Startups aren't easy. Among the more challenging questions for any founder is what do I pay myself? Should I pay myself?
You can't apply the one-size-fits-all approach when it comes to CEO pay. Several factors influence your salary: the type of industry, funding, stage of the business, etc.
For instance, if you are the founder of a bootstrapped company or a seed-stage startup, taking a salary for yourself too early might be impractical because it'll increase your burn rate. Comparing the CEO salary of a seed-stage startup with a Series C startup doesn't make sense, as they're in very different funding domains.
We'll look at various scenarios and compare different CEO salaries to give you insights into how much you can reasonably pay yourself as CEO.
How Has the Startup CEO Salary Changed Over the Years?
There's been a steady rise in the startup CEO salary from 2018 to 2021 overall. While the average startup CEO salary was $130,000 in 2018, it rose to $146,000 in 2021, an increase of 12%.
The COVID-19 outbreak shook the market in 2020. It resulted in a year-over-year decrease in the average startup CEO salary.
Although approximately 36% of companies slashed their chief executive compensation in 2020, it bounced back in early 2021. As tech firms recovered and venture funding resurfaced, there was a 5% year-over-year increase.
The average startup CEO salary also varies with the industry. An analysis of CEO salaries in 2018 and 2019 showed that Biotech and Healthcare industry CEOs had the highest average compensation.
Gender Disparity in CEO Salaries
Gender disparity in the workplace is also present in CEO compensation.
When it comes to startup CEO salary, the difference in pay is roughly $5,000. Women-led companies were more likely to be in their early stages when compared to their male-led counterparts. Although CEOs of companies in later-stage startups tend to make more money, the number of women is fewer. Companies founded solely by women received 2.2% of the total venture capital invested in US startups in 2021. This disparity in raising venture capital contributes to the pay gap.
While the average startup CEO salary saw a dip during the pandemic, it's noteworthy that more female CEOs took larger pay cuts than their male counterparts.
The above stats show that while the CEO pay of men rose about 3% between 2019 and 2021, the CEO pay of women dropped by 4%.
Factors that Influence CEO Salary
What stage a startup is in, amount of funding, cash flow, industry, and CEO experience are all factors determining CEO compensation.
Stage of the Startup
The stage of your startup is a major factor that influences CEO pay.
Not taking a salary for yourself is often a practical solution to controlling burn rate in an early startup.
For seed-stage and pre-seed startups, the CEO may not be taking a salary at all, so it's better not to compare their pay with the market standards.
In a Series-C startup, the CEO can expect a salary in line with market standards. With growth and capital funding, you can increase your pay without destabilizing your business.
Funding Raised
The amount of capital raised is directly linked to CEO compensation.
The CEO's salary depends on a complex combination of factors, but the most obvious indicator is funding raised. The general rule of thumb is that the more venture money a CEO brings in, the better the pay.
For example, a startup CEO's annual salary may rise by $4,000 to $5,000 per $1,000,000 of funding raised in a Series-A startup.
Investors are attracted to highly talented CEOs because they see them as a way to increase the value of their investment. A $100M+ company will usually have a much bigger war chest to compensate its CEO.
On the contrary, CEOs of companies that haven't raised capital may need to reduce their compensation to improve their cash flow.
Cash Flow
Cash flow describes how much money is coming in and going out of your business. Cash flow is a major factor determining your salary as a founder for early-stage startups.
You also need to consider the source of your funding when you're deciding your pay as CEO.
For instance, if you're a bootstrapped startup, taking a salary for yourself leads to more loss through taxes. But, if you can pull in outside investors at the seed or angel stage, a CEO salary can make sense. As the startup grows and is closer to an IPO or acquisition, CEO pay can increase to the market rate.
Industry
CEO salary differs depending on the industry.
The Biotech and Healthcare industries have the highest CEO pay, followed by the Hardware and Fintech industries. The pay scale of each industry also varies with time, depending on market conditions.
Compare your company with its competitors to get a CEO-pay benchmark for your industry. As an example, suppose you own a SaaS industry; compare other SaaS companies to see the market salary range of their top executives.
Experience of the Founder
An experienced startup CEO brings along years of market experience that can propel the company to the next level. This is another factor in CEO pay.
One reason for higher CEO pay in the Biotech and healthcare industry is that the CEOs in these industries possess higher academic credentials (M.D. or Ph.D) than their counterparts in other industries.
This works for a Series-C startup. But, when you're an early-stage startup, experience often has little to do with CEO pay.
Why a Balance Between CEO Pay and Company Growth Is Essential
Entrepreneurship is a tough row to hoe. It demands your presence 24/7 and many other sacrifices.
With all the stress—financial and professional—that comes with it, the least you want to worry about is your day-to-day expenses as CEO.
Financial stress in your personal life can affect your professional life. It can lead to poor business decisions. A salary that meets your expenses and allows you to avoid unnecessary stress can help you make better decisions about your startup.
But overpaying yourself can hinder growth by increasing your burn rate.
Conclusion
Founding a startup isn't easy.
If you are at an early-stage startup, taking a salary as CEO can increase the financial strain on the company. This has to be balanced with the personal needs of the CEO to pay basic living expenses.
While the CEOs of later-stage startups should expect market-value salaries, the answer to the question of when the CEO can take a salary at an early-stage startup is "it depends."
It depends on the financial health and fundraising outlook of the company.
