Erik –
Any discussion about 'fair' founder salaries requires some sense for the stage (startup vs. seed vs. growth) and market context. I've worked with a number of early seed-stage startups most of whom rarely ask how much they should pay themselves, focus more intently on validating the business model pay themselves, and in the end pay themselves what they can, when they can. That said, $50k is probably as good as any number for a funded early seed stage startup ... but once the enterprise shifts from startup 'mode' to high growth 'mode', (in my opinion) the $50k rule-of-thumb simply doesn't hold water. At some point during the growth phase, market rates apply. I'm working with founders of several funded high growth companies (companies that have raised $10+ million in growth equity with $10-15 million+ in revenues) who earn $250,000+ in salaries plus a significant cash bonus.
I'm pleased to share a recent annual compensation survey of nineteen private-growth companies from the IT and healthcare sectors completed by River Cities Capital Fund, a growth equity firm based in Cincinnati with anyone interested. Unfortunately, the file size exceeds AOMLISTS.AOM.ORG size limitations for posts on the ENTREP listserv.
To the question of whether of students should include salaries for themselves in their financial statements, at Miami, our startup track provides curricular and co-curricular programs for high growth startups (the 3x-3x-2x-2x growth profile institutional investors crave). Most (not all), high growth startups need angel or institutional funding, and whether investors place any value them or not, most, if not all, expect startups to provide 'complete' financial projections, more so to evaluate the assumptions founders have about the business opportunity and how they view the broader market itself. And that includes salaries. Consequently, we orient our student-founders to pro forma statements and venture funding expectations and expect them (1) to consider and/or plan for major cost categories-direct or indirect-in their financial models and (2) to understand how those forecasts affect valuation calculations and future capitalization tables.
My $0.02.
It is indeed important that the founder entrepreneur indicates a salary for himself/herself. Profit is not the same as a salary and should not be treated as such. A salary also imposes financial discipline on the entrepreneur. The salary however cannot be fixed. It depends on the type of business and the cashflow of the company. Please speak to a Finance or Accounting lecturer in your school, to provide a deeper explanation. Sometimes, even though the salary is indicated, the business might not earn enough for the founder to take it out. In that case, the company owes the founder, till such a time, when it can pay him/her. Hope this helps.
Greetings!
When you teach business models/planning, do your students include salaries for themselves in their financial statements? And if so, what is a fair salary during the start-up and growth phases? I am aware of debates both ways,
https://www.inc.com/alyson-shontell/how-much-do-startup-founders-pay-themselves.html
https://www.wsj.com/articles/what-entrepreneurs-should-pay-themselves-1422244851
https://www.forbes.com/sites/johngreathouse/2013/10/31/startup-founders-should-not-be-paid-more-than-this/#7b6cfad5242a
https://www.entrepreneur.com/article/223744
and I am curious what the ENT hive mind thinks.
Best Regards, Erik
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Erik Monsen, Ph.D.
Associate Professor of Entrepreneurship & Mechanical Engineering
Steven Grossman Endowed Chair in Entrepreneurship
University of Vermont
Grossman School of Business
320 Kalkin Hall, 55 Colchester Avenue
Burlington, VT 05405-0157
Email: erik.monsen@uvm.edu
Phone: 802 656 8994
Mobile: 802 503 2600
Web: http://www.uvm.edu/business/profiles/erik_monsen
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Linkedin: https://www.linkedin.com/in/erik-monsen-9b41791/
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