How Much Should Startup Founders Pay Themselves? (2024)

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Posted by Shaun Gold | September 10, 2022

How Much Should Startup Founders Pay Themselves? (2)

Founder compensation is a tricky topic.

How much are you supposed to pay yourself? What will your investors think? And are you even allowed to compensate yourself when your team is subsisting on cold pizza and borrowing the Wi-Fi from the nearest office called “I hate my neighbors?”

In this article, we provide a breakdown of how a founder should reasonably compensate themselves based on a variety of factors.

Let’s begin.

Table of Contents

  • toc-name

Should startup founders pay themselves at all?

Understanding founder compensation

First things first, founders are owners and not employees.

When you work for someone else, whether it be a small business or a large corporation, your salary is based around the market value. A market value salary is defined as “the amount of money that an employee should be paid for their position, based on the current market conditions.” This amount is determined by looking at similar positions within the same industry and geographical location.

This doesn’t apply when you are the founder of your own company. You are essentially working for yourself. Unless you are generating revenues from the first day of business or you raised a seed round at the very start, you won’t be able to pay yourself anything. If you are fortunate to have a friends and family round, that funding should go directly into the business, not your personal bank account.

Suddenly being a founder doesn’t seem so cool. If there is no money, then how are you getting compensated?

Simple.

Your compensation is the equity you own and the dream of the big payout on the horizon (whether through an IPO or acquisition). You're not supposed to get rich on your annual salary, but on your equity once you exit.

Until then, you are using every available source of funding to fuel company growth.

Founder compensation VS Company resources

Salaries are the biggest cash burn for a startup.

This is precisely why founders should not and cannot compensate themselves at the early stages. The more salaries the founders take, the less available resources for growth.

And founders will need these resources.

Funds need to be available for marketing, growth, and of course, hiring and compensating talent to help the company reach the next funding round.

Because the days of equity only positions for top tier talent are over, if you want to bring the best people on board, you will need to compensate them rather than yourself.

Not with equity. Not with commissions.

But with salary.

How Much Should Startup Founders Pay Themselves? (3)

So where does that leave founders and their personal compensation?

Not all founders are created equally

You most likely need to have money to pay yourself in the first months (or even years) of operations. Simply put, you will need to have money in order to make money. You may also forget the advantage that privilege plays in the role of being a successful founder.

Why is this the case?

Because upbringing, education, environment, and resources play a major role in launching a startup.

  • Did you attend a top school and gain a first class education that provides an edge over those who didn’t? (Having Peter Thiel as your Stanford professor is far more valuable than simply reading Zero to One).
  • Are you able to quit your job and work solely on your startup? (It is difficult to be a CEO while working nine to five and then bartending as a side hustle at night).
  • Do you have personal connections with other successful people? (Being friends with someone who is intelligent and successful is far more important than following them on Instagram).
  • Are you able to use your own personal network for warm introductions to investors?
  • Do you have the ability to pay your basic living expenses to focus on your startup?
  • Are you able to secure a job if your startup fails?

A U.K. study showed that the most common shared trait across founders is access to money via personal connections, pedigree, inheritance, or family. A 2014 U.S. survey via Entrepreneur.com illustrated that 80% of startups were self-funded.

Andrew Yang wrote in detail about this in his article on the uncomfortable relationship between entrepreneurship and privilege.

“If you look at some of our most prominent entrepreneurs, they reflect this reality. Donald Trump inherited millions. Mark Zuckerberg famously dropped out of Harvard (he and I went to the same boarding school). Jeff Bezos went to Princeton and worked on Wall Street before founding Amazon. The truth is that it’s a lot easier to start a company if you have a few things going for you.”

This goes against the idea that "anyone can start a startup". By far and large, startups remain a costly game for those who can afford it. And if you can afford it, you should be able to weather the storm of no salary.

Therefore, it is normal and expected that founders don't pay themselves at the beginning. However, this shouldn't be a long-term thing. It's bad for you. And in some sense, it's also bad for the company because it's cheating. You're keeping the company on life support by not taking a salary.

Founder salary: $50k at pre-seed, $100k at seed, $150k at Series A

Ramen profitability

When thinking of founder pay, the first thing that comes to mind for seasoned founders is a ramen noodle salary. Essentially, this means that the company can grow because the founders are putting all of their resources into the venture. They pay themselves no salaries or at least the bare minimum, which in this case is enough to cover the costs of ramen noodles.

How Much Should Startup Founders Pay Themselves? (4)

Paul Graham goes further and calls this ramen profitability.

“Ramen profitability is the other extreme: a startup that becomes profitable after 2 months, even though its revenues are only $3000 a month, because the only employees are a couple 25 year old founders who can live on practically nothing. Revenues of $3000 a month do not mean the company has succeeded. But it does share something with the one that's profitable in the traditional way: they don't need to raise money to survive.”

There are advantages to companies that are ramen profitable.

  • Better terms when fundraising.
  • Disciplined enough to keep expenses low.
  • Good for morale.
  • Ability to focus on their product and services rather than fundraising.

