How much should founders really pay themselves?

While everything is pretty straightforward with the salary of a programmer, marketer, or designer, a startup founder’s salary is somewhat more complicated.

Some early-stage startup founders don’t pay themselves at all. It may sound reasonable to extend the runway for the company, but not everyone can afford it. 

WeWork founder Adam Neumann should not be a role model, either. His example, on the contrary, demonstrates how the temptation to spend investor money on a luxury life can backfire.

But how does one know what salary to pay himself as a founder? I work at an investment fund and constantly talk to founders about it. Here’s what they think.

Minimum wage — a good start

At the early stage of a startup, the focus is on the product, its development, and marketing, so founders should invest everything in growth and talent.

At the same time, a founder should make enough money to live a normal life, to recover internal resources. It’s a myth that a founder should sleep on the floor and starve. But buying yourself a Tesla or making other expensive purchases on your salary is also questionable for investors.

Determine how much money you need to maintain an optimal lifestyle in your country of residence (without luxury restaurants, trips, or expensive clothes). For instance, Awesomic co-founders Roman Sevast and Stacy Pavlyshyna, working from Ukraine, used to make $450 a month each. They were gradually raising their salaries depending on their company’s results.

“We’ve always been lean with investments and revenues”, says Sevast. “After we tested our startup idea and reached $10,000 in monthly turnover, we raised our salary to $1,000, and after we went to Y Combinator and raised several million dollars, we got paid $2,000 each.”

“Some startup employees from other countries earn more than we do, and that’s totally fine for us,” Sevast adds.

In different countries, different salaries

However, the cost of living in Ukraine is much lower than, for example, in the U.S. or western Europe. That’s why there is no universal benchmark for a founder’s salary. Pilot research shows the average salary of a European founder is $70,000, while a U.S. founder makes $90,000–120,000 annually.

When living in Silicon Valley, after he raised his first round, AllRight founder Oleg Oksyuk set himself a salary of $8,000–12,000 a month (depending on the company’s performance). It was below the market and half of what he could make at Google.

“By default, a founder at a VC-backed startup must pay himself a salary that’s below the market average, aiming to make money on exit,” Oksyuk says. “But you can pay yourself above the market when a company starts to make a very good profit, and when there’s enough capital for further growth.”

Stage, size, and profit matter

As a startup’s income grows and it raises new investment rounds, founders usually pay themselves a higher salary. Seedcamp research shows founders’ salaries from pre-seed to seed increase by 28%; from Seed to Series A, they increase by 35%.

“After raising $580,000, our founders started paying themselves $1,000 monthly (it was half as much before this round). Sure, this is not market compensation, but as long as the company is unprofitable, it is illogical to pay yourself more,” says Max Lysak, Mate academy co-founder. “When the company started making more money, we set ourselves market salaries.”

Founder’s salary is determined by factors like the stage of the startup, its size, profit, and geography. But the fundamental rule that unites them is that in the early stages, the money should be constantly invested in the product and team development, as much as possible.

When founders just started up — and even at later stages — their salaries shouldn’t be a source of savings for them. Their source of wealth is the company’s shares. But it’s a bad idea to stay hungry and unhappy. So, calculate the optimal monthly salary and increase it proportionally to the company’s growth. In the end, the fortunes are made not from salary, but from ownership in a great company you built.