Is your low salary hurting your business?

As I walked to dinner with a friend, he described his aversion to expensive meals. I was well aware of his penchant for frugality, as I had seen him go to great lengths to save money. Until that night, I had thought he just enjoyed the practice. 

My friend runs a successful company in LA. He founded his company several years ago and raised about $10 million. The company is financially sound, with massive clients and healthy revenue. In the LA market, he could easily land a mid-six-figure job (he's been offered many). If his company could replace him (they probably can’t), it would cost them a fortune. 

So I was surprised when he said to me, “it's easier to spend a lot of money if you make a lot of it.”

He took my puzzled expression as an invitation to continue. “I have not taken a raise since we started the company. I’m pulling a salary of $70k.”

“You are not saving the f*cking penguins!” jumped from my mouth.

He runs a great company, but it exists for one reason: to make money. But he acted as if his company had a higher purpose that he advanced by not taking a legit salary.

"You're not helping anyone," I told him. "In fact, you're hurting every stakeholder by not taking home a decent salary."

We did the math together: if he doubled his salary and the company never brought in a dime of revenue, his new salary would shorten their 9-month runway by a few days.

If you’re worried about extending your 9-month runway by a few days, you are clearly focusing on the wrong challenges!

My friend is not unique. Like many investor backed founders, he made the mistake of thinking that he was helping his company by not paying himself. Why do founders do this?

You know your failures

As a founder, you know every one of your mistakes. You know every decision that led to a dead-end. Often, founders (myself included) beat ourselves up over the time and money we wasted as a result of poor decisions. This thinking fails us, as it is precisely these “mistakes” that lead to the business you run today. Great businesses are built upon how the team responds to failures, not whether they avoid failures.

You don’t feel qualified

This is particularly true of founders in their mid-20’s to mid-30’s. It’s easy to feel as though we aren’t qualified to run our own company. Sometimes this is true. But, as our business grows, we never stop to realize that we are most qualified to lead the company. Could anyone else step in and take over the organization you have built?

You are a doting parent

Like a parent to a child, founders often believe their businesses are reflections of themselves. We believe that our businesses will support the causes and the values that we hold dear. While this is possible, it's not likely if you have investors and co-owners.

You don’t want to cause harm

As an owner, we think that by taking money from the business we will prevent future success. Early in your company’s lifecycle, that may have been the case. However, as your organization grows, the minimal impact that your salary has on your burn rate or bottom line is far outweighed by the positive implications of a comfortable CEO.

Equity clouds your vision

Most (unfortunately, not all) founders receive equity as compensation. Equity is a great motivation to grow the enterprise value of the company. But it’s not motivation to *maximize* enterprise value. If you’re living on ramen and bread crust, you are far more likely to accept a low-ball acquisition offer. If you’re living on $50k in Santa Monica, an acquisition that nets you $3mil may sound pretty good. However, if you are living on a market rate salary of $150k, you may not be as easily swayed.

If you think you're immune to the impact of a crappy salary, you're wrong. If you think that you can save $50k by not paying your top talent and not adversely impact your company's success, then you're in the wrong role.

There are strong benefits to a good salary. A good board will support, and even encourage, you in raising your earnings to something reflective of your worth.

Increased mental capacity

When you have the cash to live comfortably, you are afforded more room to think. A comfortable home and the occasional vacation, indulgence, or distraction will allow you to apply more quality brain power to your work. Living in a decent home, in a nice neighborhood, and ditching the roommate will also have a positive impact on your mental wellbeing. You may choose to move closer to your office, as one of my clients recently did upon raising his salary. Each step that you can take to improve your quality of life will have an impact on your ability to run your company.

A strong salary keeps you focused

Great founders are well connected. My friend is no exception. He often gets great, mid-six-figure employment offers. Like most founders, he *thinks* he dismisses these offers immediately. However, the fact that he discussed these opportunities with me reveals the truth. When you're not making much money, you're more easily distracted by other opportunities. It's easy to lose a few hours, or even a few weeks, daydreaming about an incredible opportunity. Keeping your salary competitive reduces the lure of a high salary from another firm.

Your salary aligns your purpose

Let’s get honest about why your company exists. If you’ve brought on investors, your business must prioritize making money. Your investors are expecting a return on their capital. You are going to do a better job for them if you are getting paid. More importantly, you must consider what your company represents. Your organization is a vehicle to create wealth. Treat it that way. If it's creating value, it's okay to transfer a small amount of value to you in the form of salary.

Are you saving the penguins? If not, then what will make a bigger impact for your company: a few extra days of runway, or an increase in your focus, drive, and creativity? My money is on the latter. Yours should be too. 

UPDATE on my friend: his board approved a raise for him and his co-founder. They are both receiving a well-deserved $60k increase, and their business is gaining a massive amount of enthusiasm and focus from its leadership.

Leadership, management, or business questions? Send me an email and let's talk: [email protected]