as other members of the founding team, the raise or bonus they deserve and that you can comfortably afford.