Key takeaways
- One of the stickiest questions for startup founders is when and how much they should pay themselves, especially as they’re trying to balance the business’s best interest and their own.
- Founder salaries depend on a number of factors, like funding level, location, company size, and the founder’s personal financial needs.
- In 2023, the average startup founder’s salary was around $148,000 per year.
As a startup founder, you have many complex decisions to make—the trickiest one may be how to determine your salary.
As the driving force behind your venture, you're constantly juggling the desire for growth,your personal needs, and ongoing living expenses you need to cover. Assigning yourself a salary at an early-stage when your business still isn’t making enough money is just as difficult as determining your founder pay at a later round of funding.
CEO salaries range from $0 to over $300,000, according to Kruze Consulting’s data, confirming that there’s no simple answer to this question. This guide will help you navigate the factors that can impact your decision and make the best choice for both yourself and your startup.
Setting a founder's salary: 5 most common methods
Balancing between maintaining enough capital for business operations and ensuring fair compensation for the founder’s work isn’t easy and may require various approaches. Here are the five most common methods of paying yourself as a startup founder.
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Salary
Paying yourself a salary means that you, as a founder, receive regular payments from the startup as compensation for your role in the company. This salary forms a part of your startup payrolland is subject to applicable tax and legal considerations.
You may consider assigning yourself a salary for the following reasons:
- Personal financial needs: Paying yourself a salary helps maintain personal financial stability and address needs like living expenses, student loan repayments, or savings goals
- Fair compensation: Founders invest significant time and expertise into their startups, and a salary ensures that you get fair compensation for your contributions and efforts
- Professionalism and credibility: Paying yourself a salary adds a level of professionalism to your role as a founder, demonstrating to employees, investors, partners, and customers, that you treat the business as a professional entity, which is especially important in early-stage startups
If you opt for a salary, you need to pay income taxes on the earnings just like any other employee. At the same time, your startup also pays its portion of payroll taxes (like FICA taxes in the US).
Dividends
Paying oneself in dividends as a startup founder refers to the practice of distributing profits from the business to the founder(s) in the form of dividends. Dividends are a form of distribution of profits to the owners or shareholders of a company. Unlike a salary, dividends are not structured as regular payments but are paid out periodically when the business generates profits.
Startup founders may consider the following benefits of receiving compensation in dividends:
- Tax efficiency: By paying yourself in dividends, you may benefit from potential tax advantages, reducing your overall tax liability, as dividends may be taxed at a lower rate than regular salary income in certain jurisdictions
- Timing flexibility: Dividends are typically paid out at the discretion of the company's management or board of directors. This flexibility allows founders to time the distributions based on the availability of profits and the cash flow needs of the business
- Aligning with profit generation: By paying yourself in dividends, you align your personal compensation with the success and financial performance of the startup, allowing you to adjust your income accordingly
It's important to note that this type of payout may not be suitable for all startups or in all jurisdictions due to different tax implications compared to regular salary income.
Also, the amount of dividends you can pay yourself depends on the available profits and the proportion of ownership you hold in the company. Before opting to pay yourself in dividends, assess the financial health of the startup and ensure that it has sufficient profits to distribute.
Equity
Paying yourself in equity means that as a startup founder, you’re receiving compensation through granting yourself ownership in the company. Equity can take the form of preferred stock, common stock, or stock options, depending on the company's structure and stage of development.
There are several benefits of paying yourself this way:
- Cash constraints: Paying yourself in equity allows the business to conserve cash and allocate it to other critical areas like product development or marketing, especially in early, pre-seed stages when startups face limited financial resources.
- Alignment of interests: Receiving equity ties the founder's financial interests directly to the success of the company, aligning their incentives with the long-term growth and profitability of the startup.
- Long-term compensation: Equity compensation can provide founders with significant financial rewards if the company achieves success, particularly during liquidity events such as an initial public offering (IPO) or acquisition.
As a founder, you’re granted a specific number of shares or stock options, which may be determined by different factors: the founder's contribution, experience, company valuation, and the overall capitalization structure of the company.
To ensure ongoing commitment and alignment, equity grants often come with a vesting schedule. This schedule specifies the time period over which the founder's ownership rights gradually "vest" or become fully theirs.
Common vesting periods range from three to four years, with a one-year cliff (a minimum period before any equity vests).
When your startup reaches a significant milestone like an IPO or acquisition, you may have an opportunity to sell equity and realize financial gains. The value of the equity depends on the terms of the deal and the company’s overall success.
Owner's draw
When a startup founder pays themselves through the owner's draw, it means they withdraw funds from the company's profits for their personal use. Owner's draw is commonly used in small businesses and startups that are structured as sole proprietorships, partnerships, or limited liability companies (LLCs).
Here are a few reasons why you might want to use this method of paying yourself.
- Flexible compensation: The owner's draw provides startup founders with flexibility in determining their compensation. Since startups often experience irregular cash flow and fluctuations in revenue, paying yourself through an owner's draw enables you to adjust the income based on the business's financial situation.
- Simplified accounting: For small businesses and startups, maintaining a separate payroll system can be complex and time-consuming. The owner's draw simplifies the compensation process, as it does not require formal payroll calculations or withholdings for income taxes, social security, or Medicare.
- Tax efficiency: In certain business structures, such as sole proprietorships and partnerships, owner's draw can offer potential tax advantages. Instead of being subject to payroll taxes, which include employer and employee portions, the owner's draw may be subject to individual income taxes only.
