Founder Compensation #77

Jason Kirby
Jun 18, 2024

What's Below in Issue #77:

📰 - Founder compensation

📊 - Founders - don't raise a small seed round

🎙️ - Podcast #45 w/ Colby McKenzie, From Courtroom to Cannabis Tech

💵 - Premium startup resources

🆓 - Free startup resources

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How Much Could You Sell Your Company For?

If a private equity firm or strategic acquirer made an offer to you today, would you take it? Would you know if it's a fair deal? Are you in the position to close a deal?

Getting acquired could transform your life.

Founders don't realize that it usually takes 12-24 months to prepare a company for a successful exit, the sooner you have a plan in place, the greater the potential outcome. 

If you want to get acquired, we can help. Book a free discovery call with our team of experts to explore your options and discuss getting a plan in place that could change your life.

Book a Free Discovery Call

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Let’s Talk Founder Salaries!

Here’s how much I pay myself when starting my past companies:

I paid myself nothing when I started a company. My next milestone is a little more than minimum wage at $36K/year after I raise some money or have enough cash flow to pay my team and basic expenses first. I pay myself this until the company reaches sustainable growth or raises outside funding, where there’s plenty of money to hire talent, build tech, and invest in growth. From there, my next salary milestone is between $75k and $120k. And that’s where it stays until we’re profitable or raise a later-stage round and can pay myself bonuses or dividends.

Hampton (a founder community founded by Sam Parr) just completed a survey amongst its members that reviewed how much founders are paying themselves.

Fun Fact: According to this CEO/founder survey, it pays to bootstrapped, specifically, it pays the founder/CEO more, much more, 136% more. 

Such a juicy lead magnet, kudos to their team, if you want to download the full report, you can do so here.

But let’s dive into this topic of founder compensation. How much should you be paying yourself?

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Here’s a great reference point of where your salary should be once you’ve built a real company. By that I mean you’ve raised millions or generated millions in revenue. The founders who completed this survey have reached this point for the most part or did it with a previous company. These are not first-time founder salaries at the launch of the company, I just want to manage expectations here…you need the money in your bank account to pay you this much.

Early Days:

Until you’ve raised over $1M or are generating revenue over $250K and growing, you shouldn’t be paying yourself. If you do take a salary, it shouldn’t be much, I suggest around minimum wage salary of around $36K or up to $50k/year. I’ve done this for every startup I’ve started or operated at until we achieved those milestones. 

Now, everyone’s situation is different, but from my experience as an investor and operator, having worn both shoes, it concerns me when I am asked to invest in a startup and the founders are the majority of the burn for the company. If the capital being raised mostly goes to their salaries, it’s a giant 🚩

Either you’re not raising enough money to have a shot at success, or you’re paying yourself way too much too early. Either way, in the words of Mark Cuban, “I’m out!”

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The only exception I see is when it’s a deep tech company, where the team is really small, and it takes years for them to develop the tech. 

“But I have a family to support”

If you’re launching a startup and you haven’t generated real revenue yet, and you’re worried about your personal expenses and have to draw a larger salary than the business can support, maybe you shouldn’t have started the company?!?! Sorry, not sorry 🤷

I suggest taking a regular job, getting your bases covered, and working nights and weekends on your startup until you can generate traction and revenue to justify investors' money. Just be prepared to quit your job before you accept investor money.

Early Success:

So you’ve raised real money, $1M+ or you have growing revenue month-over-month? Ok, now it’s time to re-evaluate your salary. Talk to your cofounders/board about what’s sustainable to afford and what’s the opportunity cost. By paying yourselves more, that means you might not be able to hire someone else or splurge on some new tech. A founder’s livelihood matters too, but don’t get rich on salary. Founders make their real money in bonuses, equity, and dividends. Keep salaries reasonable.

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Cash Cow!

Generating millions of dollars in revenue profitably or have raised $10M+. Now it’s time to pay yourself a market salary, like those referenced above. Nothing about being a founder is easy, and you often take lower salaries than your employees for way longer than you’d like, but when you pull off a successful outcome, it’s time to treat yourself. 

Pay yourself a proper base of ~$150K to 250K per year and make sure to leave room for bonuses + benefits + dividends.

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What Not To Do:

After raising a sizeable round, a founding team I know well had jumped their salaries from $75k to $200K…there were 3 of them, and they were living comfortably at $75k/year. Why the huge hike? I have no idea, but it crippled the company. They were costing the company $800K/yr after all expenses were factored in. Also, their contributions were NOT equal. But founder disputes are a whole other topic TBA.

They couldn’t hire some key people, and when the company missed performance metrics after 2 years, they were nearly out of money and had to cut their salaries down to $50K, along with reducing employee comp and doing layoffs. Had they maintained their $75K or just taken $100K, they might not have been in such a dire situation and could have maintained their base. They tried to get rich off salary…don’t do this.

Let me tell you, it f***ing SUCKS to reduce salaries. It’s almost impossible to recover. You’re basically signing your death certificate. The company I referenced is operating at 1/10th the size it formerly was, and they’re still trying to figure out how to raise more money and survive…it doesn’t look good.

HOT TAKE:

In my opinion, every founder who’s venture-backed (at any stage) and is generating revenue should strive to pay themselves at least $100,000 as soon as the business can support it. This is a bit of an arbitrary number, but given the costs of living these days and the fact that the CEO/founder’s time is likely the most valuable to the company, they should be able to cover their basic living expenses and not be stressed about their personal finances.

If this newsletter was helpful give me a 👍below or just reply and let me know.

👍

-------------------------------------------------------------------------------------------------------------------------------------------------------------Data Corner

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From Seed to Series A: Why Raising More in the Seed Round Could Be Key to Reaching Series A

Founders, if you're aiming for Series A funding, raising a small seed round might not be the best strategy. Data from over 4,000 U.S. software startups, it’s clear that those securing smaller seed rounds (under $2M) are less likely to reach Series A within two years. The data from 2019 to early 2022 shows a consistent trend: larger seed rounds ($5M+) lead to higher "graduation rates."

Despite common advice to minimize fundraising, this suggests that for startups on the traditional VC path, sufficient initial capital is crucial. Interestingly, the benefits of raising larger rounds level off beyond a certain point.

-------------------------------------------------------------------------------------------------------------------------------------------------------------Discover Colby McKenzie's Entrepreneurial Journey & How He's Helping Founders w/ M&A Now in Episode 45

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We got another great story in this episode with Colby McKenzie having worn multiple hats as a successful corporate lawyer, co-founder of a cannabis tech startup that raised over $12 million, exited founder after orchestrating a strategic acquisition, and now an investor and founder of a boutique law firm dedicated to guiding entrepreneurs.

Colby talks about the grueling fundraising process, navigating the complexities of a strategic acquisition, and the importance of understanding key legal considerations throughout the entrepreneurial journey.

Check It Out

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Jason Kirby

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