If you want to earn a market value salary, you need to get a job. Paying yourself isn’t a good enough reason to justify raising early stage funding. I realize that sounds harsh, but it’s not intended to be.
Here’s a fairly common scenario for startup founders:
- Two or three people decide to start a company.
- They quit their day jobs.
- They start working on the company.
- 6+ months later they’re running out of cash because they haven’t been paying themselves.
- They go to raise money (for some reason it’s often around $500,000).
- They build basic financial models where the bulk of that money is going to pay their salaries. And the salaries are often at market value or very close to it.
- When asked why they need to raise $500,000 they say, “We’re broke and we need to start paying ourselves.”
I understand the financial challenges involved. When I started my first company in 1996 it took us months before we paid ourselves, and then the first check was for $1,000. In my first year of business I made $12,000. Year two was double that. I then sold that company because the acquirer was willing to pay us above market value salaries at the time. I decided it was worth it at that point to start paying myself something reasonable.
And I’m still hustling. I’ve got plenty of bills and as I get older it becomes harder and harder to sacrifice certain aspects of my lifestyle and financial responsibilities (apparently kids need toys!) So please don’t assume that I’m speaking here from atop a giant pile of money. I’m not.
With that caveat, let’s get back to the point of this post — you can’t use “paying yourself” as the justification for raising money.
The purpose of raising money is to accelerate the progress from Point A to Point B. That means you need assumptions around what Point B is and how you’re going to get there. Part of that will involve paying yourself (I’m definitely not saying you shouldn’t pay yourself anything!) But that’s not the reason to raise money.
Founders at an early stage have to pay themselves below market value. It’s the nature of the beast. Furthermore, if you get to the stage where belts need to be tightened, one of the first things you cut is your own salary. I went through that experience with Standout Jobs. As Fred Wilson points out in his post What a CEO Does, one of the most important things a CEO is responsible for is making sure there’s enough money left in the bank. You have to keep the lights on.
Furthermore, while investors may sympathize with the fact that you’ve gone unpaid for a long time while building your startup, it’s not going to affect their decision as to whether you should get funding or not. It does, to some degree, demonstrate the necessary gumption, passion and insanity needed to be a startup founder (and those are good things!) but investors aren’t going to say, “You’ve worked so long without pay, we’re going to give you funding because of that, so you can pay yourself well.”
So how can you avoid the scenario described above, where you go unpaid for a long time and then need to raise early stage funding in order to pay yourself?
The best way to avoid this situation is to move faster. Anything that takes 6+ months to do, where you have to do it full-time and you won’t be able to pay yourself is an immense risk. There are very few of us that can work that long (or longer) watching our savings rapidly deteriorate without income. But a lot of startups take that long to get off the ground. That slowness kills them. In fact, it’s really a form of Startup D.O.A where the startup is dead before it’s even had a chance of success.
And do it the right way. Too many founders start a project and invest 6+ months in development. Their heads are down and they’re coding. Every single day the risk is going up, not down. Instead of investing your ultra-valuable time on something for that long without any sense of whether it’s really going to work or not, I’d recommend you invest a much shorter period of time trying to validate your business and business model. Just go through the exercises described by Ash Maurya. If you can get through that stage, and do so quickly, you’ve just de-risked things immensely, and it’s going to hyper-focus you on launching something quickly to build traction. The faster you get out into the market and start validating the business, the faster you can make good decisions on things like raising financing, without a giant $0 bank account looming over your shoulder. And maybe it’s looming there anyway, but at least when you go to raise early stage financing you’re not doing it because of the $0 bank account but because you have traction, market opportunity and a good story.