Here’s how to structure a startup founder’s pay

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Starting a business is a huge leap from earning from a traditional day job. The shift, however, creates a few pain points when you have to forego that fat paycheck and reliable stream of income.

Many have asked: “Does it mean that I have to wait until year end to receive my pay?” “How do I pay for my daily expenses?” These are concerns on the short-term cash requirements of many startup founders when they’re just starting their businesses.

In my previous article here on Tech in Asia, I wrote about why salary is not the best way to pay yourself as a founder, which might have been interpreted in extreme. In this article, I will try to bridge the gap in understanding how a founder’s pay can be structured better.

Basic founder pays

Let me begin by giving you a bigger picture of how founders can pay themselves. There are two basic types of payments: payment for work and payment for investment.

Payment for work is commonly represented by salaries. Since most founders are actually working for their own startups, it is just and right that salaries are paid to compensate the work they’ve done. This can be a bit tricky to determine, though (shhh…some founders even crushed their years of friendship with their co-founders just because of this!).

Payment for investment is commonly represented by dividends. Dividends in its simplest form will be distributed equally based on the number of shares held by the investors. This is relatively straightforward since everybody is clear about how many shares they own. Now, if you don’t know the number of shares that you hold or the number of shares outstanding for your startup, please do start to worry and think more about your business.

Payment for work

You’re used to getting paid salaries at the end of the month for the work that you’ve done for your employer/s. That’s how you’re taught in school and that’s what you’re comfortable with when you’re still working for someone else.

I’ve discussed in my previous article that, as a founder, you shouldn’t really pay yourself that much in salaries because that method is inefficient. Let me explain.

Structuring your payment for work

I won’t really dive into the complexities of salary structuring, as this can be complicated and there is absolutely no one-size-fits-all solution, based on my years of practice. However, here’s the basic idea on structuring a founder’s pay.

Structure your total salary in two parts: (1) baseline salary and (2) performance-based salary. What’s the difference?

Baseline salary represents the minimum livable salary for you and your co-founders (assuming, of course, that you’re all working for your startup too). Performance-based salary, on the other hand, is related to you and your co-founders performance during the payroll month, quarter, and/or year.

Why do I recommend this? 

Payment for investment

Wait, you said I must not pay in salary in your previous article?