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Ask PG: When should founders start taking a salary?

46 points by prpon ↗ HN
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.

Thanks

28 comments

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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.
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.

pclark
we paid ourselves enough to pay rent from the day we got funding
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 You'll have your policy rescinded as soon as you try to file a claim for any sort of long-term condition.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.)

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.
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.
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.
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?
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.

rokhayakebe
I'll second that. Founders should pay themselves slightly above the minimum they need to get by. Piece of mind translates into the quality of your work (be it coding, selling or marketing). There are probably a few things that can negatively affect a company more than a founder who can't stop thinking about how he will make his rent/credit card payment.
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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.

wheels
I think for me a higher burn rate isn't motivating; it's operating without a safety net and worrying about seeing your baby hit the ground. The money that I've invested in my own company isn't what I'm worried about losing -- it's the > 1 year of my life that I've put into it. Ultimately, my life, to me, is a much higher value currency than the US dollar.
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patio11
It's the same 80 hours a week either way

I do insane workweeks because I'm a Japanese salaryman and people would talk if I didn't. What the heck is your excuse. ;)

Seriously, every time I hear stories about it, I get the feeling people are trying to be Real Manly Men doing their Rough Startup Labor (say them in the Monster Truck voice), finding things to spend 80 hours a week on. Which, since you can't sustain productivity for 80 hours a week, ends up getting frittered away on negative productivity (introducing more bugs than you fix) or just spinning your wheels doing things that don't matter (backend).

(The "you" here is a collective "you".) You may think you personally sustain productivity for 80 hours a week. I think you are too much a Real Manly Man to have ever collected data to substantiate that. How did I do? (We track it at work, which is finally starting to impact the culture here. And we have a bunch of Real Manly Men looking at the chart showing the brick freaking wall in the units-of-engineering-labor created versus time graph and saying "Well, sure, it might LOOK like we're not being productive... but that is just because some people need to man up and work harder.")

sachinag
This is why we use the phrase "all y'all" to mean the second person plural. It's actually really useful. :)

I used to work in banking and VC. 80 hours was easy. More work in banking, more travel (which sucks just as much) in VC. I don't get gaming developers complaining about crunch, but I'm always thankful on Labor Day that labor gave us the five-day, 40 hour workweek as a standard for when (if?) I get married and have a family.

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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.

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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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.