What should I pay myself? How do I price my services?
It is a question I have had to ask myself from time to time as well.
My experience with start-ups is that there is no formula for executive compensation, other than the survival of the company. If you are the sole proprietor or owner of the company, you have the full risks and are entitled to the full rewards of the business. If you are part of a group, then your ownership risks and rights (unless a partnership) are determined by your share of the corporate entity you formed.
The Simple Answer:
To yourself, you are worth what you want.
To the company, you are worth what they can afford.
To the market, you are worth what you are willing to settle for and they are willing to pay.
The Full Answer:
A company or business can only afford to pay you the net value of your contribution toward its revenue and profit generating capacity. This depends a lot on the size of the company, its stage in the corporate life-cycle, its ability to manage its cash flow, and its accounting practices.
How do you value your contribution?
You value your contribution in terms of the type of contribution you make to the company.
There are only three sources of funds for the company -
Equity (savings invested by the investors),
Debt (borrowings from creditors that must be repaid) and
Sales (sales to customers) only sales create New Money.
The other two sources just redistribute existing funds obtained from other sources.
For start-ups cash is king!
Generally, compensation in a start-up is in the form of equity or debt rather than salary or wages paid.
The rate that the company can afford to spend for your services and the amount which you demand should be consider in two parts, equity and debt. What the company can afford to pay you in ownership rights at the beginning is the equity. And the difference which you demand for a return on your investment takes the form of a salary divided into cash and debt. Debt is the compensation you are willing to defer for the future and constitutes a loan to the company.
Salary/wages is what you must have in order to afford to continue working for them. This is the cash you require to meet your own personal obligation (support your personal overhead).
Equity:
In a start-up, the business is funded through the savings of the founders, their sweat, and any other intellectual and material assets they bring and donate to the venture.
For example: If you contributed or donated 80 hours a week for four months to get the business up and running, you would have contributed 1280 hours.
The question you want to ask yourself is: “What was my time worth when I agreed to "donate" 80 hours a week for 4 months?"
I would start there to determine what your donation (investment) to the business is.
If your time is worth $75.00/hr, from example, and you can justify this fee by past earnings records, then you have donated $96,000 of time to the company.
This is your equity investment which you should capitalize in terms of your equity position in the company.
In addition, add any out of pocket expenses you incurred during that period and any material contributions you donated that you have not been reimbursed for to date. Say, $4,000. Your total investment in the company is $100,000.
Equity is the value you have risk. It is your share of the ownership in the venture. Unless the company can earn back the equity investment of the founders, you will lose the monetary value of your investment. On the other hand, as the value of the company grows as a result of sales, profits and the perception of its worth to others, the value of your investment increases.
Therefore it is critical that you value your contribution at the beginning. As a sole proprietor, you will own 100% of your investment. If you have active partners and/or other passive investors, then you will want to translate the monetary value into a number of shares or a percentage of ownership rights in the corporate entity.
You might also ask for, and negotiate, a buyout formula for your equity share of the company with your co-owners for reference if and when you leave the company. Check with your accountant and lawyer for the best way to set this up.
Debt:
In a start-up, a secondary funding source is debt. Most common here are personal loans made by the principals to the enterprise. Other sources are loans by friends, family and “angels.” Once established and proven viable, debt financing may be obtained through SBA backed small business bank loans, micro-lending facilities, among others.
Debt is paid off through the earnings from sales and call for an added cost to the company in the form of interest payments to the lender.
You need to ask yourself the following:
What would you be charging (or being paid) for your time if you were to work for someone else in the same position, in a company at the same stage of development?
This is your next best offer. Don’t try to compare your value to an established, or mature, company! Otherwise you are comparing apples and oranges
Now, if you decide that it is worth your while to stay with the company, then consider that you will be lending capital to the company. The amount will be the difference between what you could receive in salary from your next best opportunity and whatever salary the company can afford to pay you. This is a starting point, NOT the ending point.
The question for you and the company is: how big is the loan?
You need to determine for yourself:
What are my basic overhead expenses, i.e. my cost of living?
How much am I willing to lend to the company?
In what form should the loan be made -- preferred stock, warrants, options, etc.?
The answers to these questions should give you a wage or salary base to work from in your own planning as a sole proprietor, or your negotiations with the other owners as a partner/shareholder in corporate entity.
Revenue:
The problem all start-ups face is cash-flow. Going from concept to commercialization is a drain on the available cash. The most common reason for start-up failure is under capitalization.
Salary/wages are a drain on the company’s cash flow. Therefore it should be watched very closely, if the company is to grow. As an owner and a creditor, you should ask the following financial questions:
1. What does the company need to grow?
2. What is the breakeven point, and when will the company get there?
3. What does the business plan call for in terms of staffing and capitalization/growth needs?
4. Where will the money come from to pay for this?
5. What are the company's revenue and market projections?
6. What is the exit strategy for the investors and creditors?
Sales and marketing is the engine that will drive the business. As a sole proprietor, you must address this issue if you expect to survive. If you are part owner of a corporate organization, you must be prepared to forgo short term returns to achieve the long term rewards of ownership.
PURPOSE
Starting a business is your opportunity to take charge of your future. You should answer the following questions for yourself.
1. How long do you plan to stay with the company?
2. How will you recover your initial investment, through capital appreciation, salary, and/or interest and principal repayment?
3. What rate of return do I want or need to eventually earn on this investment in order to achieve my life goals?
PERSPECTIVE
When you start a business, you wear many hats -- investor, owner, lender, operator, marketer, financial wizard and broom pusher. With these hats come many different interests. You will be balancing many conflicting demands. The better you plan, the better you will be able to manage them.
Finally, I ask the questioner:
“As a potential owner how does this business venture fit into your personal life goals?”
“Is the business a means to an end, or is it the end?”
“Will you own the business, or will the business own you?”
Conclusion:
As a sole proprietor, these are daunting questions filled with risks and yet full of potential for personal freedom and satisfaction. As a member of a team of investor-entrepreneurs, it is an opportunity to be part of something in which you can see the real impact that your skills, experience, talents and efforts can have and be rewarded for it.
For further information visit: B. R. Bainton Associates at http://sites.google.com/site/brbaintonassociates/