Low salary or no salary is also symbolically important. It shows that the founders are committed to their startup and are risking it all. Rather than taking a salary, they are using the funds to keep growing and hitting milestones.

Entrepreneur and venture capitalist Peter Thiel once said that the best predictor of a startup’s success is low CEO pay.

“The lower the CEO salary, the more likely it is to succeed.”

He continued:

“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. It aligns his interest with the equity holders. But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks. In practice we have found that if you only ask one question, ask that.”

Now, you need to take this advice with a bit of distance. Old-fashioned angels may still have the idea that the founders should starve themselves and that their funding should be used to grow the company only. Modern angels understand that a starved founder cannot focus on the business if he cannot make rent. As a pre-seed founder, you shouldn't hesitate to have a healthy conversation around salary with your angel investors.

But what happens if you do need a salary? We can’t live on ramen forever and it’s an expensive world out there. Typically, once a seed round is raised, founders are then able to compensate themselves.

Show me the money!

Let’s say you hit your milestones, have great metrics, ate enough noodles to put the ramen capital of f*ckuoka to shame, and ultimately raised a seed round. Now you can afford to pay yourself a salary.

But how much? This depends.

A recent article from the New York Times states:

“According to an analysis from Carta, a company that collects and analyzes data on start-ups’ financials, the median salary for a chief executive at a start-up with a valuation between $1 million and $10 million is around $162,000.” (A spokeswoman for Carta noted that start-ups’ chief executives are often, but not always, founders.)

The same article also mentions a 2021 survey from Pilot, an accounting firm that focuses on start-ups. This survey demonstrated that founders of companies who had raised $1 million to $5 million paid themselves an average of $96,700.

Kruze Consulting created this more recent chart from May of 2022 which illustrates the relationship of startup CEO salary to the amount of funding raised.

How Much Should Startup Founders Pay Themselves? (5)

It should be noted that the founder salary can also be determined by investors and members of the board. After all, investors want their money to be used for growing and scaling the business, not paying for the founder’s weekend trip to Vegas. Although some may state that the founder should be compensated enough to cover their expenses while focusing their energies on the company.

This doesn’t mean that founders can go crazy with their own compensation as that would set off alarms. Seedcamp, a European seed-stage VC, collected data of the salaries of 185 founders from pre-seed to Series A companies.

How Much Should Startup Founders Pay Themselves? (6)

Reshma Sohoni, cofounder and partner of Seedcamp, says that the “safest” salaries she would expect to see as an investor would be in the following ranges:

  • Under €100k at pre-seed.
  • €100k or just over at seed.
  • North of €150k at Series A.

Anything above that would be a “red flag” (a big thank you to Sifted for this).

Adjusting for location, family situation, and more

As you can see, founder compensation isn’t very simple. Founders need to keep other factors in mind. This includes:

  • Company size
  • Company stage
  • Company location
  • Company sector
  • Funding and cash flow
  • Company culture
  • Founder background
  • Family situation

For a quick overview, Christoph Janz came up with a handy calculator based on stage, family situation and location to help founders determine their own salary. A few examples are below.

  • A Berlin-based founder with no kids that has raised a 2M seed should pay himself $50k per year
  • A San Francisco-based founder with two kids that has raised a 5M Series A should pay himself $171k per year.
  • A London-based founder with two kids that has raised a 15M Series B should pay himself $172,500 per year.
How Much Should Startup Founders Pay Themselves? (7)

For a deep dive by industry, Kruze Consulting created the helpful chart below. Why are founders better paid in some industries than others? Our assumption is that the CEOs of biotech companies, for example, are the highest because they tend to be medical doctors with higher education and opportunity costs associated with running a startup in that sector. It should also be noted that these founders are probably older and have a family with children.

How Much Should Startup Founders Pay Themselves? (8)

Now, if you want to go deep dive by founder's location, we highly recommend the 4 calculators created by Deel:

You will have to create an account to use them (ugh!) but they are 100% free to use and super insightful.

How Much Should Startup Founders Pay Themselves? (9)

The final secret of founder compensation

As a founder, you're not supposed to get rich on your annual salary.

You will make bank if and when your company exits, based on how much equity you still have at that point. Based on the data collected by Blossom Street Ventures, the median payday at IPO sits at $268M.

Of course, if you're still CEO at this point, your annual compensation (base + bonus + stock options) will be humongous as well.

However, there's one last "dirty secret" about founder compensation that needs to be mentioned: secondaries.

If your startup is doing well, it's not uncommon for founders to sell a small slice of their equity before an exit. This is what we call "secondaries" and is increasingly common post-Series A.

This liquidity event is effectively a micro-exit for the exit. With it comes the risk that the founder loses their incentive to perform. Many voices blamed WeWork's Adam Neumann when he cashed out big time in 2019.

How Much Should Startup Founders Pay Themselves? (10)

This remains an extreme case, however. In most situations, secondaries are a useful tool to alleviate financial stress from the founder, especially as IPOs now take 10+ years to happen.

