The issue of how founders fund their start-ups and how much they pay themselves is something I get asked quite often. It came back to my attention a couple of weeks back at an Angel Investing event I attended.
It was interesting to see some founders wearing their “I take no salary or dividends from my business right now” statement like it was a badge of honour.
Some of the businesses concerned had managed to grow themselves into companies with more than a million pounds of revenue annually, but still the founders took nothing from the business. I have to say I think this is wrong. If you are working for a business, even if you own it, I think you should pay yourself a salary.
How you do it is between your own tax authorities, you, and your accountant, but you not taking a salary sends a message to me as an angel investor, and I am not alone. It makes me question if your business is sustainable. If it cannot afford to pay its senior staff a wage then what I do, when I look at the accounts of the business during a due diligence exercise is I add into the numbers the wages that are not being paid. This then gives me a much better idea of the health of the company.
So, if you are pitching for further investment as a founder don’t think investors are fooled by the reduced overheads you are showing as the owner by not paying yourself. We put our own numbers into your accounts. So why not pay yourself and take away our guesses? Of course, if your payment is too low for the role you are filling, we will add a bit onto it still.
But it is not just the apparent improved profitability and cash flow of the business we are concerned about. We are worried about YOU. It is not in an investors interest to have a founder who is seriously worried about their family, their home, and their bills. You will be distracted, when we want you focussed on building and growing the business we have invested in or are about to invest in.
A sensible investor knows the difference between early bootstrapping, where you use your savings to start your business and perhaps for a short while live from them too, and a long-term struggle to keep your business alive while you and your family suffer. The fact is viable businesses must pay their staff, and that includes the senior staff.
We also understand if at times you reduce your salary when you need to preserve cash in your business. Most of us have done just the same thing, I know I have. It’s a kind of duty, you must help your business survive. I don’t see any harm in paying yourself a bonus or returning the funds your business “borrowed” from you, with interest when the business can afford it. But paying yourself nothing is just plain wrong, especially if you are into revenue generation and close to being cash positive.
The question then comes “How much should I pay myself?” My answer to this is a fair market rate. After all, if you plan to sell the business and leave it the new owners will have to pay somebody to fulfil your duties, or share them amongst other people in their business, who they pay right now.
In summary. We get it, in the very early stages when it’s just you and maybe a couple of other founders who are bootstrapping your business live from your savings. But when you start to employ people and grow the business, pay yourselves, otherwise you are liable to have investors asking you that tough question. “So, you expect me to believe that your business can be run for nothing?”