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When should founders finally pay themselves
When every founder needs to prioritise their own financial sustainability
Both bootstrapped and funded companies have their fair share of financial struggles. A founder, unlike a corporate employee does not maximize their everyday earning potential running their company. The modern skilled knowledge worker is often compensated with top dollars in a corporate career in the best of companies today. Managing a successful career over decades through upskilling is a challenge, but corporate employees, by and large, can achieve a good life financially. Most founders, until their funded company becomes a unicorn, or their bootstrapped company starts raking in profits, are often underpaid, if paid at all. Many investors insist on a lower pay for the founder till the company hits certain revenue and growth targets. In one’s prime earning years, this can put severe pressure on the founder.
It was after five years of profitable cash-flow growth that I could eke out a small salary for myself. With my global pedigree and academic qualifications, I could have earned a decent sum of money working in a corporation. As a bootstrapped company, the profits that we generated had to be channelled to fund future growth. Growth is a money-pit and often consumes a lot of cash and we could not stop growing as the company would have ceased to exist. It becomes necessary for a company to reach a high revenue number for the founder to earn a market benchmarked salary. The revenue needs to be large enough that the founder salary becomes insignificant and makes little difference to the company’s growth aspirations. Most founders never reach there.
During those years of low compensation, it is crucial to have an alternate income mechanism to support your life. My wife was working and without her income, our entrepreneurial dreams would have collapsed very quickly. Many founders squeeze their lifestyle and be extremely frugal during this phase. This is not sustainable over time. With growing life-needs over time, it becomes important for founders to have a semblance of normalcy in their lives that allows for comfortable living. We took vacations with our children and dined in nice restaurants, providing us the belief that life was working out well for us. This was made possible due to our decision to live in a low-cost city in India. Things would have been very different if we had decided to start from Palo Alto instead, where cost of living is very high.
For most young companies, generating a healthy cash balance is extremely tough. Even for a profitable company like ours that grew every year, accumulating reserves was not an easy task. Our bank balance never grew dramatically over time. For companies that make losses, the cash situation can become horrendous. The founder must ensure that employee salaries, vendor payments and even utility bills are paid on time, as any delays can disrupt the operations of the company. Sometimes, founders are forced to borrow money from friends and family to sustain their companies. The cash pressure can put founders under enormous stress.
Optimistic company projections often don’t work out in real life. Every so often, I would get streams of bad news, many that would result in a financial loss. A debit-note from a customer, low productivity of the operations, expedited shipping costs, high cost of customer acquisitions or an unanticipated accident were all operational issues that we encountered that had a direct financial hit to the company. For a bootstrapped entrepreneur who owns the company, a financial hit on the company is no different from a personal financial hit.
Even VC-funded companies that don’t meet their growth prospects, can face uncertain situations. To prepare for explosive growth, investors often structure these companies in such a way that cash-loss in the initial years is over-looked in lieu of future growth. However, when things go bad and the company is unable to raise the next round of funding to support its operations, founders often are confronted with bad options that take a toll on them. A possible down-round where the next set of investors value the company lower than the previous rounds can wipe out the equity of employees, founders and earlier investors.
Turning a loss-making venture funded company into a cash generating entity is the single biggest challenge for funded start-ups.
Often, the founders build their companies, assuming that their unit economics allows them to be profitable at their intended large scale. They hire talent at high costs and operate out of fancy offices in the central parts of the city. Employee engagement activities planned by HR gets expensive over time. When the tide turns, the founder is expected to change the course of a ship that has been set in a particular direction.
Cutting costs drastically by laying off employees and bringing in frugality is a morale buster for the employees and the founder. Many unicorn founders get into this situation and the pressure becomes unbearable. Even in 2025, major companies like Ola Electric (1000 layoffs), Gupshup (200), Cars24 (200) and VerSe Innovation (350) have been among the most prominent to announce job cuts citing cost pressures. These situations that are unfortunately all too common in the Indian start-up ecosystem.
Creating financial sustainability should be a crucial entrepreneurial goal. It is extremely important to get the company to a point where capital inadequacy is not dominating the founder mind.
Bootstrapped founders should try to hit this goal from the beginning so that external factors don’t affect the financial well-being of the company. While this is the ideal state, reality could be different. When the proverbial shit-hits-the-fan, founders should learn to separate their personal selves from their company. Managing emotions today to fight positively another day is critical….
In the early years of our company’s existence, I would face many crises that could potentially sink our company. A lost truck, a flooded warehouse location, a government shut-down notice, an employee who stole customer goods were just some of them. Even an iron-clad contract, insurance or pricing leverage cannot completely offset the risk of these existential crises for a young company. As the owner of a privately owned company, the financial impact of a bad outcome due to these crises would squarely fall on my shoulders.
While many of these issues resolved within a few weeks, my ability to operate effectively as a founder CEO during those times was affected. I would have constant thoughts around the uncertain outcomes, but I needed to still be the dependable leader for our employees and our customers. A founder CEO does not have the luxury to let emotions affect his daily functioning. This could only compound the issues. I had to boost morale even in those difficult times.
Compartmentalizing various issues in the mind is a skill that every founder develops to survive. As our company grew, the frequency of crises increased. My nerves were getting frayed, a condition that resonated with many of my entrepreneurial colleagues and friends. Some seasoned founders take these crises as an aspect of the business and not let it affect them materially and they soldier on.
Excerpted with permission from Penguin Random House India.
Write to us at feedback@livemint.com
Source: LiveMint
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