In any case, there is no easy answer to the founder compensation question. It will depend on different circ*mstances and factors that are unique to you and your startup. Understand that being a founder is a job that requires you to always be on. It also requires you to have a certain amount of things going for you to be successful (and knowledge of how to play the game such as utilizing secondaries). You will be responsible for not only your company, but to your investors and employees. This is worthy of adequate compensation.

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How Much Should Startup Founders Pay Themselves? (2024)

FAQs

How Much Should Startup Founders Pay Themselves? ›

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.

How much should you pay yourself as a startup founder? ›

If the cohort earning zero is included, the average founder's salary was $121,000 per year, and the median was $115,000. At the top end was one outlier who'd scraped together $755,000, but 40% of founders said they paid themselves less than $100,000.

How should founders pay themselves? ›

Rather than paying themselves a salary, many small business owners pay themselves with an owner's draw. An owner's draw is when an owner withdraws cash from the business for their personal use. Entrepreneurs who pay themselves with an owner's draw can “pay” themselves (take money out of the business) as they see fit.

How much equity should a founder get in a startup? ›

The short answer to "how much equity should a founder keep" is founders should keep at least 50% equity in a startup for as long as possible, while investors get between 20 and 30%. There should also be a 10 to 20% portion set aside for employee stock options and, in some cases, about 5% left in a reserve pool.

What is the average startup CEO compensation? ›

Kruze's report looked at the anonymized payroll data of over 450 startups that have raised billions in venture capital. It found several surprising results. The first is that the average startup CEO salary actually decreased in 2024. The average salary is now $141,000, compared to $142,000 previously.

How much do non profit founders pay themselves? ›

The nonprofit founder sits on the board and is NOT paid for the time they put into the organization. Nonprofit board members need to be volunteers (getting paid can get you into some real legal trouble).

How much should you give a co founder? ›

Equity allocation to co-founding team members should reflect a reward for the value they're expected to contribute. If the expected contributions are fairly equal, then the initial equity should be allocated relatively equally (for example, 51% and 49%).

How much of a company does a founder own? ›

On day one, founders own 100%. If you have more than one founder, you can choose how you want to share ownership: 50/50, 60/40, 40/40/20 ,etc. It will depend on how many founders you have and their contribution to the success of your company.

Is 1% equity in a startup good? ›

Up to this point, generally speaking, with teams of less than 12 people, the average granted equity for startup employees is 1%. This number can be as high as 2% for the first hires, and in some circ*mstances, the first hire(s) can be considered founders and their equity share could be even greater.

How much should a startup founder CEO pay herself? ›

In the US tech startups that have raised money tend to pay their founder CEOs about $130,000 $150,000 per year (updated for 2022 data). My firm runs payroll, accounting, etc.

Is 0.5% equity in a startup good? ›

Entrepreneur and executive advisor Kris Kelso points out that, like so many things in the startup world, there are no strict guidelines for assigning startup equity compensation to advisors. However, he says 0.5 percent and 1 percent is a good range to consider, vested over one to two years.

What is a good CEO pay ratio? ›

Where the estimated pay ratio across all respondents was reported to be 10-to1, the same group of people reported an ideal pay ratio of 4.6-to-1. And there you have it. The ideal CEO-to-employee pay ratio is not even 5-to-1. That is nearly 50 times lower than the actual practiced pay ratio of 202-to-1.

What is a normal CEO pay ratio? ›

In 2022, the ratio between CEO compensation at S&P 500 firms and average U.S. worker pay stood at 272-to-1, according to AFL-CIO analysis. The CEOs in this group averaged $16.7 million, while average worker pay stood at $61,900.

What is typical CEO equity in startup? ›

When determining CEO equity, one important factor is founding status. Is the CEO also a founding member of the startup, or has this person been hired after the company gets off the ground? Startup financial advisor David Ehrenberg suggests that 5 to 10 percent is a fair equity stake for CEOs who join the company later.

Is pre money or post money better for founders? ›

Essentially, pre-money valuation indicates the worth of a startup before external funding. It sets the foundation for investment terms by anchoring negotiations. Founders aim for a higher pre-money valuation to minimize equity dilution.

How do founders get paid after acquisition? ›

Yes, when a startup is sold, the founders typically receive financial compensation. The specific amount and structure of payment can vary depending on the terms negotiated during the sale. Founders may receive a combination of cash, stock options, or earn-outs as part of the acquisition deal.

How do CEOs pay themselves? ›

CEOs often receive base salaries well over $1 million. In other words, the CEO is rewarded substantially when the company does well. However, the CEO is also rewarded when the company performs poorly. On their own, large base salaries offer little incentive for executives to work harder and make smart decisions.

How does a CEO pay himself? ›

CEOs of public companies don't 'pay themselves'. Their compensation is set by the Board of Directors, to whom they report. The CEO is an employee, and receives compensation set by the company, just like any other employee.

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