How to set your salary as a first time founder
Avoid the headaches, avoid some of the ramen.
We didn’t have much money in 2013. We had finished university but not gotten jobs, because we were so sure that if we worked full time, Tanda would eventually succeed. To extend our runway, we would do things like spend $100 to make 100 identical servings of beans & rice. This enabled us to keep going for a little longer, but not so long that we’d get scurvy. When my co-founder posted about this on Linkedin 5 years later it was a sweet moment of reflection, but at the time it wasn’t great.
The point of this post is to minimise how much time you have to spend eating beans and rice. It’s split between how we did it, and what I’d advise companies today.
How we did it
We have been bootstrapped since day 1. Partially this was because we were arrogant enough to think we’d make lots of money quickly. Partially this was because we never found any VCs we really wanted to work with. And partially because we were 21 and all lived together, so we could live off nothing.
Here’s how we paid ourselves:
For the first two years, we didn’t pay ourselves anything. I started building Tanda in July 2012, and the first payslip I found was a small “bonus” in June 2014.
From July 2014 we paid ourselves $20k/year.
This increased to about $25k in mid-2015.
We bumped $37k in mid-2016. I think we chose 37 because it lined up with the upper edge of one of the lowest tax brackets.
When we could, we paid ourselves small bonuses at the end of financial year (end of June in Australia).
At the start of the 2016/17 financial year, we moved to a new model where we’d pay ourselves 2% of MRR each month.
We have continued to use the 2% model ever since.
If you’ve watched the talk “The Long Slow SaaS Ramp of Death”, you can imagine a similarly long slow ramp of salary growth. It was not for the uncommitted. We earned less than basically all our employees (let alone our peers or uni colleagues) for years.
Why 2%?
So how does the 2% model work? It’s simple: just take MRR, divide by 50, and that’s each founder’s pre-tax income.
For example, if our MRR was $100k, each founder would earn $2k/month before tax, for an annual salary of 24k.
In a SaaS business, MRR almost always goes up (if it often goes down… this post won’t save you). How much it grows by varies, there’s lots of benchmarks for this, but you can expect each month that you’ll get paid just a little bit more than you did last month.
We picked 2% because at the time, the salary we’d been paying ourselves was (coincidentally) around 2% of MRR. But we’d always argue about salary whenever someone felt broke, so we agreed it would be nice to have a simple model for salary gradually increasing over time. When we sat down and tried to pick a model for how to do that, it made sense to not massively change our salaries at the same time. So we just took the current percentage and made it that.
We all liked it because we knew our salary would increase modestly each month, this gave a big incentive to keep working hard.
What you should do
Use the the 2% model, but start it earlier than we did. It’s a great and very simple model. It removes many arguments, aligns everyone’s incentives, and makes the latter stages of running your business very lucrative and fun, without eating into your costs so much that you’ll never get there.
The main downside is that it doesn’t work until you have a bit of revenue. The amount of money you need to live will vary widely, but remember, 1M ARR = $20k/year salary. So if you need 80k to live, the 2% model will work great… once you have 4M ARR.
How do you decide if you need 80k or 60k? That’s for each founder to decide, but you should try and work out a minimum viable salary and be as aggressive as you can. By the way, and this might seem obvious, but every founder should get paid the same. Otherwise you aren’t co-founders. So if you have different minimum viable salaries, take the highest one, within reason.
Once you agree on a minimum viable salary, you know how much revenue you need to start paying yourselves 2%.
Until you reach that revenue goal, what do you do? This is where savings come in, if you have them. Living in a cheap place also helps. You can pay yourself less, but then you’re just admitting your minimum viable salary could be more minimum. There’s also nothing wrong with raising a bit of money to help you get through the early days until you can pay the wage you need from revenue. There’s lots of funds out there that are designed around this model, rather than targeting an exit (I run one). Don’t make the mistake of raising money so you can raise more money later; use it to make life livable until you can pay yourself properly.
A few more notes on the 2% model:
We had 4 co-founders. Any more, and 2% each can start to really eat into operational costs, particularly if you are bootstrapping. Although that’s probably not the only downside of having too many founders…
If you have less co-founders, you should still do 2%. Don’t do 4% each because there’s 2 of you; you’ll make too much salary too quickly. Re-invest the money instead.
The first few years can be rough. Send your spouse this post. Hi, spouse! Remember, the point of the 2% model is that eventually you’ll be earning 2% of a big number.
Pay yourself 2% before tax, not after tax. This means some founders might take home different amounts due to different tax deductions, marital status, etc. That’s too bad for those who pay more tax; the difference will not be significant, and it’s not worth the complexity of doing it any other way. Every founder should get paid the same (before tax).
If you have excess profit at the end of the year, pay a bonus. If things are running really well you might find that you’re paying yourself 2.5%! But only the 2% is guaranteed, everything else is money you’re taking out because you couldn’t find a way to reinvest it.
tl;dr
Pay yourself 2% of revenue.
Find some money under the couch