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How much do startup founders pay themselves as salary, and why should it matter – especially for investors? It matters because it says something about how the founder(s) see their startup. Do they view it primarily as a means to enrich themselves, or as a company with a purpose that has strong potential to grow? Taking too much capital out of the business suggests the former, which may lead investors to believe that they are not fully committed to the startup over the years ahead – when much of the growth (and returns) are expected to happen.
At Bure Valley Group, we offer some thoughts and insights for angel investors on this important topic, below. We hope you find this content useful. To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
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A sensitive balance
There is an old saying: “Where your treasure is, there your heart is also”. How we spend (and take) money speaks volumes about our priorities and what we value. This is often why investors are encouraged to meet founders who have committed some of their own money into a startup idea. Not only does this suggest that they truly believe in what they are doing, it also suggests that they are willing to accept short-term loss for the expectation of future growth and gain.
Of course, you do not want to see a founder who has put his family’s finances at risk by putting too much in – e.g. threatening their livelihood by selling their home to raise initial funding. Yet an investor doesn’t want to hear the opposite extreme, where a founder has an idea and simply expects other people to fund it. Neither do you want to see a startup choking from the outset because the founders are taking too much salary, preventing money from being reinvested back into the business.
On the other hand, eventually the startup needs to bring in enough revenue for the founder(s) to support themselves financially and give it their full attention. Many start their business while also having a part-time job, for instance, which inhibits their ability to steer and grow the startup as fast as it could. As such, the topic of startup founder salary involves striking a careful balance between the founder(s) needs and that of the business.
Striking the balance
As an investor, you naturally want to know how much of your money will be going into growing the business (generating your returns) versus the amount that will go into the founders’ pockets. A good starting point is to establish what the founder – and their family – needs to live on. The UK average salary is £27,000 (more if you are living in London), and surveys suggest that most British people think £2,000 per month is comfortable to live on. However, founders should likely not expect to reach this level of income in the initial years, where growing the business should take priority over a comfortable lifestyle.
The next key factor to consider is the needs of the business. How much revenue does it need to pay its necessary expenses – including staff and office costs? Cash flow planning for each stage of the business in the coming years will be necessary to establish how much money needs to come in (from revenue and funding) to meet each goal. This will also help determine what may be an appropriate salary increase for founder(s) to take as each goal is achieved along the way.
What should certainly not happen is a founder approaching investors purely so they can afford to pay themselves. One report suggests that the size of the funding round plays a big role in whether/how much salary can be taken by a founder. If the round is worth less than £150k, for instance, then only about 50% of founders should expect to receive a salary. Over this amount, however, over 73% can hope to begin taking home an income from their startup.
Naturally, the lower the amount of funding involved, the further the money needs to go to grow the startup. Founder expectations need to be realistic, and investors do well to spot those who understand some of the personal sacrifices that often need to be made to succeed. This can be rare. Many startup founders are, by nature, high achievers often with a history of well-paid jobs. Starting a business, therefore, typically means learning to grow in the midst of failure – and for lower pay (at first).
Conclusion & invitation
The aforementioned study suggests that, at £2m valuation, a founder can expect to take home about £25,000. At £4m this rises to £52,000 and then £80,000 at £6m. Investors, of course, are happy to discuss increased compensation if their investment is growing and bringing in returns.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827