

Ask PG: When should founders start taking a salary? - prpon

There are companies in YC portfolio that have been around for a while and those that received external funding. 
When should founders start paying themselves a salary? 
Especially in these cases:
1) when the revenues are not substantial to cover everyones pay and there are always things to reinvest.
2) When VC or Angel money is invested in the company.<p>Thanks
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pg
Founders should pay themselves whatever optimizes the long-term outcome for
the company, since it is mainly through the company succeeding that they will
make money. You need a certain amount to live on to be able to work well. But
early on, when the company has no money, it is probably not a good idea to pay
yourselves more than that minimum. Later you can pay yourselves more. But
whatever you pay yourself, you're always doing it at the expense of the stock
you hold. This is obvious before the company is profitable, because the only
way to get money to pay salaries is by selling stock. But it is just as true
after a company is profitable too. Any dollar you take out is a dollar the
company can't spend on expansion.

I notice one person advocated paying oneself a salary from the beginning,
because it "forces you to work harder." In my experience, the kind of people
who make good founders are able to make themselves work hard without such
tricks.

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sachinag
I've found that "working harder" is more accurate than saying "working more
productively". It's been my experience that many people get very excited
about, say, rebuilding backends for incremental performance reasons (because
they're good at it) rather than doing sales or marketing work (which isn't
particularly fun). Of course, you can have the world's most perfect backend,
but if you don't have users, you're in a tree/forest situation. It's the same
80 hours a week either way - but it's a more productive 80 hours if the
founders are honest about what matters _at this moment_ and what doesn't.

People enjoy working on the stuff they're good at. A lot of times success
comes from working on the stuff that you're not good at. Rebuilding a backend
sure can "feel" productive, but it often isn't the right decision for that
moment. That's why I prefer to think of it as working "harder" - it's a useful
shorthand for "don't neglect the stuff that sucks to work on". A need for
revenue, based on a little higher cash burn, can often make the correct
resource allocation decision more obvious.

~~~
pg
It is definitely a problem when founders spend their time tweaking code
instead of making something people want. But this problem is almost entirely
unrelated to the question of how much salary founders should take.
Artificially shortening the startup's runway by paying unnecessarily large
amounts of its cash to the founders is a perversely roundabout solution.

~~~
sachinag
I think you've mischaracterized my argument. I've not said anything about
amount here - my position (farther down, I think) is that founders should pay
themselves merely the minimum salary required to qualify for group health
insurance. (Usually, it takes two employees, at least in most states.)

I'm pretty sure that we actually agree about this, generally; my point is that
having a sense of urgency that comes about from recognizing that the company
is unprofitable due to salary expenses has, in my limited experience, done
wonders to get people off of needless "optimizations" and onto making stuff
people want.

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sachinag
I think one of the biggest mistakes I made with Dawdle was not paying myself a
salary immediately. One, it forces you to work harder as your cash burn is
more realistic, and more importantly, salaries are prerequisite in Illinois
(and most states) to qualify for group insurance coverage.

Again, if you haven't heard me before on this, if you have individual
insurance, you're a sucker. You'll have your policy rescinded as soon as you
try to file a claim for any sort of long-term condition. (Broken bone? OK.
Need physical therapy? Good luck.)

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jwynia
I believe that founders should start taking a salary of some sort immediately.
However, I think that the salary can be deferred if the money isn't actually
there. However, not having it on the books at all is pretending that one of
the very real costs of the business isn't really there.

~~~
URSpider94
One good case for paying a fair salary to yourself as a founder is when all of
the founders are not participants in the day-to-day operation of the business.
If one of the founders is a "silent partner," for example someone who helped
hatch the original concept but only comes in a few days a month to help out,
then the operating partners can effectively increase their ownership share of
the company over time by paying themselves for their management work.

If cash flow is a problem, then all or part of the salary could be deferred.
In the event that the company becomes profitable, or is sold, then those IOU's
become payable before the shareholders get dividends or a payout.

This is perhaps not the most efficient path for the company as a whole, and if
all founders are working side-by-side, then it all comes out in the wash.

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michael_dorfman
I can only give you my own experience: I (and my co-founder) took a salary
from day one. We also lined up paying customers immediately, and broke even
our first year. I imagine there's a connection between the two facts.

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intranation
The founders of my company (not a YC startup) always paid themselves a salary.
You can't really expect someone to work hard whilst not even earning enough to
survive.

Also, the typical response to the above of "live off savings" is backwards,
because if it's your company and you believe in it, your savings are the first
round of investment.

