How Much Should You Pay Yourself as a Startup Owner?
Ever since the founder of Gravity Payments created buzz about how much he's paying himself and his team, there has been much discussion about whether a $70,000 annual salary is too much or too little for a startup founder to pay themselves. The answer isn't cut-and-dry. Here are few factors that come into play when calculating your business owner salary.
- Revenue and business model — Is your startup service-based or do you sell tangible products? How are you planning to turn a profit? How old is the company and what kind of funding options does it have? Your startup will likely have to produce income before you’re able to draw a salary.
- Level of experience — Is this startup your first foray in this industry, or have you been in this field for a while? A seasoned veteran may command more than someone with less experience. Your credentials, contacts, and level of experience are all important factors when determining your pay.
- Type of industry — Your career field, industry, and target market will have a lot to do with how much you should pay yourself. Tech-based startups may be able to afford to pay larger salaries than nonprofits.
Once you’ve taken each of these factors into account, you can move on to choosing a salary model to calculate the income amount:
1. Commission-based revenue
Starting out with commissioned-based revenue can be a smart solution for new startups and small businesses that aim to lay a solid financial foundation. With this model, the better the business performs, the more money you stand to make. Likewise, if the business is having a slow period, you won't get paid as much. This method gives your business the chance to stand on its own without a hefty salary becoming a financial burden. Additionally, it incentivizes you as the owner to make the business succeed so your salary can increase as the bottom line grows.
2. Experience-based salary
With this model, both your age and experience in the field affect your salary. The more knowledge and connections you have, the higher salary you may be able to command. Use your network to assess how much your peers are being compensated, and then look at your personal credentials. What value do you bring to the table that no one else has? Pay yourself for this added experience — provided the startup can afford it.
3. Market-based wage
What is the going rate for someone in your position? Do research online and consult sites like Payscale.com or Salary.com to determine the market-based wage for your position. Look at other startups in the same industry as well as founders who have similar qualifications as you. Factor in your experience, age of the business, assets, and the numbers from your benchmarking research to arrive at a reasonable starting salary amount.
When determining a salary for yourself as a business owner, it’s important to choose salary that fairly compensates you for your time and effort without hamstringing the company’s financial stability. Don't pay yourself so little that you end up suffering creatively and burning out. Conversely, don't overpay so much that your business can't afford to keep paying you. Use these tips to strike the perfect balance between fair compensation and what your startup can afford to pay.