I believe that entrepreneurs should start paying themselves ASAP. Otherwise you’re starting a weird charity rather than a business. Here’s why:
- It forces you to figure out your business model.
- It’s a win / win for you and your customers.
- You get what you plan for.
Here’s what one entrepreneur said to me recently:
“I’m not going to budget for my own salary.”
I help a lot of startups with their financial models. This founder insisted that he didn’t want to include a line item for his own salary. I told him I thought that was a bad idea, he pushed back, and then I let it go. He’s going to do what he’s going to do.
His thinking was that his salary would make it impossible for his company to ever be profitable.
My thinking was that he should revise his business model if he won’t ever be able to pay himself. Better to figure that out early and revise the plan rather than hope for the best and never get paid.
Here are the benefits of paying yourself:
1. It forces you to figure out your business model.
You’re running a business, not a charity (and sustainable nonprofit charities actually do pay salaries to their owners and employees). A business creates value for its customers and receives value in return. You need to figure this out.
If you’re Uber or Facebook you can delay by raising a ton of money…but you’re probably not Uber or Facebook (and let’s not forget that the founders of Uber and Facebook raised enough money to pay themselves along the way.)
A business needs to generate revenue by definition. If it isn’t doing well enough to pay salaries then it forces the owner to either fix it or give up. This is a great thing!
We fix it our businesses by figuring out how to deliver a ton of value to people. If people aren’t seeing that value, and therefore not paying us, then life is telling us to fix my business model.
What if you need to build the coolest app in the world before people will pay you? Read Running Lean, shorten your development cycle, and get an early version of your product into people’s hands immediately—because customers are part of the design process. You need to see how they behave in order to build the right product.
Remember that Ash Maurya, the author of Running Lean, was able to get 50 paying customers BEFORE building his app.
2. It’s a win / win for you and your customers if you’re making enough money to keep doing this.
If you give up your regular paycheck then you’re already spending money. Here’s a rough idea of how much it’s costing you to start your business:
The full-time salary you’re giving up + Money you’re investing in your startup + Interest on money not going into investment and retirement accounts + Matching on retirement account contributions + any debt you take on
So it gets more expensive every day.
If your goal is to make this new business work then you need to earn money doing it. Otherwise you will eventually have to find a job doing something else. And the sooner you can pay yourself enough to live on, the more time you can devote to building your business.
You’ll stick around longer if you’re paying yourself—so it’s a win / win for both you and your customers.
3. You get what you plan for.
Your financial model is a planning tool. It’s part of how you navigate towards your goals, and how you’re going to measure your company’s progress.
If you don’t have a line item for your salary then you will make decisions based on lower revenue than you actually need to build a sustainable business. And that’s where you will end up.
If you’re not paying yourself then you can charge artificially lower prices. And once you’ve attracted a bunch of customers you start to get locked in at those lower rates, and it’s hard to raise them.
As I pointed out last week, I recommend winning on features and charging full price for as long as you can.
I do understand that some businesses need to run lean at first, and each situation is certainly different. But I also know how hard it is to go without a salary for a long time. If you’re not generating revenue and you’re having trouble raising money, then it’s time to take a long hard look at your business model.
Written by Mike Lingle — Read more practical suggestions for startups at mikelingle.com.