Ask an Investor: How much should I pay myself as founder?

Opinion by Sean Percival. He is an American investor and entrepreneur with investments in over 120 early-stage startups. Formerly a partner at 500 Startups, today he works with X2 Labs in Stavanger and here on Shifter gives candid answers to common founder questions.  

In the many great sagas of Silicon Valley founder stories, you hear a lot about teams starting with nothing and struggling to get through those tough first years. For example, at 500 Startups we had a founder living in an old van in our office parking lot instead of paying Bay Area rent. He also never wore shoes, but that’s a whole different story. In any case, he was focused on maximizing his investment capital and didn’t mind making a few sacrifices along the way. This is why the startup dream is different in America. There, you’ll put everything (and more) on the line to prove your idea and build your company.  

In Norway, I can’t say I’m seeing the same level of sacrifice in those crucial early days of a startup. One of those areas is founders’ salaries. You absolutely deserve and need to get paid, but that’s probably not due until you’ve reached a few milestones with your business. Those include launching your product, generating some revenue, and showing you can attract private capital.

Personally, I’ve learned to appreciate the Norwegian work-life balance. However, I’m sorry to say, that a founder doesn’t really get that during the first year. These are the tough days that prove your dedication and tenacity to push through and succeed. So that may mean roughing it a bit with your salary and general quality of life.

I asked four Norwegian founders at different startup stages what they are currently paying themselves. I was impressed to hear the answers and felt all were in the appropriate range given the stage of their businesses. They break down as the following and may serve as a helpful benchmark as your plan your own founder compensation:  

Company 1 – Early stage, in beta and pre-revenue:

The founder currently does not take a salary. Instead they support themselves by doing small consulting projects on the side.

Company 2 – Early stage, launched and with some revenue:

The founder pays themselves 240K NOK per year to cover basic needs like rent.

Company 3 – Mid-stage with substantial revenue:

The founder pays themselves 500K NOK.

Company 4 – Late-stage company with revenue:

The founder is paid 700K NOK annually, which seems high, although this company is later stage and has several rounds of private funding.

So, to answer simply, you should pay yourself as little as possible for as long as possible.

Here’s why:

Every krone spent on your salary is a krone not spent on getting to market

At the start, all that matters is getting out there and driving usage and/or sales. So any money you have should be focused here until things start to move. This may include salaries for engineers, but beyond that it should be put into marketing channels that validate and scale the business. Showing growth is the fastest path to securing new capital and ultimately getting you a salary that improves over time.

Money in your pocket doesn’t make you hungry

If you’re looking at your young startup’s financing and thinking about how long you can draw salary, you’re doing it wrong. Mainly because you’re not going to feel a sense of urgency if you know you have paychecks for the next 12 months. Instead you should be thinking about how that money can be best utilized within the business. That may also create a bit of pressure on you personally, but that’s a good thing. All the best early-stage founders I meet in California are on a short budget and massively over-leveraged financially. It puts a fire in your belly to make things happen much faster.

It may signal that you’re in it for the wrong reasons

If future investors see you’re drawing too much salary early on, that may be a bad signal. This is especially true as you seek capital in markets outside of the Nordics. In the end you should be in it because you want to make an impact and believe in the financial upside of the equity you own in the business. It’s understandable why equity is not as highly valued in Norway as other markets given a lack of liquidity events and current tax laws. However, encouraging founders to be more focused on equity compensation will be better for the Norwegian startup ecosystem in the long run.

But Sean, how will I survive?! How will I eat and pay for trips to hytta?

Well, if startups were easy then everyone would do them, right? The truth is that startups, especially in the early days, are incredibly difficult. They take a lot of big sacrifices to build, grow, and just survive. The founders who make the greatest sacrifices stand to gain the largest reward. So I’m sorry to say that if you’re a first-time founder and this is the first year of your startup, you’re not going be living very well.

When I invested in Timely I was super impressed by the founder Mathias Mikkelsen. Not only had he proven his business early by generating revenue, but he had gone as far as to sell his apartment to support the company. That shows commitment to your dream and the willingness to take a chance. So, as an investor, I knew the capital would be well spent, and I made my largest single investment in a Norwegian company of 2.1M NOK.

So before you plan that next trip to your cabin or take an Instagram showing your fancy trip and latest purchases, perhaps stop and take a moment to think. Am I really making the tough sacrifices needed for my startup? Perhaps go even further and ask yourself: does your family really need that second or third apartment? They might be sitting on your seed money right there. With that, and if you can live on cheap noodles for awhile, you just might have everything you need to survive.

 


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Hør også vår seneste podcast med Marius Aabel i No Isolation. Han sluttet i oljebransjen for å lage roboter som hjelper langtidssyke barn. forteller om det glade 80-tall, med programmering på papir og etterhvert på Commodore 64. I podcasten får vi høre om lærdommene fra tidligere prosjekter innen videostrømming og nettdating. Om hvorfor No Isolation har lyktes godt så langt – om strategien, jobbingen, rekrutteringen, de smarte avtalene, investorene og det gode arbeidsmiljøet. Han forteller også om selskapets nye satsing på eldre. Og hvis noen skulle lure på hvorfor han fortsatt er single eller hvor lenge han skal leve, får dere selvfølgelig vite det også.

Hør hele podcasten med Aabel på Shifter. Last ned podcasten i iTunes / Podcaster på iphonen eller bruk din foretrukne podcast-klient på Android. Søk på «Shifter».

One thought on “Ask an Investor: How much should I pay myself as founder?

  • 21. januar 2017 at 08:22
    Permalink

    God og interresant artikkel. Men jeg lurer litt på hvor representativ dette synet er blant investorer. Er det er «en amerikaner i Norge» perspektiv eller om det kan betegnes som et perspektiv fra en utenlandsk investor.
    Synes det er lite tilgjengelig informasjon om tankene til investorer i norske startups.

    Reply

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