What is the Basis of Salary of the Founders and How will it Change in Future?

By | January 6, 2022
Basis of Salary of the Founders

Last Updated on by Admin LB

Introduction 

This article ‘What is the Basis of Salary of the Founders and How will it Change in Future?’ will provide you with the information that entails in order to determine when and how much to pay yourself as a founder. A fundamental decision you’ll have to make as a founder or business owner is what will form the basis for your earnings. In order to achieve stronger alignment with your investors and to maximise the value that all parties/shareholders gain from each round of investment, it is critical that you pay yourself as little as possible as a founder member of the team. 

Even if you have completed your first round of funding or are just getting started on your project, you will face the decision of whether or not to pay yourself.  Even while Startups, business owners, and corporate strategies all operate on their own timelines, they all arrive at the same point in the development process.  Depending on the requirements of your organisation. Make a cash-flow forecast for the operations of your company’s business.

Method for Determining Metrics for Basis of Salary of the Founders of the Company 

In terms of the compensation equation, the measurements you’ll need to figure out how much to pay yourself are likely to be the most challenging part of the process to figure out how to calculate. Every situation is different, and every founder is in a different position, which may make things more difficult. Assessment of your own spending to determine how much you should set aside for yourself each week or month (fixed and variable). Divide your income into two categories: barely enough to survive and comfortable luxurious living. 

This will help you achieve financial balance, also some basic fulfilments are mentioned below:

  1. The first is paying yourself enough to meet basic living requirements. Rent, food budget, Considerations such as insurance, and whether or not there are any dependents, are just a few of the things to think about.
  2. Strike all other discretionary items from your life for a while and get used to just the bare necessities.
  3. Make a personal financial statement with all of your expenses, credit card balances, and short- and long-term loans included. There is no such thing as a minor detail, so this could be one of the most difficult projects ever. You want to make sure your revenue covers your expenses. 
  4. You should be able to provide for your monthly living expenses. Paying off debts lowers monthly expenses and increases personal net worth, both of which are key factors when borrowing money to start a business. 
  5. Add the totals of the monthly budget items. This is the bare minimum that you must pay yourself in order to live. Remember to keep track of all of your costs. Costs are calculated on a quarterly, semi-annual, and annual basis. You must be meticulous. This money will be required for six to twelve months.
  6. As the founder of a company in its early stages of development, you may be eligible to receive equity compensation for your work. 
  7. In the financial world, shares are the financial realisation of your investments, which is made possible by the fact that you have a stake in the objective and that your success is based on the success of the company in which you invest. As a result of owning a stake in the objective, and your success being dependent on the company’s performance, equity represents a goal. Another advantage of equity is that it allows others to participate in your vision by investing in your company. Because the founders are the sole owners and founding pillars of the company, it is necessary to examine equity allocation and wealth distribution before hiring new team members. 

If we say start-up, money is one of the most valuable assets you may have as a start-up founder. Increasing your remuneration too much will surely result in a faster depletion of your finances, but you will also create a sour atmosphere in the company. Occasionally, entrepreneurs must acknowledge that they are no longer operating in the dot-com era, and that having a high burn rate is no longer a source of pride for their organisation.

You will be setting a precedent for better alignment with your investors and maximising the value that all parties/shareholders gain from each round of investment if you are extremely careful in your remuneration as a founder. Rather than the success of your company, your compensation as a founder is determined by the health of your company’s cash flows. 

The Possibility of Changing the Basis of Salary in the Future

If you are determining your salary, it is vital to consider the source of the investment or the source of the money. They could come from your own account, the wallets of investors, or even revenue generated by the firm itself, which will have an impact on the foundation on which the founders’ salaries are calculated in the future.

  • Salaries are determined by the quality of work performed and the development made within the company. 
  • The salary structure only outlines the right and consistent way to indulge and function efficiently.
  • Founders frequently make the mistake of dividing shares depending on the amount of early work done. 
  • Even though you have a lot of work ahead of you, the equity should be distributed fairly to structure your salary in future. 
  • Consistency and investment in the long-term success of the organisation have the potential to alter the salary structure in the future.

To summarise, here are the procedures to take in order to generate a reasonable estimate of how much you should pay yourself or what should be the basic foundation for founders’ salaries.

  • Create a cash flow for the company (including future raises and revenue).
  • Analyse the cash flow to determine expenses and burn rate. If there is not enough money, you will have to raise it, or the business is not in the right stage.
  • To determine how much to pay yourself, have an honest look at your personal expenses (fixed and variable). Find a balance between just enough to survive and being relatively comfortable. 

Conclusion 

In order for you to be a successful founder of a company, you must be able to properly identify the relevant salaries or payments you are deserving of as well as the valid reasons for which you must compensate yourself. Reliability as well as equity inside the long-term success of a company by the founders ensures the growth of the company and serves as the foundation for future changes in salary structure and compensation.


References 

  • How much should founders pay themselves after raising seed funding? What would be reasonable to investors?, Available Here
  • Kavvya Kishan, Startup Founder Salary Guide: How Much To Pay Yourself?, Available Here
  • Paying Yourself: From Startup and Beyond, Available Here
  • Startup Founder & CEO Salaries in India, Available Here
  • What Indian Unicorn Founders Earn, Available Here

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Author: Mayank Shekhar

LLM, Faculty of Law, University of Delhi, UGC NET (Law) qualified. Under Mayank's leadership, Legal Bites has been researching and developing resources through blogging, educational resources, competitions, and seminars.

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