How much should you pay yourself?

One of the hot topics amongst entrepreneurs is how much you should pay yourself. Pay yourself too much and you'll stunt the growth of your business. Pay yourself too little and you'll stress yourself out worrying about the daily expenses of life. There is no "correct answer" to this question.

I was watching the No Plan, No Capital, No Model, No Problem video on Guy Kawasaki's blog a few weeks back and someone in the audience asked that very question to the panel of entrepreneurs. Some of the entrepreneurs were not much farther along than I am, and some had been running successful companies for years. No one on the panel agreed upon an answer per se, but they all agreed that most founders make little to no money during the startup phase and into the first few years. The majority of the panel worked for 6 months to 2 years without taking pay.

I feel like there's a misconception about entrepreneurs and how much they pay themselves. Just because you own a million dollar company that doesn't mean you pay yourself $100k, $50k, or even $30k. True entrepreneurs do what's necessary for the business to succeed and many times that means paying yourself less than the three college programmers you just hired.

How much to pay yourself and when to pay it is a decision each entrepreneur has to make for themselves, but I've been in three distinctly different situations since I left my career and one has worked much better for me.

Situation 1: I just quit my job and my sites (SportsLizard and iPrioritize) were essentially breaking even. I took NO pay for about six months and lived off savings. This was stressful...avoid doing this if you can :). I am now a firm believer that every business should immediately generate revenue, and if it doesn't it should tweak it's model so that it generates revenue temporarily until the original plan is making income. This leads me to situation 2...

Situation 2: I started SEO consulting and I was pocketing everything. Once I figured out I needed revenue, I started spending about half of my time doing SEO consulting and the rest trying to grow my sites. I made a lot of money in this phase, but the problem was I was biased towards anything that would bring money ASAP since I pocketed it right away and that changed the way I worked.

Situation 3: I form Pure Adapt with 3 other developers and we go on salary. We toyed with different payment plans, but ultimately decided on salary. Our "performance incentive" is our stock in the company, and it's nice to know exactly how much I'll be pulling in from month to month. We pay ourselves VERY little for how much revenue we generate, but at least I can budget for my bills and not worry about doing a quick "cash grab" project that's bad for the business to pay my credit card off. Extra money gets re-invested into the business, and we're just getting to the point after about 7 months that we're considering giving ourselves raises to the point where we make what an average 23 year old makes coming out of college...still much less than I think people think we make, but it's what's necessary for us to grow the right way.

The faster you can get yourself into Situation 3, the better in my opinion. Salary becomes an expense just like hosting or rent, and the company finds a way to pay it every week. For me, this has enabled me to stop worrying about my personal financial situation and focus solely on growing the company for the future.

Of course, in a few years we'll hopefully be able to pay ourselves a high salary and still have plenty left over for the business. But as we grow in the meantime this will work just fine.