Investors want their investments to accelerate the company, not just maintain the status quo burn rate

Staff Writer

Are there any investors who still think that the founder should not draw a salary? originally appeared on Quora – the knowledge sharing network where compelling questions are answered by people with unique insights.

Answer by Adam Gering, CEO of Uncommon Social, on Quora:

I believe that a founder should take exactly zero dollars from the check I write to the company in the form of salary. If the founder earns a salary, if should be paid from revenue, or from growing the company to the stage where it is able to attract much more investment capital.

Why? Because I’m a pre-seed investor and I’m writing a relatively small check.

Whether the founder should draw a salary depends upon the stage of the company, the amount of the investment, and some simple math. What percent of the investment is going to pay the founder’s salary, how much does it take away from growth spending, and how much does it impact runway? A salary of $100,000 is going to be a very relevant allocation from a $250,000 investment, and a largely irrelevant allocation from a $2,500,000 investment.

Seed investors often feel the founders should continue to bootstrap off of their own savings and spend all seed money on new spending (i.e. development and marketing). They want their investment to accelerate the company, not just maintain the status quo burn rate. If the existing burn rate is too high compared to the amount of investment sought (or seekable based on valuation), it will make the company unfundable.

So absolutely, if I were to write a $10,000-$50,000 check to a startup, and not as part of a much larger seed round, I’d expect them to spend it on new things they need, not pay it to themselves as salary. That is the point: use it to reach a milestone, not to transfer risk from founders to investors.

At the point of a series A or a well-endowed seed round, investors would like founders to take the minimum amount of salary that they need to cover their living expenses, but no more. That can range from minimum wage for a serial entrepreneur with savings or a student entrepreneur in a dorm room to 75% of market wages. Runway math still comes into play.

Finally, at the point the company is well off the ground and has raised substantial capital and/or is achieving substantial revenue, salaries can approach market rates. Personally, I believe market salaries or taking a small amount of money off the table during a later-stage funding round will put founders in a position to find their global maximum outcome rather than seek a local maximum and an early exit.