Why startup founders should always pay themselves a fair market salary

5 Mins read

The idea of living off the bare minimum, foregoing a founder salary and bootstrapping your startup might be a romantic one, but is it viable? 

My cofounder Lee and I began Flash Pack in exactly this vein, using our own savings and a modest startup loan to launch our community travel concept in 2014. Initially we worked from our spare bedroom, expanding the business while both holding down full-time jobs and saving every penny we could. 

We didn’t start paying ourselves a salary until 2016, when our annual revenue was close to £1m and we were experiencing a major inflection point in our growth, growing 4x that year —  but this decision came too late and would soon have major implications for our business. 

But it’s a common trend among most founders, notes Healy Jones in Kruze Consulting’s 2022 Startup CEO Salary Report. “For the most lightly funded tech companies, the concept of ‘ramen profitability’ encourages founders to take no salary to keep expenses minimal and make the company more attractive to investors,” he says.

What a fair startup founder salary shows investors

As a founder, it’s easy to assume that not taking a salary and sacrificing everything for your startup shows your dedication to growing your business. But in reality, it sends out the opposite message. When we were mooting the idea of raising outside capital in the early days of Flash Pack, investors would say, “Are you serious? How can you run this business for free? Is it really sustainable?”

Investors want to see founders salaried because it demonstrates a full commitment to the success of that venture. So many founders work on their business at the same time as freelance work but this puts additional financial and time pressures on the founder as well, which could result in bad decision-making and burnout — something no investor would want. 

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This connects to the wider question of viability, too. Starting your own brand is a tough ask, mentally and emotionally. A 2017 study of 500 tech startups by venture capital firm BGF Ventures found that more than a quarter of founders worked 60 hours plus a week, nearly half experienced constant stress and 40% suffered financial setbacks. 

If you’re worrying about making mortgage or rent payments at the same time as running your business, the impact can be catastrophic. Undue stress leads to poor decisions that can quickly affect all areas of your life, including a startup that needs all your attention. Paying yourself a fair market salary can help alleviate that. 

A fair salary protects founders during troubled times

When Lee and I finally decided to draw a salary, we ran into a question that traps many entrepreneurs — how much should a founder pay themselves? The margin for founders’ salaries is vague: a report this year from Seedcamp found that they have zero connection with traditional “success” indicators such as revenue or number of employees. 

In our case, we ended up going too low — lower than many of our employees — because we gambled on how quickly the company would grow. In 2019, we were paying ourselves £80k per year each when the business was valued at £50m — but this simply wasn’t enough. We were forking out more than £40k a year for a nanny for our baby, which we could barely afford after tax. This left us in a continuous battle with anxiety and stress over our personal finances.

Research has found that for every £100k increase in valuation, startup founder salary should increase by approximately £1,300 per year, with founders on a salary of about £80k at a £6m valuation — so we were really underpaying ourselves.

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It’s a classic trap that backfired spectacularly when Covid hit in 2020, and our trip bookings went silent overnight. 

The travel industry was decimated and we were at the centre of that. Our business model also revolves around bringing small groups of strangers together; hardly complementary to social distancing. 

Having lived on low founder salaries, our entire net worth was tied up in the equity of our company, which had completely collapsed. On top of that, we hadn’t yet secured an internal investor before Covid struck, which put us in a hugely precarious position. We had no other option but to file for insolvency. During that process, we were still paying off credit cards from the business, and had invested a large sum personally, which we never reclaimed. 

It was a lesson that taught us that paying yourself as an early-stage founder is paramount when preparing for hard times and unexpected shocks. And though the worst of Covid has hopefully passed, rising inflation levels around Europe, the looming prospect of increased interest rates and an economic slowdown all pose a challenge to founders looking to sustain growth in 2022.

How much a founder should pay themselves isn’t black and white: it will depend on things like the stage of the business, the founder’s personal circumstances and location. Our early investors told us that our salary should be the total of outgoings, plus enough money for a date night every couple of weeks and a basic holiday. 

The road to founder salary transparency

Thankfully, our story had a happy — albeit not easy — ending. We remortgaged our house and were able to re-buy our business assets. We also secured a multimillion-pound Series A investment; the kiss of life needed to bring Flash Pack back to its feet.

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With that money we launched Flash Pack 2.0 in November 2021 and decided to rewrite our salary policies in the name of greater fairness and transparency. The travel sector already lags behind other industries when it comes to fair pay, as well as diversity and inclusion. We decided that if we didn’t want to feed into wider gender and ethnicity pay gaps, we needed a radical overhaul. 

When deciding our current salaries we wanted to ensure that they allow for long-term thinking while still sitting approximately 20% below market rate, as we are a Series A business. From Series B onwards I think it’s fair to start paying ourselves market rate. Ultimately, as your company grows, the chances of stability and success increase — and a founder’s salary should also increase with this success.

All Flash Pack roles — including our own— have publicly available salary bands, and we’ve developed a compensation calculator that benchmarks our pay levels against 3,000 similar startups. We also pay ourselves a fair market salary that allows us to put 100% into our business with fewer distractions. 

While our experience was exceptional — Covid, as we know, was a crisis on an unparalleled scale — it taught us a fundamental lesson: you don’t earn a badge of honour by going without pay. Especially now — as founders may be thinking of tightening their belts to keep expenses minimal or make their company more attractive to investors — the fairytale of a salary-free startup is exactly that. Real success means relief from anxiety, and remittance that’s lasting and fair for all.

Radha Vyas is the cofounder and CEO of Flash Pack. 

Source: | RADHA VYAS

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