How Should Founders Pay Themselves?

Founder compensation isn't one-size-fits-all, and the "bootstrap until you break" mentality isn't always the best strategy. Recent data reveals that the median startup founder's salary in 2023 was $145,000, which fell to $143,000 in 2024. 

But this figure only tells part of the story. 

The actual compensation varies dramatically based on funding stage, location, and industry. In pre-seed startups, founders often take minimal salaries ranging from $40,000 to $75,000, while post-Series A founders typically earn between $125,000 and $175,000.

Perhaps the most challenging aspect isn't just determining a number—it's striking the right balance between personal financial stability and company growth. 

According to a CB Insights report, this balancing act becomes even more critical when you consider that 82% of startup failures are attributed to cash flow problems. 

To help founders navigate this complex decision, let's explore the various compensation methods available and their implications.

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Understanding Founder Compensation Methods

When it comes to paying themselves, founders have several options beyond the traditional salary model. Modern startups increasingly adopt hybrid approaches, combining multiple payment methods to optimize cash flow and long-term value creation. Let's break down each method and understand its practical applications.

1. Traditional Salary vs. Alternative Compensation

The conversation around founder compensation has evolved significantly in recent years. While a regular salary remains important, successful founders often craft compensation packages that align with their company's stage and goals.

i) Base Salary Structure

A fixed base salary provides a stable income and helps founders meet basic living expenses. However, base salaries typically fall below market rates for equivalent executive positions. 

For example, while a CTO at an established tech company might earn $250,000+ annually, a technical founder might start at $60,000-80,000 in the early stages. This gap reflects the investment founders make in their ventures.

ii) Equity-Based Compensation

Beyond the base salary, equity remains the primary wealth-creation vehicle for founders. Most founders start with 20-30% equity stakes, which varies based on co-founder arrangements and early investment terms. 

The key to equity compensation lies in vesting schedules—typically four years with a one-year cliff—which protects both the founder and the company's long-term interests.

iii) Deferred Compensation

As companies navigate early-stage cash constraints, some founders take a strategic approach by accruing salary during lean periods. This deferred compensation gets documented as future payable wages. 

For instance, a founder might defer 50% of a $120,000 salary during the first year, planning to collect it once the company reaches specific revenue milestones. This approach helps preserve cash while maintaining a clear record of earned wages.

iv) Performance-Based Bonuses

Many startups implement milestone-based bonuses to align founder incentives with company success. Upon reaching revenue targets, closing funding rounds, or achieving product launches, these might trigger. 

Let’s take the example of a B2B SaaS startup in which the founder receives a $25,000 bonus upon reaching $1M in annual recurring revenue—this directly ties compensation to company growth.

v) Profit Distributions

Profit distributions can supplement lower base salaries for profitable startups, especially those not seeking venture capital. Some founders establish quarterly distribution schedules based on predefined formulas, such as allocating 20% of profits above operating expenses and reserves. 

This method works particularly well for bootstrapped companies with steady revenue streams.

2. Tax and Legal Implications of Different Payment Methods

The choice of compensation method carries significant tax and legal implications that founders must carefully consider:-

i) Tax Considerations

Each payment method triggers different tax obligations and opportunities. For instance, while salary payments incur immediate payroll taxes, equity compensation may qualify for favorable tax treatment under Section 83(b). 

Additionally, deferred compensation must comply with Section 409A regulations to avoid harsh tax penalties.

ii) Legal Requirements

Proper documentation and compliance are essential for all compensation arrangements. This includes:

• Ensuring compliance with minimum wage laws, which apply even to founder-employees
• Meeting securities regulations for equity agreements
• Obtaining necessary board approvals for significant compensation changes
• Maintaining written agreements for all compensation arrangements

The following table summarizes the key considerations for each compensation method:

When implementing these various compensation methods, working with qualified legal and tax professionals is crucial. Their expertise ensures that your compensation structure supports both personal financial health and company growth and meets all regulatory requirements.

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What Are Some Factors Influencing Founder Compensation?

While every startup's situation is unique, certain key elements consistently influence how much founders should pay themselves. Let's examine these factors in detail:-

1. Internal Factors

The internal dynamics of your startup play a crucial role in determining appropriate compensation levels. These factors directly impact your company's ability to sustain founder salaries while maintaining healthy growth.

i) Company Stage and Runway

Your startup's current stage and available runway significantly influence compensation decisions. For instance, Aileen Lee, founder of Cowboy Ventures, notes that companies with less than 12 months of runway typically need to consider reducing founder salaries to extend their financial cushion. 

