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Alok's Posts / Startup

The Mystery of Entrepreneur Salaries

If Agatha Christie and Sherlock Holmes were commissioned to solve the ‘Mystery of Entrepreneur Salaries’, my guess is that they would prefer to get married, go on a honeymoon, have kids and settle down.

Neither of them would hazard a chance to solve the world’s most complex mystery.

But who needs Agatha or Sherlock, when you have Rodinhood?!

These are my findings:

– Entrepreneurs feel guilty in taking salaries

I have met more entrepreneurs than the number of times you’ve shook hands with people; and not even once have I come across an entrepreneur who has boldly spoken about her salary.

The discussion around salaries is ‘hush hush’, and muted. Entrepreneurs tell me how much they draw in a very guilty, often self-incriminating way. I always wonder ‘why’?

Being an entrepreneur myself (I did not draw salary for 15 months in my first venture), I believe that the anxiety to save every drop of cash in the startup instills this strong belief that cash taken out for ‘self’ salaries is doing injustice to the business.

Well, the fact is that it does impact cash flow, but an entrepreneur must survive. Love and fresh air does not impress anyone anymore. It makes the other person pity you… even offer to buy you lunch!

So, there is no running away or feeling guilty about being priced.

– Entrepreneur salaries are important to show the real picture.

My Marwari accountant brain clearly segments ‘expense booked’ from ‘expense paid’. In other words, even if a legitimate expense is not ‘paid’ (to preserve cash), it still needs to be ‘booked’ or accounted for as a payable, so that the real picture of the business is revealed.

Hence, if goods are bought on credit or advertisement delivered (but not paid), these have to be shown in the P&L of the business so that it reflects the true position of the business (as in is there a profit or loss) and also who are creditors that need to be paid.

In the same vein, entrepreneurs need to at least ‘book’ their true salaries, even though they may withdraw it later, at their own pace. The reason is simple. If the business cannot afford to pay them, then it’s a business not worth having.

And if the business can easily afford to pay them, then it means that real and genuine ‘value’ has been created in the enterprise! Hey, it even signals that a professional CEO could be employed!

Even better is a situation when startups with ‘salaries outstanding’ get funded, the entrepreneur can even take some money back home and also negotiate a better salary post funding.

If the VC doesn’t allow taking money home, at least the amount of payable salaries shows as capital contribution by the founders towards building the business!

– How much is too much? How little is too little?

There is no science or ‘pay commission’ that determines how much should entrepreneurs be paid in their own Companies. We all read of greedy CEOs who pay themselves millions of dollars and of noble souls who pay themselves a dollar each year as compensation. So how much is too much and how little is too little is anyone’s guess.

My benchmarks are:

– The entrepreneur must have her basics provided for.

So depending on the lifecycle of the entrepreneur, the usual costs of living, supporting family and the occasional holiday must be built-in, into the payable salary.

– If the entrepreneur is a ‘career professional’ migrating to an entrepreneurial career, then the salary must at least take care of what I call ‘lifestyle maintenance’.

This means that if the professional has a certain lifestyle that she could afford via the salaries of her previous job, then that lifestyle must be maintained in the new entrepreneurial role. Sure, they can be no more room for savings, but the last thing you want is the kids of the newborn entrepreneur to wonder, “What the heck did mom do wrong to punish us like this?”

– Salaries vs. Equity

There is a big misnomer in the community that if you are the entrepreneur promoter with the largest chunk in equity, then there is no need for any significant salary. At best this applies to serial entrepreneurs who have already become rich.

But in startups, there is no guarantee that the equity may even convert into pots of gold. However, the days and years spent in building the business can never be recovered. If you are a first time entrepreneur, struggling with a startup, do not be fooled into believing that you should be slogging all day long, building a golden castle but eating cabbage soup in the community soup kitchen.

– Venture capital influence

A few VCs bully entrepreneurs into not drawing reasonable salaries. They reward these entrepreneurs by funding their company but punish them into not letting them take some monthly money home.

This is perversion of a miserly level. I ask why these VCs should indeed draw obscene salaries themselves, when the money they have raised from their own financiers has still not borne return?

I believe that entrepreneurs need firmness and dignity while negotiating salaries before they close their investors and investments and not leave this topic open, to be treated like vagabonds in hope of VC kindness at dinner time.

All in all:

– If you are an entrepreneur, price yourself correctly and reflect that in the business.

– Take some cash home and keep some payable. Maintain a healthy balance.

– As an owner of the company, be reasonable in your salary demand but don’t feel ashamed of being paid!

