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Have You Paid Yourself Today?

You’ve got a great idea, some buds ready to work with you, and the urge to get going with your own biz. Time to get a start-up company going and make some cash, right? Before you go splurging, you need to consider just how big your paycheck is going to be.

Pieces of the Action

Taking a ride into business sometimes means you’re going to have to cough up some gas money. You’ll have investors and employees who want their paychecks as well. If you need investors, you’ll definitely want to show them what you plan to pay yourself. “Anyone that is investing and doesn’t see a salary figured in is going to think you don’t know what you’re doing,” says Michael Goldstein, president of Professional Planning Associates, a consulting firm for business planning.

Earn Your Keep

Figuring your own paycheck sounds like a real cool deal, but you can’t just launch off into Bill Gates’ salary range. “You have to come up with a salary that is market-based,” says Michael, “Look at it as what you would pay somebody to do that job.” Michael suggests looking at salary rates for a job like you would be doing in a larger company. Be realistic, if you’re supervising five people making widgets, you probably won’t be making the big bucks right away. He also says that the nature of your industry could be a factor. If you’re working with high-tech Internet apps your value might be a bit higher, and so you can give yourself a little raise. “It’s a little bit of common sense,” Michael says. Checking out sites like Salary.com can really help with this research.

When It Pays to be Underpaid

Sometimes actually underpaying yourself a little may be good for your company. If you’re on the hunt for some investors to back your big idea, you want to show them you’re willing to make some sacrifices in order to grow your biz. “When you’re working for less compensation than your job value, you’re building ‘sweat equity,’” says James Cotto, a vice president financial consultant with Merrill Lynch in Mt. Kisko, NY. James explains that sweat equity looks good to investors because your work value goes to the bottom line of the company. “It helps you leverage the strength of the company in order to grow,” says James. You can come out looking like a risk worth taking to folks who might back you with cash. If you’re cutting yourself a big check, you might scare them away. “As an investor, it’s unacceptable to find the price/earnings ratio is high due to high salaries,” says James.

Balancing the Budget

Keeping those investor folks happy is great, but you don’t want to live on those cheap noodle meals, either. Striking a balance with your salary can keep your backers in good spirits and you in some decent chow. “I think that in general you’re going to see some pretty modest salaries in those situations,” says Fred Sturgis, vice president of technology investment banking at Chase H&Q, “At the same time you don’t want your CEO to be worried about paying the bills, you want them to have enough to be able to concentrate on the business.”

Paying yourself as a business owner should keep you from being flat busted, but your salary isn’t what gets you those big numbers. “The objective is to really increase the value of the stock, or the equity,” says Fred, “that’s where you can really create some wealth for yourself.” As a start up, squeezing pennies is going to be a way of life. You’ll want those pennies to go to something that will build your company, and not into your pocket. Hold out from taking a big paycheck, and later you can score the big bucks out of your stock.