How to Pay Yourself a Salary as a Startup Founder

As a Startup founder you may think to yourself: “The priority is the establishment and growth of their business”. However, when prioritising in this way, founders tend to direct as many funds into the business as possible instead of giving themselves that fancy millionaire founder salary.

At some point the human desire for luxury will kick in and you will want to reward yourself for your entrepreneurial feats. Let us walk you through some considerations to help guide you.

When should you pay yourself a salary as a founder?

Figuring out the right timing to start paying yourself a salary as a founder while you are constantly worried about the health of your company is a challenge. Paying yourself a monetary salary may mean that you sacrifice capital that would be used in growing your business, and that sacrifice might be too significant, especially if your business is still in its early stages.

Founders will usually pay themselves a salary once their company raises seed funding, and even then, they are likely to be conservative in the salary they give to themselves. Think of it this way, if investors inject capital into your business, it may be difficult to explain why that money is being used to pay the founders a seven-figure salary.

How much should you pay yourself?

The range of salaries paid to founders varies heavily based on factors including the amount of capital you have already raised, your business cash flow, and the potential to increase your Startup’s capital in the near future.

The Australian Startup Salary Guide by Think & Grow provides a good indication of what the salary standards for CEO founders of startups have been in recent times depending on the startup’ stage of funding.

At a cap raise of $0-$500k, the range of CEO founder salaries is $0 to $120k with an average of $76,792. The low end of this range shows that in some circumstances, paying yourself a minimal salary may be in the best interest of your startup with the mindset being that greater rewards will be reaped later.

Meanwhile, at a capital raise of $10m-A$50m, the range of CEO founder salaries is $120k to $338k with an average of $227,551. As these numbers show, the lights get brighter as the business grows and paying the founders more generous wages is a feasible endeavour. 

Of course, it must be said that even as a startup reaches new heights, many founders must consider whether the best move is to redirect as much capital to the continued efforts of growth for their startup as opposed to filling their pockets to buy a new mansion and a supercar.  

You may also want to keep an eye out for salary caps included in the deal when raising through a Venture Capital.

Are you a director of the company?

You may also be a director of your startup in which case you would be entitled to directors’ fees for your services as a director. However, these funds can be funneled back into the startup in the form of a Directors’ Loan which is where the startup borrows funds from its director.

As a director, you may also authorise a permitted deduction of your wages which would be retained by your startup, and hence allow for the startup to retain some much-needed funds.

Are you an employee of the company as well?

If you are a founder working for your startup as an employee as well, then you must receive at least the  minimum wage under your state's or country's laws. As this is a legislative requirement, you cannot contract out of this obligation. You can compensate yourself for your work and time through shares in the form of Sweat Equity, however, this approach is only useful when, as a founder/employee, you cannot afford to pay yourself a market-rate salary. It does not relieve you of the obligation to pay yourself the minimum wage. 

Sweat Equity is a non-monetary benefit given to a person in the form of shares as compensation or a reward for their time and labour contributed to the business. This is of course ideal for early stage startups that are yet to raise large amounts of capital or is being bootstrapped by founders.

So in summary, as a founder you may be entitled to payment based on your employment status as well as directorship. Balancing this with your business objectives and capital raising requirements is the challenging part.

Biztech Lawyers can help you grow

In need of legal support from a tech startup lawyer? Biztech Lawyers is a multi-award-winning law firm, known for fuelling and protecting tech innovation worldwide. Get in touch now to see how we can help.