– If VCs ask you to work for charity, tell them to go and invest in Mother Teresa’s business instead.

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First featured in the October issue of Entrepreneur magazine (India).

Read ALL my other articles published in Entrepreneur mag HERE.

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29 Comments

  1. This is a real good read for people at start of their carriers and confused about their savings before starting up. This confusion can actually delay the start up at right time or reduce their confidence to take the plunge.

  2. Awesome article. Being a first time entrepreneur myself (who does not draw salary!) I can connect with all the points mentioned here. A question I have: is it a good idea to get more equity stake into the company every month in place of the forgone salary?

  3. no. 

  4. Good one! revelation that VCs do prevent founders from taking home salary.

  5. As usual its great writeup Alok.. Being a marwari, I can easily get your point about booked vs paid expenses 🙂  This surely support the entrepreneur..  I appreciate your views here.

    My question is if you wear the hat of an investor and fund a start up, will you agree for an entrepreneur in that start up to draw the salary for lifestyle maintenance even if she is a career professional migrating to the start up career??

  6. Why not? Isn’t not taking salary = putting more money into the startup?

  7. amazing!!! just realized , now i really need to start paying myself from my venture 😛

  8. interesting take on things.. as always.. this is a subject that I have always wondered about as an entrepreneur…

    While one shouldn’t rip the company, its crucial to not struggle to make ends meet…

  9. Found these interesting points on Venture Nursery’s website on eligibility criteria (http://venturenursery.com/HOW-OUR-PROGRAMS-WORK.html):

    1. Ideally, you should not need an income, any income, for at least 2-3 years of starting up. It does take time to build a business. If you have a boyfriend or girlfriend on whom you need to spend money, or you are married and your spouse isn’t working or have a child who needs support, factor it in before you decide to take that start-up ship. No investor wants you to take any respectable salary while also building your own business.
    2. Remember what they say about compensation. It’s something you get paid when you can’t to do what you love doing. That means it’s either your business or compensation, not both.
  10. Why I believe this is a really important point of view:

    • As an entrepreneur, if I have to think about meeting my daily expenses, its a waste of my time and energy. I sincerely believe any investor would be better off providing the entrepreneur a reasonable take home so that the focus in on business only.
    • I also have the belief that since a startup is a risky investment – the goal of the investor is to make a really large return on it (though this is only my assumption – any investors reading may clarify). By giving the entrepreneur a reasonable take home – the objectives of the investor and entrepreneur become more aligned.
    • I see any investor forcing an entrepreneur to take a less than reasonable compensation as not having a belief in the business itself – like damage control – correct me if I’m wrong but isn’t this completely against investment philosophy. For, any investor when investing, wants a favorable outcome and when and if it comes – what the entrepreneur took home on a monthly basis just wont matter.

    There is one argument – that having being compensated properly, an entrepreneur may not put in the required effort as he is already taken care of (no risk) – like, why should the investor take all the risk alone. I probably don’t have a iron clad answer to that, but I believe you can’t expect entrepreneurs to not care about their business. Anyone with a more rational argument here on this is more than welcome to add.

  11. Good Post, this reminds me of some thing that happened in past.  one of my fathers friend who is also a IIM graduate and woked for big companies in gujarat, retired and now in devotional life. he once told me  ” dont think of how much to take   10k or 20k from your business, think you need 30k every month and work according to it, then your business will run in good path, you get your 30k with out any problem. because the positive way of thinking always helps you to run your business the best you can”  as its quite old suggestion i might not typed the right one. but i think one can understand

     its really like i need 30k for my self and so i need to reach more than 60k business this month and that’s how you show good business cycle.  if you still cant think like that then you might be decreasing your self, your ideas, your potential, your strength, your positiveness .

    if suppose if you think that as a startup i cant draw that much, then as all entrepreneurs do, work hard and get the business run and then think of taking more as salary and keep it on running faster than before

    Thanks

    Sai 

  12. Good article… an eye opener.. I should at least start paying myself on paper..!!

    Thanks for solving the mystery, Mr Rodinhood.. 

  13. On the same note

    http://venturenursery.com/HOW-OUR-PROGRAMS-WORK.html

    Read point 4&5 in ELIGIBILITY CRITERION: BOOTCAMP of the above link. Is this an acceptable ask from an accelerator? Debatable?

    V

  14. I totally agree with Alok on this. I didn’t draw salary for more than 2.5 years and believe me it does creates a difference. Entrepreneur should give himself a target of say 15-18 months by which start-up should be able to afford some basic salary. You should not only target long term value creation but have short term targets also.