Here's a general framework to follow:

• Pre-revenue: Minimize salaries to essential living expenses
• Early revenue: Scale salaries with monthly recurring revenue (MRR)
• Post Series A: Begin transitioning toward market-rate compensation

A practical example comes from Pipe's co-founder Harry Hurst, who shared that their founding team took minimal salaries for the first 18 months, increasing them gradually as the company hit specific revenue milestones.

ii) Available Funding

The amount and source of funding directly impact founder compensation:

• Bootstrapped: Typically tied directly to revenue and profits
• Angel/Seed funded: Often $40,000-$75,000 annually
• Series A and Beyond: Gradually approaching market rates

iii) Number of Co-founders

The founding team's size affects individual compensation. Consider this breakdown from a recent First Round Capital survey:

• Solo founders: Often take higher individual salaries (median $125,000)
• Two co-founders: Usually similar salaries (median $95,000 each)
• Three or more: Generally lower individual salaries (median $75,000 each)

iv) Role and Responsibilities

Compensation often varies based on each founder's specific role and expertise:

• Technical founders: May command higher salaries due to market demand
• Business/Operations founders: Often tied more closely to company performance
• Product founders: Frequently align with industry standards for product leaders

v) Company Revenue and Profitability

Current financial performance sets practical limits on founder compensation:

• Pre-revenue startups: Focus on conservation
• Revenue-generating: Can implement profit-sharing models
• Profitable companies: More flexibility in compensation structure

2. External Factors

External market conditions and industry standards are vital in determining appropriate founder compensation. These factors help benchmark your decisions against broader market realities.

i) Market Conditions

The current funding environment and market dynamics influence salary decisions. If the market health forecasts a downturn, you can always take a lesser salary to compensate for the future. 

ii) Industry Standards

Different sectors have varying compensation norms:

iii) Geographic Location

Location significantly impacts salary requirements and expectations:

iii) Cost of Living

Local expenses directly affect minimum viable salaries. A founder in San Francisco might need $120,000 to maintain the same lifestyle that $70,000 would support in Austin. Key considerations include:

• Housing costs
• Healthcare expenses
• Transportation
• Family obligations

iv) Competitor Compensation Practices

Understanding how similar companies compensate their founders helps in setting competitive rates. Recent trends show:

• Early-stage competitors often share salary data through founder networks
• Industry-specific compensation databases provide benchmarks
• Investor networks can offer compensation guidance

To help founders make informed decisions about their compensation, consider this decision framework:

1. Assess company runway and burn rate
2. Calculate minimum personal financial needs
3. Research industry and regional benchmarks
4. Consider the impact on future funding rounds
5. Plan for regular compensation reviews

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Founder Salary Guidelines by Funding Stage

Moving from understanding compensation factors to practical implementation, let's explore specific salary guidelines for each funding stage. These recommendations are based on recent market data and insights from successful founders and investors.

1. Pre-seed and Bootstrapped Stage

The earliest stage of company building often requires the most significant financial sacrifice, but there are strategic ways to approach founder compensation during this period.

i) Typical Salary Ranges

Recent data from Y Combinator and AngelList shows the following ranges for pre-seed stage founders:

• Bootstrapped: $0-50,000
• Friends & Family funded: $40,000-60,000
• Pre-seed institutional funding: $50,000-75,000

Jason Fried, founder of Basecamp, advocates for the "pay-yourself-first" approach even at the earliest stages. His recommendation? "Take enough salary to remove financial stress but not so much that you lose hunger." This typically translates to covering basic living expenses plus a small buffer.

ii) Survival Strategies

During the bootstrap phase, successful founders often employ these approaches:

1. Part-time consulting work (limited to 10-15 hours/week)
2. Gradual salary increases tied to revenue milestones
3. Minimum viable salary with equity-based compensation
4. Cost-sharing arrangements with co-founders

iii) Resource Allocation Considerations

At this stage, carefully balance salary against other critical needs:

2. Seed to Series A

The seed stage represents a critical transition period where founder compensation begins to normalize while still maintaining startup frugality.

i) Market-Rate Considerations

Typically, founder salaries during certain funding stages are given below:

(*These valuations are based on market value assumptions and do not represent the actual value.)

ii) Investor Expectations

Most investors expect founder salaries to follow these general guidelines:

• Post-seed: 50-65% of market rate for the role
• Pre-Series A: 65-75% of market rate
• Post-Series A: 75-90% of market rate

iii) Scaling Compensation with Funding

As you raise more capital, implement a structured approach to salary increases:

1. Initial bump post-funding (typically 20-30% increase)
2. Quarterly reviews tied to company metrics
3. Gradual increases aligned with:some text
   • Revenue growth
   • Team size
   • Burn rate management
   • Market conditions

