Understanding Founder Economics
You might be thinking about starting a business. In today’s post, I want to make sure you fully understand the economics. Every new founder thinks they are going to have a hugely successful exit and make millions, or even billions. However, the reality is that the early days of startup life are tough. You get to bestow the title of CEO and Founder upon yourself, but you better be ready for the economics you are signing yourself up for.
Here’s the true facts — most startup founders cannot take a salary for the first 6–12 months. You need to be prepared for a period without any cash flow from your business for this early time. Do you have enough of a financial cushion to make it through a period this long? If not, you might need to find another way to get your business rolling. Many people will choose to start their business as a side hustle, working a full-time job with a regular salary while exploring their startup ambitions in their free time. I have worked with other founders that commit a full day to their startup while having some other form of income like driving for Uber or being a personal trainer or doing influencer campaigns. If either of these methods is how you plan to launch your business, please know that these are really common and can definitely work.
After you raise a Seed round, you should expect to take a salary in the range of $50–100K per year. I have seen more and less, but this is probably about the right area. In the early days, investors are not going to want to see you take too much of their cash going out of the business to cover your own personal expenses. Founder salaries maybe double at the Series A or B rounds from these levels. Now depending where you are currently working now, these might sound great or they might sound low. If you are in a high-income investment banking or corporate job, you should not expect venture investors to fund your same lifestyle while working on an early stage startup, that just isn’t how it works.
So where is the payoff? Well, that comes 5–10 years later when you are able to sell the business or take it public. Most founders will still own 10–30% of their business at exit, so you can certainly dream about a big check if you can build something special. However, if you sell your business to an acquiring firm, they may ask you to stay on for 1–3 years as part of an earnout situation. This will further extend the time until you can truly cash out from your new business.
This is why I have previously written that starting a business to get rich is probably not a great idea. You are much better off starting a business to solve a problem you are passionate about and let the money be an exciting bonus. Thanks for reading today’s post, I hope this helps you prepare for the long-haul financial implications of being a founder.