~~~
idlewords
So rather than live off your savings, you invest your savings into a startup,
and then use the money to pay yourself a salary. Clever hack!

~~~
sjf
And now you get to give 20% of that money to the government!

~~~
jlangenauer
At least here in Austalia, I hear the done thing is to call your initial
investment a loan from you to the company - that way, the company can "repay"
the loan to you, and because it was your money to begin with, you don't have
to pay tax on it.

(Disclaimer: I'm not an accountant)

~~~
ryszard99
i can confirm this is actually the case. my GF and i have started up own own
company (plug: <http://www.boolos.com/> ; disclaimer: head hunting in energy).
our accountant has given us exactly that advice, and you dont pay tax on it.

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nuweborder
In these cases, founders should never start paying themselves. As a startup
entrepreneur, one must sacrifice for the financial health of their new
business. If the company is in well enough financial health, then it is ok for
founders to pay themselves a salary. But never if the company's revenues are
not enough to cover their pay. When you go into working on a startup, you
should understand that there are many times when it is in the best interests
of the new company, to reinvest revenues into the company. In the long-term
this will create a substantially greater payout for the founders later. The
reward does not always come quickly. But with patience and hard work, when it
does come, it will be much greater. Founders whom understand this, and are not
looking to get paid too quickly, are the ones that are truly invested in the
project for the long run, and want to see it through to being a success, as it
is their creation and their baby. Not getting a payout in the beginning, for
the purpose of improving the business for the later, will ultimately increase
the founder's work ethic and dedication to the company. I am a creative
thinker, and MBA, and have started a startup called www.bidrealm.net, and am
working on another. For both of these sites, it was never in my mind to begin
to receive a salary up front. I created bidrealm.net with no investors, and no
debt, and have never taken a salary because I want the business to be 10%
financially sound before that happens. The last thing that I want to do, is to
take a salary, have my business not meet its goals, or even loose money or go
out o business, and then after the fact I crunch the numbers and realize that
if I had not taken a salary, that money would have either saved the company,
or even continued to make it profitable and a success. What a terrible way to
go out.

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narendranag
We're a three-person, three month old startup and we started paying ourselves
as soon as we quit our day jobs. (It helped that we managed to get a client
for the base version of our product (a web based app) in the first month
itself.) At the moment, two of us have quit our jobs and the third is hanging
on to his while we code-code-code.

However, we do have salary bands -- bare survival money, doing well money and
bring it on money. Currently we're withdrawing survival money. We're hoping to
change that pretty quick by spending all our time coding and getting our
product out pronto :)

~~~
icey
Out of curiosity, is your ownership split evenly in to thirds? Or does guy #3
hold a smaller piece of the pie since he isn't taking as much risk on as the
other two?

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byoung2
I believe planning to a salary from the beginning forces you to think about
profitability from the beginning (or if not profitability, at least viability
of your revenue model). When I started my business, it was comforting knowing
that I could pay myself what I was making at my 9-5 while the business was
growing. Of course that limited me to business ideas that could generate
revenue from day one.

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pclark
we paid ourselves enough to pay rent from the day we got funding

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indiejade
Things to keep in mind: "Salary" is not the same as "wage" but is often
confused with it. Salary, if taken in a yearly context, is basically a year-
long loan out against all stakeholders in a company or organization.

Deliver more value than you take, and you're all good. The less you take, the
less you're expected to deliver. This is how itty-bitty companies manage to
get by. However, wage is more of a short-term thing and what companies usually
end up paying their first employees to do the crappy "dirty work". Wage work
sucks; it is usually hourly, and almost never results in anything productive
value-wise.

So minimize self-investment, maximize any external investors' interest (taken
only when needed), look out for the people below you and gradually up the
ante.

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yrashk
I wish I could pay myself from the first day — to avoid being distracted by
day job or contracts and to have some sort of realistic cash burn.

