SaaS Founder Salary: How Much Should You Pay Yourself?

Founder Compensation: A Growing Conversation

Investor Leo Polovets recently highlighted a critical point on Twitter: if a seed-stage company founder is concerned about covering monthly electricity bills, their salary is likely insufficient.

Conversely, he suggested that monthly savings exceeding $10,000 might indicate a salary that is excessively high.

The Shift in Perspective on Founder Pay

Polovets’ observation has fueled a wider discussion regarding appropriate founder compensation. Both startup founders and investors are increasingly acknowledging the impracticality of prolonged periods without income.

The traditional expectation of founders foregoing pay for extended durations is being challenged as unsustainable.

SaaS Founders Have an Advantage

Founders within the SaaS (Software as a Service) sector often find themselves in a more favorable position. This is due to the industry’s trend of companies achieving revenue generation very early in their lifecycle.

Some SaaS startups even manage to operate successfully without requiring external funding.

Navigating the Compensation Question

Despite overall success, determining an appropriate salary for oneself remains a challenge for many founders. Understanding prevailing practices is also difficult.

To address this, we have compiled perspectives from both founders and venture capitalists (VCs). This research identifies key factors and benchmarks to assist in making informed compensation decisions.

Key Considerations for Founder Pay

• Understanding the financial health of the company is paramount.
• Market benchmarks for similar roles provide valuable context.
• Personal financial needs must be realistically assessed.

Establishing a fair and sustainable salary is crucial for founder well-being and long-term company success.

Establishing Founder Compensation

The term "founder salary" is frequently used when discussing how founders should be paid. However, framing the discussion around a fixed salary can inadvertently set unrealistic expectations. Instead of attempting to correlate personal compensation with previous earning potential, data suggests founders generally accept a reduction in pay.

Consider the experience of Chris Sosnowski as an illustration. Prior to dedicating himself full-time to Waterly, his water data management startup in early 2020, his income exceeded $100,000. However, he emphasized that his prior salary wasn’t a primary consideration when determining his new compensation.

He based his pay on the funds required to sustain the company’s operations, as he communicated to TechCrunch. This approach aligns with the concept of deferred compensation, a strategy well-understood by those with equity in a company.

Having invested personal capital and holding a majority stake, Sosnowski anticipates future financial rewards if Waterly succeeds. He expressed his hope to eventually reimburse himself a full year’s salary for the period of reduced pay.

Like many entrepreneurs, Sosnowski’s current earnings fall below his market value. Initially, he went several months without pay. He then began paying himself $10 per hour, later increasing this to $14 in 2021.

His motivation for this modest compensation was practical: he wanted to establish a 401(k) plan for himself and future employees, but a higher income would have resulted in negative net pay.

We are highlighting Sosnowski’s situation not only because of his openness in sharing financial details, but also because his circumstances are relatable. He is a married man with three children, not a young, single individual. He and his family had accumulated savings for over a year before he forgone his salary.

Despite these savings, sacrifices were still necessary. “I can live my life without entertainment … so that’s what we did for 2020,” he stated. Sosnowski prioritized essential needs while eliminating non-essential expenses, demonstrating sound and measured financial planning.

This contrasts sharply with some questionable advice that has been circulated, such as the suggestion to rely heavily on credit card debt. Indeed, creating financial instability can negatively impact a business.

Research indicates that financial stress can impair judgment, which is a critical function for any founder. Sound financial planning is therefore essential for effective leadership and decision-making.

SaaS Compensation Benchmarks

Christoph Janz, a German venture capitalist, developed a valuable calculator to assist SaaS entrepreneurs in determining appropriate self-compensation. The associated blog post details the primary considerations Janz incorporated: company stage, family size, and geographical location.

The calculator defaults to locations like Berlin, San Francisco, Paris, and London, using Berlin as the baseline. However, it’s designed for customization. For example, Nasser Ghanemzadeh, an Iranian founder, indicated that Tehran should be assigned a 0.4 coefficient relative to Berlin within the spreadsheet.

Utilizing resources such as Numbeo allows for comparisons of living costs between cities, enabling you to derive a suitable coefficient for your specific location.

Key Factors in Salary Determination

A significant advantage of Janz’s calculator is its integrated approach to various factors. It estimates a $60,000 salary for a founder of a pre-revenue SaaS company in Berlin with one child.

Conversely, the estimated compensation rises to $207,000 for a CEO of a San Francisco-based startup generating $10 million in annual recurring revenue (ARR), having secured a Series C funding round exceeding $25 million, and having no children.

As an investor specializing in B2B SaaS, Janz recognizes the multifaceted nature of a company’s stage. Therefore, his model considers both funding stage and revenue metrics like ARR or run-rate revenue.

Janz posits that a startup founder with ARR surpassing $2 million can be considered financially equivalent to someone who has raised a Series A round of over $5 million. This perspective is particularly useful for bootstrapped companies or those operating in markets with atypical median sizes.

Further Data on Later-Stage Compensation

For insights into compensation at more advanced stages, a 2019 Crunchbase article by Sammy Abdullah concerning CEO salaries at the time of IPO is worth reviewing.

However, it’s important to note that not all CEOs featured in the article are founders or exclusively focused on SaaS businesses, necessitating careful evaluation.

For instance, Tien Tzuo, the co-founder and CEO of Zuora, received $300,000 in compensation when the company filed its S-1 in 2018, in addition to $102,060 in bonuses and other benefits.

The Importance of Frugality

While the median salary outlined in Abdullah’s post is $276,000, exceptional cases often garner attention. Abdullah highlights that “some of the most effective CEOs accept the lowest salaries.”

