According to a recent report, startup founders are navigating the tricky terrain of compensation in 2024.
The average startup founder in the US is making $142,000 this year, with bootstrapped founders typically paying themselves between $1-$100K annually and VC-backed founders between $50K-$150K.
But how do you determine the right salary for your unique situation? Let’s break down the key factors to consider.
Average Startup Founder Salaries in 2024
Determining appropriate founder compensation for 2024 necessitates understanding average startup founder salaries, which slightly increased from 2023 due to an improved funding landscape.
The average startup founder salary in 2024 stood at approximately $143,000, marginally higher than the average startup CEO salary of $141,000. Technical and product founders typically earn more than their CEO counterparts.
Founder pay tends to rise as startups mature and acquire more capital, with seed stage founders earning $133,000 on average compared to $218,000 for Series B founders.
Particularly, technical and product focused founders, such as CTOs and CPOs, command higher salaries than other roles like CEOs and COOs.
To conclude, founder salaries reflect their role, technical expertise, and the startup’s growth stage, with compensation increasing as companies secure additional funding rounds.
Bootstrapped vs VC-Funded: Impact on Founder Pay
Whether a startup is bootstrapped or VC-funded greatly affects founder pay levels. Founders of bootstrapped startups typically pay themselves lower salaries compared to founders of VC-funded startups.
According to industry data, VC-backed startup founders earn an average salary of $183,000, while founders of bootstrapped startups earn an average salary of $133,000.
This discrepancy arises because venture capital funding provides startups with more capital, allowing founders to compensate themselves at higher rates.
Furthermore, the stage of the startup and the timing of fundraising also impact founder salaries, with founders of later-stage startups and those who have recently raised funding tending to pay themselves higher salaries.
How to Determine Your Salary as a Founder
While the gap in founder salaries between bootstrapped and VC-funded startups is notable, establishing an appropriate compensation package for a C corporation founder requires a nuanced approach.
To determine your salary, start by researching industry standards for similar roles and companies at your stage. Consider factors like your experience, the company’s performance, and funding situation.
Consult with an accountant to verify compliance with IRS requirements for reasonable compensation. Review your personal financial needs and the business’s ability to cover expenses.
Aim to strike a balance between fair pay and the company’s long-term financial health. Regularly re-evaluate your salary as the business grows, making adjustments as necessary while adhering to tax regulations regarding excessive compensation or disguised dividends.
Pros and Cons of Paying Yourself a Salary vs Dividends
As a C corporation founder, the decision to pay yourself through salary or dividends carries distinct advantages and drawbacks.
Salaries provide a stable, predictable income but require regular cash flow and are subject to payroll tax withholding.
Dividends offer more flexibility but require planning for year-end tax liabilities and are subject to double taxation.
The appropriate mix depends on the company’s cash flow, your personal financial needs, and tax considerations.
Salaries simplify tax planning but may result in overpaying taxes if not monitored closely. Dividends provide more control but require careful tax planning to avoid double taxation.
Consulting an accountant is recommended to determine the best compensation structure that balances personal financial goals and tax efficiency.
Tax Implications of Founder Compensation
Determining founder compensation carries significant tax implications for C corporations. As C corporation founders, your salary is subject to payroll taxes, including Social Security and Medicare taxes.
Nonetheless, dividends distributed to you as the owner are subject to double taxation – first at the corporate level and again when you pay personal income tax on the dividends.
This double taxation makes paying yourself a reasonable salary more tax-efficient than taking dividends.
The IRS requires your salary to align with industry standards for similar roles to avoid potential penalties. It’s vital to carefully structure your compensation to minimize your tax liability while complying with regulations.
Consulting a tax professional can help you traverse the complexities and optimize your tax strategy as a C corporation founder.