In the early days of a start-up, most entrepreneurs are concerned with finding money to put in, not how much they can take out. But, at some point, the unspoken question of salary begins to loom
In the early days of a business there will inevitably be a trade-off between a living wage for its founders and the capital required for growth. In the short term, if you have resources from a previous venture, savings, equity release or a partner who’s earning, you can survive without needing to take much money from your business.
“You can live without necessarily drawing a salary if that’s the best way to keep capital in your business and that’s what your business needs,” says Mark Kingsley-Williams, founder of Trade Mark Direct. “But entrepreneurs, as much as anyone, need some money to live off.”
The funds available can vary, depending on how capital-hungry a business is and the nature of the industry it is operating in. Kingsley-Williams mentions a friend and colleague whose designer flooring company has relied on bootstrapping for years to keep it operating. He explains, “They needed to build up capital within the business and there’s no point in them putting money into the business to draw out a salary upon which they then pay PAYE and income tax.” Conversely, Trade Mark Direct itself, which doesn’t require a lot of capital tied up in a rolling stock base, was able to support a working salary for its founder much earlier.
When it came to putting a monetary value on Kingsley-Williams’ time, the considerations were fairly simple. “The only discussion in relation to my renumeration was, ‘Is it a market rate for what I am doing?’” he recalls. However, he’s keen to stress that an entrepreneur can’t just pay themselves an equivalent salary to one they would receive if they were working in a similar role at an industry leader such as Goldman Sachs. “There are surveys done on what the market rate is for people inside and outside of London at all the different levels – that’s a good guide.”
So, deciding how much to pay yourself may actually be a fairly easy call. But what about when it comes to justifying it to another party? How do you make sure you’re on the same page?
Last year, a US-based entrepreneur asked a question on Q&A site Quora about his co-founder refusing to budge from what he felt was an unreasonable minimum salary requirement from their business, attracting a flurry of responses from venture capitalists, CEOs and entrepreneurs, and highlighting how precarious differences of opinion over salary requirements can be if not handled ahead of time. “If one party ends up drawing out more than the other then obviously that’s a bias,” comments Kingsley-Williams. “The only way to get round that would be to drop their equity interest.” Obviously, this is a rather messy solution and reflects why it is so important to discuss what a potential partner’s salary expectations are ahead of time. “It’s really a conversation they should have had even before they’d formed a limited company together.”
Another area that may worry fledgling entrepreneurs is what effect their salary might have on potential investment concerns; however, it’s possible these fears may be unfounded. “Investors will take a reasonably enlightened view,” says Kingsley-Williams. “Particularly if you’re at a stage in life where you have a spouse and children, they’ll know you can’t live as cheaply as you can if you’re a single person in your twenties.” There will almost certainly be an expectation that you only take enough to cover your basic living costs, but, as Kingsley-Williams points out, that is because the more profitable the business is, the more it will be of benefit to both parties. “It will be based on your equity interest in the business increasing in value over time, so your interests and theirs are aligned.”
Ultimately, a start-up isn’t always going to be in a position to pay a competitive salary straight off the bat, but as long as its founder can live and the business continues to expand, then that income will eventually be something they can recoup. “I think the main point is that the business can only afford to pay what it can afford to pay, but a necessary discipline is to keep track of what the business might otherwise be paying you,” says Kingsley-Williams. “That should be being accrued as a loan from you as the director of the business.”
Founder and former CEO, Pacific Direct
When I started Pacific, for the first two years I simply took what I needed to live – eat, exercise and stay mobile. It actually took me ten years to buy myself a company car as I always worked with the knowledge that if I retained all the cash in the business that I could, I could use it to grow. I was lucky in that I had no incumbents and really small overheads.
The mistake I made was that, as and when the business could afford to pay me better, I initially did not do so. When we were professionalising the business and needed to employ professional management, I employed my first general manager from Reebok on a salary of £126,000 plus car and expenses at a time when I was paying myself £24,000. I learned, as I continued to underpay myself, that at the point of exit it would be very quickly noted I was not taking a market-rate wage. In fact, in doing so, I was devaluing the business, so towards exit I did gradually raise my salary.