This sentiment, echoed by a VC at Blossom Street Ventures, aligns with common investor viewpoints: “[Venture capitalists] generally prefer to support a resourceful, economical founder over one who spends lavishly, and the CEO’s salary is indicative of their overall philosophy.”

VC Perspectives on Founder Compensation

The prevalence of discussions surrounding founder pay often originates within the venture capital community. While opinions may differ, a common viewpoint was articulated by Peter Thiel at TechCrunch50 in 2008.

However, a shift in this perspective is currently unfolding due to several factors. Increased recognition of diverse personal circumstances is a key driver, acknowledging that the inability to forego a salary doesn't automatically indicate a lack of dedication. Charlie O’Donnell, a New York-based VC, noted on Twitter that “[F]ounder salary is a real issue that gets in the way of parents and anyone not in their 20s starting up.” He further stated, “TLDR: You don’t need to wear a barrel to start a company.”

A more practical reason for this evolving flexibility is the intensifying competition among VCs for promising investment opportunities. As Danny Crichton highlighted on the Equity podcast, “There is just not a lot of supply for founders, so the old rule that post-Series A, a founder should not take more than a salary of [$125,000 or $150,000] … is dead.”

This competition isn't limited to VCs vying against each other. Founders now have a broader range of options, particularly within the Software as a Service (SaaS) sector. Strong performance metrics can unlock access to revenue-based financing (RBI) or the emerging category of “flexible VC.”

These alternatives offer a pathway to avoid traditional VC terms, though not necessarily to eliminate all financial oversight. TinySeed, an accelerator and fund focused on bootstrapped SaaS startups, explains, “To avoid a situation where a founder pays themselves an enormous salary and never takes dividends, we determine a fair salary cap with the founders.”

Generally, founders are demonstrating a decreasing reliance on VC approval regarding their compensation. This was exemplified by Alexander Deeb, CEO of edtech startup ClassHook. His financial projections included a predetermined salary of $60,000 for himself and his co-founder, independent of VC input.

Deeb stated, “If we have the right investors, they would trust that we’ve made the right decision for ourselves.”

Returning to Core Principles

The decision-making process at ClassHook mirrors the considerations of many startup founders. According to Deeb, their approach to determining founder compensation involved researching typical founder salaries online and calculating individual living expenses for a reasonably comfortable lifestyle. While accepting some financial discomfort, they prioritized avoiding any negative impact on their work.

Furthermore, they intentionally overestimated salary needs within their budget, recognizing that any remaining funds would benefit the company’s growth and investment capabilities. Currently, this remains a projected scenario, as Deeb and his co-founder have not yet begun drawing salaries.

ClassHook’s development began with serious work on the concept in November 2014, culminating in a formal launch in February 2016. Initially, both founders contributed part-time, but Deeb transitioned to full-time dedication in May 2019, supported by personal savings. He also proactively reduced personal expenses and increased home cooking to promote both health and financial prudence.

Shifting Investor Perspectives

Historically, venture capitalists exhibited caution towards founders simultaneously maintaining external employment. However, this perspective has evolved, with some investors now actively recommending it. O’Donnell articulated this shift in a blog post, emphasizing that even a modest income can be crucial for a founder’s stability.

He observed that the assumption that full-time commitment is a prerequisite for fundraising is often inaccurate. O’Donnell stated he would not penalize a team for continuing to work until securing funding after a raise.

Establishing a Financial Runway

For those intending to dedicate themselves fully before securing funding, entrepreneur Wes Winham, based in Indianapolis, proposes a useful guideline. He suggests ensuring a personal financial runway of two years, encompassing both living expenses and anticipated self-compensation, before committing full-time. This strategy proved successful for his SaaS company, Woven.

Winham leveraged the proceeds from selling a previous venture, PolicyStat, to establish this runway. He initially conducted approximately ten customer discovery interviews to validate his idea. Following the PolicyStat sale, he meticulously calculated his financial needs to ensure a two-year buffer without a salary, referencing guidelines from Jason Lemkin, founder of SaaStr, who recommends a 24-month commitment for SaaS startups.

Salary Progression

After the initial two-year period, Winham began paying himself an annual salary of $60,000. Subsequently, following the completion of their seed funding round, he and his co-founders increased their salaries to $105,000 per year, as reported to TechCrunch.

Key Stages of Founder Compensation

A significant turning point for many startup founders is securing a seed or pre-seed funding round, often coinciding with the initiation of founder salaries. Analysis of numerous U.K. funding events, conducted by the legal tech company SeedLegals, revealed a clear trend in a 2019 publication.

Approximately 50% of founders securing funding of £150,000 or less begin drawing a salary. This figure rises to 75% for those who have successfully raised between £150,000 and £1 million (roughly $211,000 to $1.41 million).

Furthermore, the data indicates a direct relationship between company valuation and founder salary. For each £100,000 ($141,000) increase in valuation, founder compensation typically increases by approximately £1,300 ($1,834) annually.

Utilizing Milestones for Salary Adjustments

O’Donnell suggests that framing compensation around specific achievements can be a beneficial approach.

A structured plan involving incremental salary increases tied to reaching defined objectives – such as a product launch or generating initial revenue – can effectively address concerns regarding motivation. This strategy also ensures that spending aligns with the remaining risks.

Evaluating Long-Term Financial Well-being

A crucial self-assessment involves considering the potential outcome of startup failure.

Ask yourself: would you later question whether your salary contributed to the company’s downfall? Or would you lament having forgone compensation to a degree that is ultimately unrecoverable? This is a vital consideration, as startup success isn't guaranteed, and long-term financial stability is paramount.