How Much Money Should Company Founders Get?
Written by Nidhi Ann Raj for Gaebler Ventures
What is the basis of determining the salaries of company founders? Should there be a vast difference between their pay and the salaries of other executives?
One of the most important things to be taken into consideration while setting up a company is the amount co-founders should get in terms of profit.
Partners should decide amongst themselves how to divide the shares and what percentage should each of them get. Decisions involved around capitalization, hiring/ firing or M&A involve a lot of money and should be addressed beforehand.
Another important question to be answered is how much each partner will get in case one of them leaves the company. Though it is a bad issue to address while starting a company, it is better to resolve this in the beginning itself to avoid further misunderstandings down the line.
Once that is cleared, you should proceed to a more touchy issue - how much to pay yourselves? If there are more than one owner, it is only fair that whoever has invested more in the company (be it in the form of money, time or energy) should receive a larger piece of the cake. It would be nice if the compensation package for company founders is based on a number of criteria like the amount invested, the risk tolerance of each founder, factors pertaining to the company like its location, industry, experience etc.
When it comes to getting shares from the company's common stock, founders prefer to use a vesting schedule to determine who gets how much. According to the standard vesting schedule, the vesting period is usually for 3-4 years, with a 1 year 'cliff'. The 'cliff period' is one in which the founder is not allowed to receive any share of the profit or even the money vested by that founder into the company. During this period, which is usually the first year of the business, any profit received by the company is reinvested into the business. Any loss, however, is divided among the founders.
In this way, if a founder decides to leave the company within the first year of starting a business, he will have to lose the entire money he invested, to the company. This also ensures that his decision does not put the company at a grave loss. Starting next year, a percentage of the profit is divided among the owners. Each founder receives a weighted amount every year till they get 100% of the money initially vested into the business.
In the early stages of development, say maybe for the first 5 years, the company may not be in a position to pay a fixed salary to its owners. Once all the employees are paid off and all liabilities are met, the owners can decide their pay. A fixed pay closer to the Fair Market Value may be a good offer. However, if you have agreements with a venture capitalist, there may be changes to this pay. Though, in reality, many founders choose to pay themselves, less than 50% of the market value. Also keep in mind tax implications if you decide on high salaries. Hence, although it is not wise to grab a huge chunk from your own company for personal expenses, it will be frustrating if the time and energy spent is not worth something that is clear and reasonable.
Nidhi Ann Raj is a gifted writer who is currently pursuing post-graduate studies at George Brown College in Toronto Canada, where she is specializing in Marketing and Finance.
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