Startup Salaries: Why Less Is More

Think you could strike it rich by starting your own company? You’re not the only one.

It’s no surprise many entrepreneurs dream of becoming millionaires. After all, the startups we always hear about are the wildly successful ones. Mark Zuckerberg is now one of the top 20 richest people in the world after starting Facebook in his college dorm room, and Jeff Bezos is worth billions after starting Amazon out of his garage.

But most startup founders are far from billionaires, even if their companies are successful. In fact, the majority of startup founders make less than $50,000 per year.

Most of us would choose a much bigger number if we had the power to name our own salary.

But besides taking into account the budget and expenses of your business, there are a lot of other factors that come into play when founders calculate their salaries.

Not everyone needs or even wants to earn hundreds of thousands of dollars every year. Just like in a more traditional job, your salary will be determined in part by your experience, your cost of living, and the success of your company.

And a big salary for a startup founder can have wide ranging effects besides adding onto your company’s expenses, such as setting high expectations for all your employees.

After taking all these factors into account, it’s no surprise that many startup founders will make their salary smaller than you might expect. In fact, venture capitalist and entrepreneur Peter Thiel said that the lower a CEO’s salary, the more likely they are to succeed, and that the number one predictor of a startup’s success is low CEO pay. He suggests founders pay themselves no more than $150,000.

If your top priority is to get rich from your startup, you might be better off working your way up the ladder in a more traditional career in an established company.

Wondering exactly how startup founders determine their salaries, and how all these factors that come in to play? Check out the statistics below and the numbers might surprise you.

Startup-Salaries-less-is-more

Startup Salaries: Why Less is More

There are more than 20 million startups around the world. A key to whether they succeed or not is how much the founders pay themselves. According to a study by Compass, a benchmarking company, 75% of startup founders in Silicon Valley have a salary below $75,000 and 66% below $50,000.

Step by Step

According to the study by Compass, the stage a startup is in affects the founder’s salary.

  • Concept
    • $39k
  • Working Prototype
    • $39k
  • Development
    • $41k
  • Functional Product (Limited Users)
    • $44k
  • Functional Product (High Growth)
    • $63k
  • Mature Product
    • $70k

The Impact of Age and Experience

The younger the founder, the less the pay.

  • Salaries increase for those between 41-50.
    • This could be due to the more experienced founders being paid more.

With age comes experience… and more money.

  • The study shows that founders that have experience with startups tend to pay themselves more.
    • While first and second time startup founders stay lower on the pay scale.

Startup Salaries Around the World

  • Average salaries among startup founders vary around the world.
    • The highest is in Australia with $72,000 and the lowest in India with $30,000.
  • 66% of founders in Silicon Valley have salaries below $50,000.
    • Compare this to the average salary in Silicon Valley which is around $94,000.
    • Keep in mind Silicon Valley is one of the world’s most expensive places to live.
  • Here’s a look at startup founders around the world with a salary of $50,000 or less:
    • London, England – 74%
      • Average Salary: $110,000
    • Tel Aviv, Israel – 73%
      • Average Salary: $79,000
    • Toronto, Canada – 79%
      • Average Salary: $67,000
    • Sao Paulo, Brazil – 74%
      • Average Salary: $63,000
    • Berlin, Germany – 72%
      • Average Salary: $55,000

How Much Should You Pay Yourself?

  • Enough to get by.
    • Think about the cost of living where you are.
      • Silicon Valley startups tend to invest more in salary, simply because it requires more money to live there.
    • According to Peter Thiel, a rule of thumb is that CEOs should not be paid more than $150,000 a year.
      • If you are, many investors, such as Peter Thiel, founder of PayPal, will not invest in your company.
  • What you’re worth.
    • Build that amount into your business plan, so you get a more accurate idea of the capital you’ll need to get the business up and running.
      • This way, you won’t be painting an artificial picture of the money it costs to operate your business, and those costs will stay the same.
    • Once you break even, you can determine changes in salary based on factors such as:
      • How much income your business will be able to sustain.
      • How much your business income will be taxed.
      • How much your personal income will be taxed.
  • Projecting your salary:
    • Create a personal finance statement that includes a list of your living expenses.
      • Don’t forget to include credit cards with outstanding balances and loans, both long and short term.
    • Use a personal balance sheet to help you, because it includes a list of common items you will need to consider when you determine how much money you need to live every month.
    • Add all the amounts on your monthly budget together. This is what you will need to pay yourself in order to meet your basic needs.
      • Don’t forget to include expenses you incur quarterly, semi-annually, and annually, as well.

“The lower the CEO salary, the more likely it is to succeed.” – Peter Thiel

There are many factors that contribute to the success of a startup, but the amount founders pay themselves can definitely have an impact.

Sources

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