While some entrepreneurs may enter the startup game looking to get rich quickly, Sydney founder Marty Spargo has built an online salary calculator to show founders that “entrepreneurship is not as glamorous as it seems” by proving that the higher a founder’s salary is, the lower the long-term value of their equity becomes.
Across the board their responses were unanimous: it should be the bare minimum in the short term to grow equity and wealth in the long-term.
Spargo is the co-founder of Sydney energy drink delivery startup Reize, and was inspired to create an online founder salary calculator after his experience in the Sydney startup ecosystem saw him witness a rise in “new founders, usually coming from the corporate world and having expectations of making millions”.
“I think I have a duty of care to provide some of the harder truths about entrepreneurship — it’s not always as glamorous as it seems,” Spargo says of his motivation to build the tool, which was launched this week after a month of development and trials.
The calculator asks founders to nominate how much they want to pay themselves, as well as what revenue returns they want to see from their startup’s marketing spend.
It also asks for details about their startup’s net profit, the pre-tax revenue multiples of companies similar to theirs, and their equity stake in the company.
Spargo says the calculator is built to help founders “understand the impact that their salary has on the long term value of their equity” by using a graphical representation to show how paying high salaries can “harm the value of your future equity”.
“It’s not really created to help you find an optimal level of salary, but is trying to demonstrate that you should be paying yourself as little as possible to grow your business,” he says.
“If you have successful business, you should be more focused on investing as much as you can back into business … if someone is not comfortable with paying themselves a modest salary over a long period of time then they should know that before they start [a startup].”
Reize turned over $120,000 in revenue in the last year, according to Spargo, and is in the process of raising its first $800,000 funding round. But he says that revenue growth and fundraising shouldn’t necessarily justify a large salary increase.
“At all times founders should be getting paid below market rate,” Spargo says, which he puts at around $50,000 – $70,000 per year for startup founders.
“Founders need to have skin in the game — you can have equity or cash but not both, you need to choose.”
“You don’t want to be bleeding your company dry”
Michael Jankie, co-founder of Melbourne-based social media startup PoweredLocal, tried Spargo’s salary calculator and found the results “sobering”.
“Where I think the calculator is great is that it shows you the effect your pay has on your equity,” Jankie tells StartupSmart.
“I can sit here and say I deserve $200,000 a year because that’s what someone who works the hours I work should earn, but when you plug that in to the calculator you can see the detrimental effect that can have on your equity, and the long term loss it causes.”
“It’s sobering to use something like that, and while you can argue you’re worth that much, it’s a really poor use of scarce resources: cash.”
Jankie, who says he pays himself “less than half of the market rate” for his level of work — which he places at $180,000 per year — suggests founders should be paying themselves “an amount that is enough to live off” without having to take on extra jobs or financial stresses.
He emphasises that “it’s important to be paying yourself less” than market rates in order to grow your startup, because “you don’t want to be bleeding your company dry just for the sake of taking more money”.
“In my business I’m not the highest paid person — the majority of employees earn more that I do, but the flip side is I earn more equity, so I am invested in the long game rather than the short game,” he says.
Blackbird Ventures co-founder Niki Scevak supports Jankie’s sentiments, adding that early-stage founders should ask themselves “what’s the absolute minimum they can survive on” and pay themselves that amount.
Scevak says most early-stage startups that have raised around $1 million in funding usually pay themselves between $70,000 – $100,000 a year, however, he suggests startups seeking seed funding should only be paying themselves “what you need to get by”.
“Sometimes there are people that are motivated by cash and their salaries are very high — that’s an inversely correlated variable to startup success,” Scevak says, adding that founders who pay themselves high salaries are “definitely a negative turnoff” when he is considering investing in a company.