As the business owner, you need to establish if there are sufficient profits or retained earnings available for distribution by reviewing:
- Income statement
- Balance sheet
- Cash flow statement
to understand the business's financial position.
The withdrawal should be accurately recorded in the company's financial records as a reduction in owner's equity and an increase in drawings or distributions. This ensures transparency in the company's financial statements and facilitates tracking personal income separate from business income.
Paying yourself through owner's draw is generally more suitable for small businesses and startups with a limited number of owners. As the business grows and additional stakeholders, investors, or employees are involved, other forms of compensation, such as salaries or equity grants, typically become more common.
Reinvesting profits
Paying yourself by reinvesting profits means using the company's earnings to fund the growth and operations of the startup rather than taking personal compensation. The profits are retained within the company and reinvested into different operations, including:
- Research and development
- Marketing
- Hiring additional staff
- Expanding infrastructure
- Acquiring assets
There are many benefits of reinvesting profits into your business:
- Accelerated growth: By reinvesting profits, you allocate resources to fuel the growth of the company, increasing the investment in product development, marketing campaigns, or expanding into new markets, which can help the startup achieve faster growth.
- Building value: Reinvesting profits in strategic initiatives and scaling the business may allow founders to increase the company's overall worth, attract potential investors, and enhance future funding opportunities.
- Long-term sustainability: Preserving cash and using profits to meet operational needs, the startup can maintain stability and weather potential financial challenges or downturns, even when operating within a limited budget.
While reinvesting profits can contribute to the long-term success of a startup, it's important for founders to strike a balance between reinvestment and personal financial needs.
Reinvesting all profits may not be feasible or sustainable in all situations. If you opt for this payout method, you should identify areas within the business where reinvestment can drive growth and create value: analyze market trends, customer demands, and competitive landscape, as well as internal capabilities to determine the most strategic areas to allocate funds.
Regularly reviewing KPIs, financial metrics, and progress toward the growth objectives helps determine the effectiveness of the reinvestment strategy and make any necessary adjustments.
Understanding legal considerations and the financial health of your business
Before determining your salary as a startup founder, there are several factors to consider other than your personal financial needs.
- Industry benchmarks: What are the market rates and industry benchmarks for founder salaries within your specific sector?
- Business stage: Are you still in early stages where your funds are limited or is your business already generating significant revenue?
- Investor expectations: Have you already found investors to provide funding for your startup and do they have specific guidelines around the founder’s compensation?
- Market value and expertise: Do you have specific experience and skills that are critical for the success of your startup?
- Role in the company: Have you assumed the role of the startup CEO, CTO, COO, or another position?
- Long-term sustainability: Can you set a salary that covers your personal needs and still supports the long-term growth of your startup?
It’s also key to separate your personal and business finances for three main reasons:
- Liability protection: By maintaining separate accounts, you establish a legal distinction between yourself and your business entity and protect your personal assets from being at risk in case of business-related liabilities, debts, or legal issues.
- Financial clarity: Separate personal and business finances allow for better financial management and tracking. This helps maintain accurate records of business income, expenses, and profits, making it easier to analyze the financial health of your venture, also facilitating tax preparation, reporting, and compliance with legal obligations.
- Professionalism: Separating finances provides a sense of professionalism to the business, enhancing your credibility when dealing with partners, vendors, investors, and customers.
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The legal implications of setting up a founder’s salary depend on the laws of the country where the business is founded and the chosen business structure.
For example, as a sole proprietor, you and your business are considered the same legal entity. You have full control over the business and receive all profits but are personally liable for any business obligations, so you might be able to draw money directly from your business.
In other business structures, like partnerships, you share liability and profits with partners, while in LLCs, profits and losses can be passed through to the owners’ personal tax returns.
Different business structures also have varying compliance obligations, such as registration, licenses, permits, and annual filings. Corporations generally have more extensive compliance requirements than other structures.
How much should you pay yourself as a startup founder?
As mentioned above, many factors can affect your decision, from whether your startup is at the pre-Series A stage or already generating revenue, to whether you still have a day job and other streams of income.
The latest data shows that the global average salary of startup founders and cofounders or startup CEOs ranges from zero to $1M, with the median salary being $100k per year.
Source: Pilot.com
Founders backed by venture capital usually have a higher salary than startup founders who haven’t raised a seed round just yet, according to Pilot’s research.
Over 90% of founders with annual salaries between $100k and $200k run VC-funded startups. The data also varies based on geography, with the highest salaries being in the San Francisco Bay Area (Silicon Valley) and New York.
Startup founders increase their salaries after fundraising rounds, with around $130,000 for seed to around $250,000 for Series B founders, Kruze Consulting found. CTO salaries tend to be higher at early stages, and then CEO salaries take over at later funding stages.
Pay yourself and your entire global team with Deel
Unsure which method you should choose to pay yourself as a startup founder? Don’t have time or expertise to manage the complex tax regulations involved in the decision making process? Need to find a way to streamline payments for the rest of your team, too?
Deel’s here to help.
With our in-house team of payroll experts, you will:
- Unify direct employee, EOR employee, and contractor payments under one roof
- Use one-click payments to fund your whole payroll, ensuring timely and accurate payouts for your team
- Skip the worry about tax calculation or filing no matter where your workers are located
- Get important data insights thanks to Deel’s reporting feature so that you can optimize your payroll operations and scale your startup hassle-free
Book a 30-minute demo with our experts and learn all about Deel today.
Disclaimer: This post is provided for informational purposes and should not be considered legal and financial advice. Talk to a professional such as a financial advisor or accountant for more information about your specific case.
