Tuesday, June 06, 2006

Founders: Don't Underpay Yourself

Founders: Don't Underpay Yourself
I always advise company founders not to underpay themselves. Underpaying yourself isn't a noble sacrifice, it's a distortion. If your business can't turn a profit paying market salaries, maybe it's not such a good business.

Of course, it's hard to draw this line sometimes, especially when you're a first-time founder. When I started my first company in 1999, I am ashamed to admit that I paid myself a salary of $75,000. There was no good reason to. Heck, I paid the CEO I recruited to replace me $180,000.

I've talked with a number of friends, and all of them agree on this point. But now I even have an HBS study to back me up.

Noam Wasserman's team surveyed 1,200 executives at 500 high-tech startups, and found that on average, founders pay themselves $30,000 than their non-founder executives. Wasserman's theory is that rather than the standard agency cost problem that leads to excessive executive pay in established companies (i.e. that the agents (executives) make decisions with the owners' (shareholders) money), startup founders typically see themselves as stewards, who identify closely with the organization and put the organization's interests ahead of their own.

Now there are still some valid reasons to underpay yourself. It may be a short term way to keep the company afloat. It may also help you underpay your other executives by setting an example. But these reasons generally apply only to founders who are already wealthy (indeed, the founders of my company, who made hundreds of millions on their last venture, pay themselves the minimum amount allowed by law to still receive healthcare benefits).

If you are a first-time founder, for goodness' sake, pay yourself fairly. Because no one else will speak up for you.

8 comments:

Justin K said...

I assume you're talking about post revenue, post "beta" startups ;-)

Chris said...

Good point!

Either cashflow positive or venture-funded.

If you're bootstrapping, it doesn't make much sense to pay yourself out of your own pocket and hand over 30% to Uncle Sam.

Zoli Erdos said...

Wow, Chris, you pay well, I want to come and work for you:-)

Joke apart, back in 2000 I was co-Founder of a startup and we proudly claimed to be cashflow-positive when we sought funding. We really thought we were ... until the investors asked us what we paid ourself: $0. Then they informed us that indeed we were not cashflow-positive, after factoring in what we should have paid :-(

Chris said...

I paid all too well...this was 1999-2000, when I had to fork over large amounts to anyone just to get them on board. I paid my marketing manager $100K, my marketing director $125K, and my product manager $125K. And it just drove me nuts.

At one point, my product manager asked me why we were going to go through the trouble of doing something "just to save $25K a month." I nearly strangled him on the spot.

Anonymous said...

Zoli,

Good point. You should always keep track on how much you're underpaying yourself so that you're always aware of the opportunity cost you're giving up. After a few years, this can add up to quite a lot! ;-)

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