How Do Entrepreneurs Figure Out Their Salary?
Entrepreneurs don’t really talk to each other about how they figured out how to pay themselves. What’s appropriate? What’s too much?
A common misconception that entrepreneurs make about their salaries (that induces extreme anxiety) is that they have to raise money for their salary as if they're an employee of a decades old company. We borrow from the context of corporate salaries and think about our desired salary for the whole year, rather than within the context of a small business with a short financial runway.
I’m willing to bet that for the majority of entrepreneurs, the thought of how you’re going to fundraise your salary for a full year raises some panic. You want to be able to live while investing enough money into the development and growth of your startup. But how do you do pay yourself a livable salary while having enough money left over to keep your startup running?
Start From A Different Place
Rather than thinking about your salary for the whole year, go backwards and figure out the baseline expenses from where your salary needs to start. That’s a much easier pill to swallow --understanding your minimum needs, and then building off of that as your startup grows.
You need to be cognizant of what you need to pull in every month for your startup to achieve operation + compensation.
To figure out your baseline expenses for your startup and yourself, complete the following calculations:
Find the sum our startups expenses every month (email hosting, website hosting, meeting expenses, advertising expenses, office rent, etc. If you are a freelancer or a sole proprietor, also include the taxes you have to pay every quarter).
Your baseline expenses every month (bills, rent, food stipend, etc.). (What do you need at a minimum to pay for your bills, feed yourself, and hang out with friends?)
Add these two categories together, and multiply it by 1.5 and voila, this is what you need to pull in every month for your startup. (A 1.5 multiplier is thrown in there for unanticipated expenses, and/or a profit margin that you can reinvest into your startup. It's a sound practice to have a bit of a cash cushion as well.)
As your startup grows in revenue, you can keep increasing your salary accordingly towards your ultimate salary goal. As your business grows, you can equally increase your personal salary by the same percentage growth, or according to add-ons you'd like to achieve. For example, you might have a savings goal add-on, or a vacation add-on -- add-ons are monthly amounts that you can add on to your monthly expenses to achieve a specific goal such as investing a set amount for your savings account every month, or saving money for a large vacation at the end of the year.
This method of determining your salary is a guilt-free, responsible way to achieve your startup's mission and growth goals, while also living your life.
I've met a lot of entrepreneurs who are unsatisfied with their accomplishments, despite having raised up to six months of financial runway for their startup and it employees. Why? Because they are framing their accomplishments within the context of a corporate structure.
Here's a big secret that a lot of entrepreneurs don't like to admit -- many of them have less than six months of financial runway for their startup at any given time. If you are a small business that has been around for less than 6 years, it's extremely likely that you won't have the financial runway to cover a full year. The vast majority of startups deal with this, be OK with it.