One of the hardest questions that new entrepreneurs face is: When to pay themselves? I have seen all sides of this question. I have seen those who won’t even start a company until they gain enough capital investment for a paycheck and I have seen those who always find a reason to hold off on paying themselves. Which way is right?
It probably won’t surprise you to hear that the right way is a happy medium to both of the described ways. But the ‘why’ is what might interest you.
1. Payday immediately – This way is wrong for several reasons. First, you may never even start your company because you are ‘waiting’ for enough capital investment to pay yourself. Second, many of those who are looking to invest don’t want to pad your pockets. Whether angel investors or friends, most ready to give you money for your idea will want to give it to something in the business. It is hard to invest in a company when you know it might actually be going to your new car!
The next reason is that your new company is too cash flow fragile to start paying yourself. Essentially by taking the money yourself you are limiting your company’s future growth by limiting its purchasing power. You will find many things you should do for your company that you can’t because you lack the funds. Just remember if your company starts to succeed you’ll earn a much greater paycheck if you just show some early sacrifice.
A last and final reason to wait on the paycheck is to wait until you’ve earned it (wait until you start to reach success). By waiting you won’t be dilusional that your company is doing well when it is not. You’ll be hungry and literally working for food. With your back up against the wall you’ll find that you’ll work harder than you ever have in life. You also won’t over-charge for your product. I have seen inventors seemingly try to earn all their investment back in one sale because they are trying to get ‘paid’ right away. By pricing to get paid asap, you are most likely pricing your product(s) out of potentially a real success. Buyers are smart and sales will be severely limited if your pricing is padded to give you that paycheck now. Work hard, stay hungry and you’ll get to a paycheck.
2. Waiting for Payday – This way is also wrong for several reason. First, you must recognize your value. No one else is going to recognize all your hard work by paying you, so you must do it yourself! Think about this; if you don’t pay your Accountant, Lawyer, or Graphic Designer they’ll come after you and demand their money. If you don’t pay yourself no one will come after you… but why are you less valuable than your hired out professionals? Truth is, you are the most important person in your company and once the company starts to succeed that must be recognized by a paycheck.
The next reason is that if your company is really going well and has a chance to be successful, it must be able to support your paycheck. No one will want to buy your company if they look at the books and realize that the ‘owner’ never got paid. This will scare off any potential purchaser as they will be concerned that something is wrong with the company. They will feel the company can’t afford the needed expense and will not be convinced until they see the necessary expense on the books.
A last and final reason to pay yourself when the company starts to succeed is that you deserve it. You didn’t leave a cushy (yet boring) job to earn nothing. You quit so you can make a better life for you and your family. Respect yourself and you’ll find a greater appreciation for ‘doing your own thing’ and the entrepreneurial life you dreamed of.
