Wondering if you’ve outgrown manual bookkeeping? We've got you covered in the battle of Excel vs. accounting software.
August 11, 2022
As a founder, you have a lot of responsibilities. One of the most important is making sure you are paid for all your hard work. It's essential to have a clear plan for how you will pay yourself. But how do you do that?
When a company first gets going, income isn’t always stable, and if there are only a few months under your belt, it's hard to make accurate financial projections. That doesn’t mean you shouldn’t include your salary in those projections. That magic number differs for every founder, and we’re here to help you find it.
By the end of this post, you will better understand how to financially support yourself as a founder. So, if you are a founder and want to ensure you are paying yourself fairly, read on for some tips.
Other than needing money to pay personal bills and other personal expenses, it’s a crucial part of your business expenses and should be accounted for ASAP. Whether you pay yourself a salary or use the draw method, your compensation factors into payroll and, ultimately payroll taxes, which we’ll touch on later.
Operating budgets depend on the exact amount that can be spent on total expenses to run your business. When cost ends up higher than income, your company loses profitability. It’s a slippery slope downward and a hike to get back up just to break even. We suggest finding your salary in the early stages for this reason.
One question we often get from entrepreneurs is how they should start paying themselves. It's a great question and one that doesn't have a simple answer. The truth is, there is no right or wrong answer — it all depends on your circumstances.
You'll need to consider a few things before you start paying yourself. You don’t want to hurt the business, but you don’t want to lowball yourself. Planning for your company's future and looking at all angles is the best way to find a balance between what you should earn and what your company can afford.
Before fleshing out a solid number, here are a few things to consider:
There are three routes to take when you begin paying yourself as an entrepreneur. As we said above, individual circumstances and business structure affect every founder's paycheck. What works for one company may not work for another. We’ll take a look at what options are available below.
Sole proprietorships and partnerships use the draw method because of its benefits for small business owners. Owners pull money from the business’s income when needed compared to having a consistent paycheck—paying accurate income taxes for both the business and individual fall on your shoulders. You’ll have to keep proper records each time you draw money from the company to prep for tax filing.
This method is flexible for both the owner and the company, but inconsistency can be a gamble. If your sales dip or the market turns, your available cash pool becomes shallow.
Salaries are consistent paychecks that typically include benefits. The company deducts the proper taxes per paycheck on your behalf. All salary and benefit payments are recorded as an expense deductible during tax filing.
Corporations or startups with a decent amount of pre-seed or investor funding choose this payment method because it's a more straightforward solution. The salary method combines all necessary paperwork on the business side, includes the amount in the business budget, and deducts personal income taxes.
This method's most complex part is determining a salary based on what your business can afford and what you need as an individual to make a decent wage.
Companies with an S Corp tax status can combine both methods to save on income tax. Salaries are subject to income tax, but dividends are not. Many S Corp owners split a salary between both methods. Their salary goes through payroll while the rest is distributed from profits as dividends.
Selecting a salary that covers your needs without disturbing cash flow depends on a few things. According to a study by Seedcamp, three significant factors affect a founder’s salary.
1. Last round type
3. Number of co-founders
In their findings, the United States recorded the highest founder salary through all-around types. A pattern in data suggests that founder equity percentage decreases as salary increases.
Holding higher equity during the early stages benefits founders by allocating a more significant portion of cash flow to the growth of the business. Once the company generates consistent revenue, your salary can grow alongside your company.
It’s important to note the survey was conducted across the United States and the UK, with the average taken from all data. Due to the U.S. being on the higher end of the salary spectrum, you can investigate what a higher salary than stated below will look like against your company’s expense budget.
Below are the average salaries and equity percentages held by founders per last round:
Pre Seed: $50,721k - 39%
Seed: $70,121 - 26%
Series A: $108,292 - 19%
You deserve to get paid for your hard work. We suggest founders include their salaries on their operating budgets to protect their cash flow and startup runway. You can alter operating budgets, but if you’re already running with tight financial resources adding a salary a few months in can be the start of cash problems.
One way to safeguard your company’s financial health is by monitoring your total expenses, operating and non-operating.
To serve founders better, at Zeni, we’ve created a highly detailed company dashboard for founders to use anytime. Instead of waiting for expenses to come in at month’s end, we use real-time accounting to update each trackable metric.
Top expenses are broken down into bar graphs with a fully interactive report. You can see these expenses by week, month, three months, six months, or year. Our financial experts assigned to your company will help you navigate all the information tracked by our bookkeeping software.