Guest Post by Ajeet Khurana
Here’s a tip for the well-heeled, corporate-type planning to turn entrepreneur: slip off your crisp white shirt and designer tie, and fasten your belt instead. There are many individuals, who, while climbing the corporate ladder are bitten by the entrepreneurial bug. They have the brains and the drive to go it alone but there is usually one hitch.
When they submit a business plan to angel investors or early-stage venture capitalists, they are inevitably faced with the following question: ‘How much have you invested in the business yourself?’ The last thing investors want to hear is a notional number based on the salary the entrepreneur has just ‘sacrificed’.
Factoring In Missed Salaries
When a salaried individual gets entrepreneurial, there is a tendency to value oneself based on one’s last-drawn salary. The entrepreneur almost feels he or she is doing investors a favor by demanding a sum that is equal to, say, half their last-drawn salary. This is ludicrous. If your previous salary is a benchmark of how much you expect to draw from your start-up’s funding, you should reconsider getting entrepreneurial in the first place.
Investors Bring In Money To Grow Business
Up until an entrepreneur is self-financing his or her venture, it makes no sense for them to draw a salary at all. That would amount to taking money out of one pocket and putting it another! In the process, the entrepreneur would end up paying income tax. Often, entrepreneurs end up crediting themselves salaries for this period but they do not actually pay out.
Thus, as an angel investor, I comes across business plans that envisage paying the entrepreneur a hefty sum on account of unpaid salaries! That will just not fly. Investors bring in money to grow a business, not to pay the entrepreneur’s foregone wages.
Am I Saying Entrepreneurs Should Not Draw A Salary?
Not at all. All I am saying is the salary drawn cannot be benchmarked against the last salary drawn. There are many entrepreneurs who ask me, ‘What percentage of my last-drawn salary would seem reasonable?’ I always reply, ‘Forget your last-drawn salary. If that is the measure of your ‘worth’, maybe you should remain salaried.’
How Much Is Right? And Why?
The salary you draw should be enough to…