Startups hemorrhage cash at the beginning (in most cases). Be ready for it to impact your wallet. While you may not be personally investing in the business with your existing cash, it is likely that you will be making less money than you would if you went on the open market to get a job. That lower salary is as if you are investing in the business with lost wages. The amount of money a startup costs is often ignored, but it’s one of the many founder sacrifices that are made when starting a new company. The personal financial burden of creating a startup is only one of the founder sacrifices faced by entrepreneurs. We cover them all in The Startup Playbook.
In some cases, founders will invest a great deal of their personal money into the business. We have all heard the stories of founders maxing out credit cards, taking second mortgages, and borrowing money from friends and family. While there aren’t any right or wrong decisions on this front, you’ll want to understand that building a startup often means taking a step back financially for a period of time. Of course, if the startup is successful, you may take giant steps forward, but there is significant risk involved in between when you start and you get to the outcome you are looking for.
There’s a lot to think about concerning your personal financial situation. In general, you are going to want to figure out how during the startup process that you are generating enough income that you aren’t worried about supporting yourself and your family. Being worried about making ends meet is probably not helpful to keeping your focus on the business.
Of course, if your business is generating significant cash then paying yourself more is a perfectly acceptable path to consider. You’ll want to balance that with how much you want to reinvest into the business to continue to help it grow even faster. If you have investors, work with them to figure out what is a reasonable path economically for you and that works for your business.
The financial sacrifice in the early days of a startup can take a toll on founders. Make sure that you talk to your co-founders, investors, and advisors about the right way to approach this tricky topic for your startup.
If you’d like to hear more about how founders should compensate themselves, grab a copy of our book, The Startup Playbook.