3. Growth Stage and Beyond

At this stage, founder compensation should begin approaching market rates while maintaining alignment with company success.

i) Transitioning to Market-Rate Salaries

By Series B and beyond, founder salaries typically evolve to match executive compensation:

ii) Performance-Based Adjustments

Implement structured compensation increases based on the following:

• Company valuation milestones
• Revenue targets
• Market expansion goals
• Profitability metrics

Paul Graham, a co-founder of Y Combinator, suggests that by this stage, founder salaries should be "normal but not luxurious," typically matching what you'd pay to hire someone to replace you.

iii) Long-term Compensation Planning

Consider these elements for a sustainable compensation structure:

1. Regular market benchmarking
2. Clear performance metrics
3. Equity refresh programs
4. Succession planning considerations

To help founders implement these guidelines, here's a practical framework for salary progression:

Initial Salary = Base Living Expenses + Location Adjustment + Role Premium
Salary Growth = Initial Salary * (1 + Growth Factor)
Where Growth Factor = min(Revenue Growth %, Funding Milestone %, Market Rate Adjustment %)

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Best Practices for Setting Founder Compensation

Determining founder compensation isn't a one-time decision but an ongoing process that requires careful consideration and regular review. 

Let's explore proven strategies for creating and maintaining an effective compensation structure.

1. Balance Personal Needs with Business Requirements

Start by creating a detailed personal budget that accounts for:

1. Essential Living Expensessome text
   1. Housing and utilities
   2. Healthcare costs
   3. Debt obligations
   4. Family responsibilities
2. Business Considerationssome text
   1. Monthly burn rate
   2. Runway calculations
   3. Growth projections
   4. Industry benchmarks

2. Plan for Growth and Scaling

Implement these strategies for sustainable salary progression:

1. Create clear salary milestones tied to:some text
   1. Revenue targets
   2. Funding rounds
   3. Product launches
   4. Market expansion
2. Document your compensation philosophy:some text
   1. Principles for salary increases
   2. Equity vesting schedules
   3. Performance metrics
   4. Review periods

3. Build a compensation review framework

Follow this quarterly review checklist to consider your salary:

• Company runway status
• Revenue growth rate
• Market conditions
• Personal financial needs
• Team size and structure
• Investor feedback

4. Regular Compensation Reviews

Schedule structured reviews that consider:

• Company performance metrics
• Market salary data
• Personal financial goals
• Stakeholder feedback
• Industry trends

5. Work with Investors and Board Members

Building consensus around founder compensation requires transparency and strategic communication with stakeholders. 

Follow these best practices when discussing salary with investors:

1. Prepare comprehensive datasome text
   1. Market salary research
   2. Company financial projections
   3. Personal budget overview
   4. Compensation benchmarks
2. Present multiple scenariossome text
   1. Conservative growth plan
   2. Moderate growth plan
   3. Aggressive growth plan
3. Be transparent aboutsome text
   1. Current financial situation
   2. Family obligations
   3. Long-term career goals
   4. Alternative income sources

6. Document it and promote transparency

Maintain detailed records of all compensation-related decisions:

7. Building Consensus on Compensation Decisions

Follow this process for major compensation changes:

1. Gather relevant data
2. Present proposal to the board
3. Address concerns proactively
4. Document final decisions
5. Communicate changes clearly

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Frequently Asked Questions

1. What's the average salary for a startup founder?

Founder salaries typically evolve to match executive compensation:

However, these figures should be adjusted based on location, industry, and funding amount. For example, enterprise SaaS founders typically command 15-20% higher salaries than consumer startup founders at similar stages.

2. Should founders take a salary during the pre-seed stage?

Yes, most successful founders and investors recommend a minimal salary covering basic living expenses. Brad Feld, managing director at Foundry Group, advocates for the "sustainable founder" approach: "A founder who's worried about making rent can't focus fully on building the company" in his book The Startup Community Way. 

Consider these factors when determining your pre-seed salary:

• Minimum living expenses
• Available runway
• Revenue potential
• Personal savings
• Family obligations

3. How do investors view founder salaries?

Investors typically expect founder salaries to reflect these principles:

• Below is the market rate for the role
• Aligned with company stage
• Tied to performance metrics
• Transparent and well-documented

4. When should founders transition to market-rate salaries?

Consider transitioning to market-rate compensation when:

• Series A funding is secured
• Revenue exceeds $5M annually
• Team size reaches 50+ employees
• Company achieves profitability

The transition should be gradual and tied to company performance metrics.

5. How does location affect founder compensation?

Location significantly impacts salary requirements due to cost of living variations: