In the earliest stages of startups, founders will often do whatever it takes to keep the lights on and to drive the fledgling company in the right direction. Anyone with a fragment of experience will tell you that running out of money is the largest killer of promising startups. At some point, a company either fails or starts seeing revenue or fundraising money come in. That’s when many founders ask the question, “When can I give myself a raise?”
What will my investors say?
One of the knottiest questions to answer boils down to fiduciary responsibility - the company has been limping along on a shoe-string budget. Still, even after you are vc-backed and you have a bit more money in the bank account, it can feel scary to increase your burn rate by hiring more staff and starting to pay the founding team properly.
In short: Don’t worry about it: good investors will want you to take a wage. Yes, that has an impact on the company’s run rate, but it doesn’t matter. Startups are excruciatingly hard, and there will be many days you might be tempted to throw in the towel. Making sure that you pay yourself a market wage takes financial worries off the table - and if your company can’t afford your market wage yet, it is a good idea to make it clear to your co-founders, your investors, and your board that you are setting the intention to do so whenever you can.
How do I know what to pay myself?
That’s a tricky question because it depends on a few factors. If you’ve recently had a regular job, you’ll probably have a fair idea of what your market value is as an employee, so that’s a data point. You can also check with other startups that are roughly your stage and size - your investors may have data from across the portfolio that you can use as guidance.
Finally, there are some other excellent guides out there - such as our 2021 Startup Salary Report, which includes data going as far back as 2018, and shows how salaries typically increase from funding round to funding round.
What’s the right way to give myself a pay increase?
If you have investors, you probably have a board. Founder / C-suite pay is typically a conversation that you want to have with the board. We have seen founders who thought it was fair to increase their pay but forgot to inform the board. They only found out when one of the board members noticed an increase in staff costs without additional headcount. Suffice to say, that turned into a tense board meeting.
In our experience, the best way to handle this is the same way you would discuss anything else in a board meeting. Put it on the agenda, and do your homework to present your case. A natural time to do this would be tied to hitting certain milestones, in particular, associated with fundraising activities: Tying a pay-raise to a successful fundraise means that you can bake the updated salaries into the financial models for your post-fundraising company.
Your assignment, in either instance, is to do a cash flow forecast. Show how paying yourself appropriately won’t run the company into the ground. It’s not unheard of to remind the board that removing some personal financial stressors on the founding team will help you focus on the business rather than worrying about meeting rent that month.
You can get creative with compensation packages
If the money is tight, you can propose a slightly more creative solution. Some founders have negotiated themselves goal-based variable compensation packages. These can be as complex or as simple as makes sense for your business.
One example: “We want to set our base wage to $110 per annum. In months where we close more than $200k of sales, the founders are paid a $2k monthly bonus. When we hit our $200k goal six months in a row, we believe that proves that the business has become more stable; at that point, the bonus goes away and the new base wage becomes $150k until we negotiate a new founder compensation plan.”
When do most founders give themselves a raise?
Both our experience and data suggest that founders most often give themselves a raise after a successful fund raise. Raise a big Series A? That’s a great time to increase your salary. The following chart breaks down founder CEO pay by amount of funding raised.
Assuming a startup is well funded, other common times for founders to increase their pay is at the fiscal or calendar year end/beginning, at particular development/product milestones, and at specific revenue targets.
Whatever structure you come up with, make sure you present it with scenarios and examples, along with your various cash flow forecasts. It becomes a pretty easy sell to the board if you can show with data and graphs that the company can afford to pay you what you need. And if the company can’t afford it, perhaps now is simply not the right time to take a pay increase.
To get started, check out our example financial models for startups.