How To Pay Yourself

When you are starting out, you likely cannot pay yourself anything. In fact, you probably will be spending money out of pocket for early business expenses.

<aside> 💡 Tip: If you are spending money out of pocket for startup expenses, it makes sense to structure it as money you lend the company at a fair market interest rate. This allows you to pay yourself back in the future with a little bit of interest and importantly, since it’s a loan repayment, you won’t be taxed on it.

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But once you raise your first round of financing, you can and should pay yourself. Here’s my general framework on how to think about it:

• Pay yourself enough that you are not stressed day-to-day about money. Building a startup is all consuming and you want to be able to focus 100% on your business.
• But, this should not be enough that you are saving a material amount of money.
• The numbers vary tremendously based on your specific life situation — whether you have dependents, are you the sole bread winner, where you live etc. This is also why it can be easier to sometimes start a business when you are younger as you “need” less money.
• This will also be a lot less than your fair market value if you took a full-time job somewhere.

As the company does better, you can give yourself “raises” till you eventually level out at market salary.

But remember — a W-2 income is the least efficient way of building wealth from the perspective of taxes, so it does not make sense to max this out.

My Salary History as a Founder