You’re likely asking yourself “Well, how much is that?”
Being a startup founder can make the question of how much to pay yourself difficult. We have heard many founders ask us what the standard salary is that founders are paid. It is hard to figure out, but there is a Founder Salary Database which Seedcamp have put together, to try and give an indication of what founders are compensated in pre-seed to Series A companies. Founders can at least benchmark themselves against other founders with this unbiased peer data set.
Getting paid means founders don’t need to moonlight.
And not taking a salary won’t necessarily make founders look more committed. Investors may question whether they are serious about the business and how long they can sustain it if they are doing it for free.
Average annual founder salaries by Funding Round
Series A: £106,392
Average founder annual salaries by Company Revenue
O – 50k: £61,345
50 – 100k: £75,873
100 – 250k: £66,367
250 – 500k: £77,011
500k – 1m: £72,611
1 – 5m: £93,834
5 -10m: £105,372
Founder salaries are typically higher in the UK than in Europe
UK founders at Pre-Seed and Seed are roughly earning £15k more than founders in Europe.
The general opinion is that this is relative to the cost of living. As a result of London’s very high cost of living, many startups are based there, where founders tend to pay themselves more.
How startup founders pay themselves
The method of paying themselves a startup founder depends on their business structure. If they own the company, they can either pay themselves a salary or issue dividends. Sole traders are subject to income tax and national insurance on net profits, and you may withdraw cash from the business without tax effect, due to the net profits being taxed rather than drawings. HMRC requires that they submit a Self-Assessment once a year to report the net profits and determine the tax owing.
As a company owner/director you are taxed on any income withdrawn from the company. Salary or bonus are taxable as reportable earnings and subject to PAYE and national insurance. Shareholders are subject to Income Tax on any dividends that must be paid out of “distributable reserves” (this means profit left after all expenses including corporation tax has been factored in the funds available).
The optimal minimum salary for a director varies by individual circumstances depending on other income streams e.g. rent, interest earned, but it will be £12,570 or under. It’s important to pay a salary to meet state pension requirements, but aiming to maximise national insurance savings. Your accountant can advise what’s most appropriate for you.
Settling on the right salary
Founders should discuss their salary with investors when they negotiate the terms of their funding round. In the future, their shares may contribute to their compensation, but for now, they should be compensated appropriately with their salary.
Founders may take a while to feel it’s time to take a salary, but paying themselves a salary early on will help them attract investors in the future.
What’s important is that they do pay themselves a salary and that it scales with their startups valuation and revenue. When the venture becomes profitable, that’s when they can start to reward themselves with a higher income.
We’re here to help
If you need help with navigating your salary structure for early-stage startups, our experienced startup accountants and tax advisors can assist. Call us today on 0203 282 7109 or email us.
Seedcamp is a European seed-stage VC, who collected data of the salaries of 185 founders from the UK, Europe and North America. You can find the source to their research here.