Congratulations, you’ve started to get some great traction on your startup! You’ve either raised some capital or are starting to get enough sales to consider paying yourself a salary and hiring some first employees.
Making sure you get the right compensation for yourself and your staff is an important consideration while scaling up.
How much should you pay yourself?
In the first four years of founding Appster, Josiah and I paid ourselves $350 a week, that’s $18,200 a year. It wasn’t much, but it was enough to cover our minimal expenses and invest every cent back into growing our company.
One mistake that too many entrepreneurs transitioning from a corporate role into their own startup make is not understanding that every dollar you take out of your startup in the early days is a huge opportunity cost later on as your growth compounds.
If you take a $100,000 salary while you’re just getting started, it will cost you millions a few years later, on sales and growth you could have potentially achieved if you put it back into the business.
You should be prepared to pay yourself the absolute minimum you need to pay your bills, and then reduce those costs down to the minimum.
For us, that meant renting a tiny bedroom in a student apartment, often sleeping at the office under desks and giving up things like going to the movies with friends and eating out. The lower your personal overheads, the less stress you’ll have to succeed.
If that’s not possible for whatever reason (such as having kids or other commitments), then I think you should focus on moonlighting — keeping your day job while you work in your spare time to get your idea off the ground.
How much should you pay staff?
People always say that money isn’t important to them, but it’s a mistake to think that underpaying employees is a smart idea, even if you’re a scrappy startup.
Founders often think that just because their startup looks like a more interesting place than their current job, people will often apply or accept offers lower than their current salaries.
However, taking on a new staff member without significant equity ownership on that lower salary is almost always a massive mistake.
If you mapped somebody’s excitement about joining you at the interview stage and then looked at the long-term startup grind with problems, fires and daily challenges; it won’t take long before they are regretting their decision to join you while struggling to take care of bills at home.
You’ll quickly notice your office doesn’t feel as fun and the energy that used to be a characteristic that everyone commented on, doesn’t really exist anymore.
My only advice here is: never hire anyone for significantly less than they’re paid currently. It’s not worth it, even if they want it!
If you need their talent or experience, consider hiring them as a freelancer a few hours a week, putting them on as an advisor or taking them on as a co-founder with significant equity (if they are committed to the company!)
You need to offer more than just cash, you have to offer meaning
The people that will make a true difference to your startup will have more options for employment than you can imagine.
They’ll have a LinkedIn InMail full of recruiters pointing out where the grass is greener, so you need to offer more than just cash to retain people.
One of the things startups can offer that many huge companies cannot is the ability to see how your work has a big impact on the company’s success. The best thing you can do is constantly remind people of the meaning behind their work.
That’s why it’s critical that as the CEO you are always reminding everyone of 2 things:
1. Why the company matters and what the vision is
2. Why what they are doing matters to the company and the clients it serves
You only know you’ve done this successfully when people start to roll their eyes because they’ve been in so many “vision pitches” that they can recite them by heart. At that point, you’ve said it enough!
Mark McDonald is the co-founder and co-CEO of Appster, a leading mobile app and product development company with offices in Melbourne and San Francisco.
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