One Simple Rule On How Much To Pay Yourself Once You Raise Venture Capital
The Answer: 2 X The Average Employee Salary At Your Startup
You’ve done it. You’ve raised venture capital for your startup. Congratulations!
You now have the financial resources to hire a team, build a product, and grow your business.
You also have a new problem: what to do with all that money? How much should you pay yourself? What’s the right amount? How do you make sure you don’t overpay yourself or underpay yourself?
To figure out how much to pay yourself as a founder of a startup, I talked to dozens of founders and investors who have raised money for their startups.
And I found that there is one simple rule that almost every founder uses when deciding how much to pay themselves: The Founder/CEO Salary = 2x Average Employee Salary.
Here’s why this works, how it applies to founders at every stage of their startup, and what you should do if it doesn’t work for you.
Here’s why this 2x rule works for most founders. You can think of it as “hiring yourself as an employee” and then paying yourself a salary.
The average employee salary at your startup is a good proxy for the cost of hiring someone to do the same job you do. It’s also a good proxy for the market value of your skills.
So if you were to hire yourself as an employee, you would have to pay yourself twice as much as the average employee makes at your company. This is exactly what you do when you set your founder/CEO salary to 2x the average employee salary.
There are a few other factors that affect how much you should pay yourself, including:
- The stage of your startup (early-stage startups typically pay their founders more than later-stage startups)
- How much money has been raised in total (the more money that has been raised, the less founder equity each founder owns, so they get paid less)
- How long have you been working on this startup (founders who have worked on their startup for a long time should get paid more than founders who just started working on their startup)
- Your personal circumstances (for example, whether or not you have kids or another source of income).
These factors are not covered by the 2x rule. So if you use the 2x rule and it doesn’t seem to work for you, you can also adjust your founder/CEO salary based on these other factors.
Here’s how to use the 2x rule to set your founder/CEO salary.
Step 1: Calculate the average employee salary at your startup.
At most startups, the founder/CEO is also the most senior employee. So you can just use your own salary as a proxy for the average employee salary.
If you’re not the most senior employee at your startup, then you can use the same method that human resources departments use to calculate average salaries at a company:
Ask each employee what they make. Sum up all of their salaries. Divide by the number of employees.
Here’s an example: If your startup has 10 employees and they all make $100,000/year except for one who makes $50,000/year and one who makes $150,000/year, then the average employee salary is (8 x $100k + $50k + $150k) / 10= $100,000/year. (Bernhard Kauer on Medium)
Step 2: Set your founder/CEO salary to 2x that number.
So if your startup has 10 employees and their average salary is $100,000/year, then you should set your founder/CEO salary to 2x that number: $200,000/year.
(Note: If your startup has more than 10 employees and their average salary is less than $100k/year, then set your founder/CEO salary to 2x that number.
If your startup has more than 10 employees and their average salary is more than $100k/year, then set your founder/CEO salary to 2x the average employee salary.
If you’re a founder who just raised venture capital, you might think that your company is different from the rest of the startups out there.
You might think that you should set your founder/CEO salary to something other than 2x the average employee salary.
But this is actually very rare. Most founders set their founder/CEO salaries to 2x the average employee salary, even if they raised venture capital.
Here’s why:
Founders who just raised venture capital have usually given up a lot of equity to investors in exchange for funding their startup.
So they have less equity in their startup than founders who haven’t raised venture capital yet.
As a result, it makes sense for them to pay themselves less than founders who haven’t raised venture capital yet: if you have less equity in your startup, then you can afford to pay yourself less without putting yourself at risk of losing all of your financial security.
There are two exceptions to this rule:
Founders who just raised venture capital who are also the most senior employees at their startup.
These founders might think that their company is different from the rest of the startups out there, and that they should set their founder/CEO salary to something other than 2x the average employee salary.
But in practice, most of these founders still set their founder/CEO salaries to 2x the average employee salary.
Founders who just raised venture capital and have multiple sources of income (for example, they own a business outside of their startup). These founders might think that they can afford to pay themselves more than 2x the average employee salary.
The reason is that most startups fail. If your startup fails, then you’ll probably lose all your equity in your startup anyway.
So it doesn’t matter whether you have more or less equity in your startup: If your startup fails, you’ll end up with nothing either way.
So as long as you don’t put yourself at risk of going broke if your startup fails, it doesn’t matter whether you have more or less equity in your startup.
Now let’s talk about how to set your founder/CEO salary if you’re not the most senior employee at your startup.
If you’re not the most senior employee at your startup, then you can still use the 2x rule to set your founder/CEO salary.
But it won’t be as simple as just multiplying the average employee salary by 2. Instead, you’ll need to think about how much equity each of your employees would get if they left your company and started their own startup.
If a junior engineer at your company quit and started his own company, then he would probably get a 1% ownership stake in his new company (and he might also get some stock options).
So if that engineer left and started his own company, then it would make sense for him to pay himself $100k/year (since that’s what an average engineer makes at your company).
And if he did that, then it would make sense for you to pay yourself $240k/year (since that’s 2x what an average engineer makes at your company).
So to set a founder/CEO salary if you’re not the most senior employee at your startup, first calculate what each of your employees would get if they left your company and started their own startup. Then multiply that number by 2.
This is why it’s so important to be generous with equity when you hire new employees: the more equity you give them, the more likely they are to stay at your company for a long time. And the longer they stay at your company, the more valuable they become.
But giving away too much equity can be risky for a founder. Here’s why: If you give away too much equity to employees, then you might not have enough equity left over to sell your company one day.
As a result, you might end up having to sell your company for less than it’s worth (because nobody else will buy it), or even having to shut down your company because you can’t afford to keep paying yourself and all of your employees.
At the end of the day, the salary that you pay yourself as a founder is not just about how much you need to live. It’s also about your financial security and your ability to keep control of your company.
And the 2x rule helps you strike the right balance between these two competing goals. The 2x rule works for founders at every stage of their startup, whether they’ve raised venture capital or not.
About the Author
I am the Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students learn better. I am also a mentor and angel investor in other Startups of my other interests (Proptech, Fintech, HRtech, Ride-hailing, C2C marketplaces, and SaaS). You can also find me on Cudy for early-stage Startup Founder mentorship and advice.
You can connect with me on Linkedin (https://www.linkedin.com/in/alexanderlhk) and let me know that you are a reader of my Medium posts in your invitation message.
