Not a penny more, not a penny less!

N. Ramakrishnan | Updated on March 10, 2018

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Hari Prakash Shanbhog, Founder and MD, ipomo communications.

Satyen V. Kothari, Managing Director and Founder, Citrus Payment Solutions

To take a salary or not is the question

Some quit the comfort of a high-paying corporate life to start a venture on their own. Some others decided to become entrepreneurs right after college, taking a shot at an idea they had nurtured even while studying.

While the former sink in all their savings into the business, the latter bootstrap and get going. Both these categories of entrepreneurs face a common dilemma: Should they take a salary at all in the first place? If so, how much should it be?

There are differing views. One that says the entrepreneur has put in so much effort that he or she should be adequately compensated. The other that feels that after all the business is the entrepreneur’s and hence he or she should not take money out of it till it has reached a certain level.

Broach this subject with entrepreneurs, they are quite clear. In the case of a start-up, every penny or paisa is crucial for and needed to run the business.

In such a situation, taking money out in the form of salary will be a drain on the business, especially when its cash flows are still to stabilise.

“It is very important that an entrepreneur does not take salary in the first few years and one should plan for this before taking the entrepreneurship journey,” says Hari Prakash Shanbhog, Founder and Managing Director, Ipomo Communications India Pvt Ltd. Hari, who worked in Wipro for over a decade, quit to start his own venture in Bangalore.

“An entrepreneur,” he says, “taking a salary in the first few years is like eating into his or her own limited resources. Every penny saved is penny earned and cash is king.”

Harsh Rajan, who quit a well-paying job in the financial services sector to start Hey!Math with his wife Nirmala, points out that any venture in the initial years will not be able to pay the entrepreneur. So, the entrepreneur is compensated in the form of equity rather than cash.

“You can put a certain value to what you are walking away from in terms of your current job. That can be compensated in terms of equity, over and above the cash the entrepreneur is putting into the venture,” he says.

Admittedly, it is a tough decision for anyone to leave a successful career and a good pay package to become an entrepreneur.

However, if they have taken a call and decided to become an entrepreneur, they must be aware of the consequences. Entrepreneurs are aware that they have entered a marathon race and not a sprint.

“Normally,” says Hari, “nobody takes that decision unless they see 10 times returns in the next five to 10 years, along with the passion for creating something new.”

According to entrepreneur and angel investor Raghu Rajagopal, if there is no external funding, the entrepreneur does not get paid, but his or her salary is accounted for in the books of the company. This helps when an external investor comes in. This, he says, is the global practice.

In the US, however, entrepreneurs pay themselves a salary to sustain themselves, as they are on their own and not with their family. In India, says Raghu, the social set-up is different.

Social structure

Entrepreneurs can fall back on their parents, in-laws or extended family. The social structure here will take care of the entrepreneur’s needs till the venture takes off. Entrepreneur salaries are typically decided based on the stage the venture is in and the funding it has got.

According to Kanwaljit Singh, Senior Managing Director at venture capital firm Helion Advisors, typically at the start-up or pre-funding stage, the entrepreneur does not take any salary as he or she is investing every rupee in building the business.

As the venture starts to deliver revenue/cash and after raising a small angel or venture capital round of funding, the entrepreneurs take nominal salaries. Once the business matures and starts generating reasonable profits, or if a larger round of funding is raised, then the salary also increases.

“We have seen that this could be typically 50-75 per cent of market salaries,” says Kanwaljit. The balance is always between the cash flow needs of the business and the fact that entrepreneurs have significant ownership in the company, which is meant to compensate for lower salaries.

Adds Samir Kumar, Managing Director of venture capital firm Inventus Capital Partners, in the case of companies that have raised funds from outside investors, entrepreneurs should take a salary. “The last thing we want is an entrepreneur sitting in office and worrying about paying bills at home.”

In the case of companies that have raised funds from external investors, a compensation committee decides the entrepreneur’s salary.

A number of factors, including what stage the company is in, the equity the entrepreneur holds, his or her experience, cash flow position, affordability and profitability of the company go into deciding the salary. In any case, the salary will be lower than market rates. But that is the trade-off the entrepreneur has to make – he or she owns the business rather than working for someone else.

Venture capital firms discuss with entrepreneurs they have funded and find out their real needs – daily living costs, kids’ education and saving for the long-term – and tell them that they need not worry about these issues. The salary will be adequate to take care of these things. With the assurance of an adequate salary, the venture capital firms then know that the entrepreneur will do what they want him or her to do – stay focussed and motivated on building the company.

According to serial entrepreneur Satyen V. Kothari, Managing Director and Founder, Citrus Payment Solutions Pvt Ltd, the really smart guys in India can make Rs 1-2 crore in salaries. Why should he/she work for Rs 15-20 lakh, he asks. “As an entrepreneur, make sure you take how much you need. It is never going to be market salary,” he adds.

Satyen points out that he could easily get much more by working for someone else than what he is earning in Citrus. In the consulting business that he had in the US, “I was making five times as much money and working half the time. I was taking five months off a year travelling. It was a lifestyle choice. But this is a lifestyle and passion choice. It is a trade off at the financial level. Nobody forced me to do it,” adds Satyen.

A metric to judge

According to him, the good VCs that he had seen let the entrepreneur propose something. It is a metric that they judge the proposal by. Is this person being reasonable or unreasonable? In the first company he started, in the US, for the first few months Satyen says he did not earn a salary.

“The first round of funding we got, we took a basic salary that was average for an employee level. The next round, when we got the bigger round, we said we sacrificed two years, now we have to come up to general standards. The guys were understanding,” says Satyen. Because you have proven your credibility, right?

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Published on June 16, 2013

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