  15. Our CA says that even if we book salaries and we don’t accept it in reality we need to start paying the TDS for the same..thats why we haven’t started booking salaries yet for the founders

  16. I agree about pitying thyself or feeling guilty. I think other made me feel more guilty than  I really was!

    As an entrepreneur, I did pay myself a salary in the first year for which my accountant reprimanded me. However, someone needs to pay rent and live to continue paying the bills (Try having a windfall expense that takes away half your savings in the first three months of being an entrepreneur). However, I went an entire 1 and half years without a salary after that and even absorbed the expenses of the business for 6 months without any re-imbursements to make up. But it feels good to beat all that money hole without any funding and proudly say I own every piece of my business without any outstandings! For the record I pay myself less than what I used to earn before I was an entrepreneur, I fix my pay based on completing my commitments and taking care of a little insurance just to keep the hunger going. 🙂

  17. yes he is right. but what is the portion of TDS to salary? Quite Less! If you cant pay even that, they you are in trouble.

    book lesser salaries if required. Also TDS has some deadlines in filings…

  18. Vivek,

    To add value to readers, simply copy and paste the content here so that it becomes an easy reference.

    This is what is written:

    1. Ideally, you should not need an income, any income, for at least 2-3 years of starting up. It does take time to build a business. If you have a boyfriend or girlfriend on whom you need to spend money, or you are married and your spouse isn’t working or have a child who needs support, factor it in before you decide to take that start-up ship. No investor wants you to take any respectable salary while also building your own business.
    2. Remember what they say about compensation. It’s something you get paid when you can’t to do what you love doing. That means it’s either your business or compensation, not both.

    Alok:

    I dont agree AT ALL.

    This is meant for third-fourth round entrepreneurs who are self sufficient.

    I guess each model is different..

  19. Yeah, and I dont agree.

    Its not meant for folks who have EMI’s and tuitions fees etc

    This is meant for the RICH who want to start up for fun.

    PS – I know the Venture Nursery guys very well

  20. Apologies  for the lazy post …. 

    The second point does raise concerns for me though. Not sure if they do follow this seriously or is it just to attract serious/passionate applications. 

  21. will send this post to Ravi Kiran and ask his views

  22. TDS deducted in any month has to be paid by the 7th of next month…
    In my view its hard to get debt funding. And if one does manage to convince a bank, interest rates for unsecured loans are crazy. if one get a CGTMSE loan or a working capital loan, its still not cheap.
    new ventures (especially ones which deal with tangible products or real estate and not services) require tremendous amount of capital for expansion and to build momentum and size that make it interesting for both the entrepreneur and the investor to join hands…
    in this scenario, in the first few years, every rupee is worth 10000 times what it would be worth when the enterprise reaches its maturity…
    Perhaps Alok, you’d disagree. But this is something we experianced at Eco Corner….

     

  23. Amish, as i have said, its all depends

    maybe you are not looking to get funded.

    there are so many entrepreneurs who are and i have seen that establishing a salary base early helps.

    finally, i state that this happens AFTER a few months/years

    So, if say after 18 MONTHS

    – you get funded by a VC to build a business that has no revenue (like my games2win biz initially)

    OR

    – you are a services business that starts ops and hence a topline and bottom line

    THEN, You SHOULD be able to pay PART/ TDS on salary!!!

    If not, then…. best of luck!!

  24. Hi Alok, 
    It definitely seems like we agree on certain aspects that determine when we should start taking a salary such as time period, the type of business and the fact that there are no fixed rules…

    I was just sharing our views given that Eco Corner is in retail which is laden which some seriously heavy real-estate and inventory-related costs…

    And just to share with you, yes we are looking at funding, but are keen to build a certain brand momentum and sales turnover which would allow us to get a better valuation before we approach the investors…

    cheers!

    Amish

  25.  “I pity the fool.And I will destroy any man who tries to take what I got!” 
    -Mr. T in Rocky 3

  26. Amish in your reply to Alok earlier you said Bank interest is high!

    Just wondering, if bank interest or working capital loans are considered high then why go for angel or venture funding where the cost of funding equals losing your pants while you keep your shirt on?

  27. Its indeed a must read article, for startup entrepreneurs like me,
    We had running our startup since last 3 years. and didn’t took or booked salaries we deserved — Now looking forward to.

  28. Nice One Alok…

    got many take aways….thanks

  29. Alok, I do agree with you; but are their any VC’s in India who’ll fund your “Start Up” along with “Lifestyle Maintenance Expenses”.

    I have a minimum viable concept under “E-Commerce” domain (with no cash burn); but due to my “Liabilities”; I can’t take a plunge.

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