As entrepreneurs, we will be confronted in different ways with the salary issue, both from a psychological and operational point of view. Depending on the stage of development of the business, financial realities will quickly impose constraints. The entrepreneur will have to test his judgment and diligence so as not to weaken his company by paying himself disproportionately for the financial capacity of the company. Then comes the question of the evolution of the executive’s salary as the company grows, particularly with the potential arrival of new players in the equation (management employees, external shareholders, etc.).
Finally, can the entrepreneur pay back the salary debts of the past? How can he evaluate the value of his contribution objectively and how can he maximize the benefits of his shareholder status? Did this subject catch your attention? Read the following…
When you have the luxury of paying yourself
The first issue of the entrepreneur’s journey is whether and when he will be able to earn a salary from his business activities. More importantly, he needs to analyze his personal financial needs to determine how much time he will be able to work without a paycheck, or what will be the minimum wage he will need to meet his financial obligations. Of course, if you start your business after your university studies and still live with your parents, the needs will not be the same as if you already have a mortgage and a young family to feed.
Nevertheless, the reality is the same for many and the issues are real : the company may not have the financial strength to pay you for a few years, and sometimes even for much longer than expected. So you have to be ready, knowing that you may have to spend all your financial resources on starting the business, growing and developing it, or hiring your first employees.
In short, you need to make sure that the business takes off before you even think about the question of your financial worth in the job market…
When you have no choice but to pay yourself
At a certain point, the first paycheck must arrive, either because you no longer have an emergency exit or because the profits that are generated finally allow you to get a salary. This is a critical step, but you will not necessarily become an official employee as you may simply pay yourself with dividends, which will cost the company way less (I will explain why in the second part of this article).
In my case, I started to pay myself a meager salary in the form of dividends, two years after officially starting the activities of my company, once I had fully consumed all my reserves. This quickly increased the company’s expense ratio and it was necessary for revenues to follow and sales to be the most profitable… Which was not my case, and I started losing money, then more money, before being able to pay myself a salary.
This is the true burden and the reality, and it is only at this stage that we truly become aware of the impact of our decisions on the viability of our business. Ironically, the founder is the key person in each company, and from the meritorious point of view, it is obvious that this person should receive an adequate compensation, but the reality is that his contribution will not be recognized for some time. It is presumed that he will, one day or another, be able to pay himself a salary : and here I am not talking about adequate remuneration, but the simplest salary.
The salary is perceived as an income from the personal point of view, but as an expense from the professional point of view, it is a duality that the entrepreneur will have to learn how to handle correctly. Those who fail can quickly cause the bankruptcy of their business.
The evolution of the entrepreneur’s salary
The general perception is that an entrepreneur makes a lot of money and is a shareholder of an asset that is most likely very valuable. Not only have I found in my personal journey that people tend to overestimate the turnover and value of businesses, but also underestimate the difficulty that the entrepreneur may encounter to pay himself a salary. Yet the entrepreneur can live on the poverty threshold… for a long time before seeing his business becoming profitable, or before giving up and looking for a stable job that pays better!
It is clearly when the entrepreneur decides to sell his business that he hopes to become financially of his own adventure. But nothing guarantees that this day will come and that the valuation will be up to his expectations. This is another subject that I will discuss in a future article, valuing a small company, the REAL value of a company.
While for years he had to sacrifice his paycheck for the benefit of his company, once the entrepreneur begins to see profits build up on the bottom line, how should he consider his own pay? I felt a lot of guilt myself, especially since I was receiving requests for salary increases from my collaborators who felt underpaid. Nobody cared if I was receiving a salary, or not… except me. I was not told that it was my turn, that I also deserved to pay myself properly… until the day I met my business Angel who wanted me to make it a priority.
Then, as the years go by and the profits accumulate, you have to consider salary growth, but this will reflect several factors, including the involvement of the partners in the decision… which brings us to the next point treated in the second part of this article.