In Short
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Paying yourself below the national minimum wage is unlawful under the Fair Work Act 2009.
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Consider directors’ fees or authorised deductions if you’re also a director.
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Market-rate salaries are typically feasible after securing seed funding.
Tips for Businesses
Before paying yourself, ensure compliance with employment laws by documenting your role and compensation. If you’re both a founder and director, consider directors’ fees or authorised deductions to manage cash flow. Consult legal and tax professionals to structure your compensation appropriately and avoid legal pitfalls.
Most founders in the early stages of their startup agonise over every dollar spent. And paying yourself or your co-founder a salary will limit how much capital you have to inject into your startup. However, it is not sustainable (nor nutritious) to survive off canned tuna.
In our experience, founders typically wrestle with two questions:
- Can I pay myself or my co-founder with sweat equity, instead of a minimum wage?
- When should I start paying myself a market-rate salary?
This article explores some rules to help guide you around cutting yourself a cheque. In particular, we explain your legal entitlements under Australia’s employment law, and how to maintain cash flow in your business.
Can I Pay Myself With Sweat Equity?
A startup founder usually forfeits a market-rate salary in the early stages of their business and is compensated instead through shares (also known as a ‘sweat for equity’ arrangement).
If you or your co-founder work full-time in your startup in exchange for equity, you might also be an employee and would likely have a written employment contract.
If your startup does not pay its employees the correct minimum wage entitlements, it will breach Australia’s employment laws, and your company (as well as its directors) may need to pay significant fines.
So, it is important that you have a document in place setting out what work you are performing for the business and how you are compensated for that work.
After proving your startup’s success in your home country, you may be thinking about the next step for growth — expanding overseas.
This free guide aims to introduce startup founders to the Australian startup market.
What if I am the Director and the CEO/Founder?
If you are a founder and director of your startup, but not an employee, you may be paid directors’ fees for performing key duties. These duties are usually agreed by a company resolution or set out in the company constitution, for example, managing the board. In this situation, a director is not entitled to minimum wages under the FWA.
However, it is rare that in the startup’s early stages, a founder would not work in the business as an employee.
Practically, a founder who is a director and an employee can help the business’ cash flow in the following ways:
- choosing to feed your directors’ fees back into the business through a directors’ loan; and
- authorising your employer (i.e. the startup) to deduct money from your wage (also known as a permitted deduction under the FWA). An employee (i.e. you) must authorise the deduction in writing, and it must be principally for your benefit. In this instance, you will derive the most benefit from your startup’s success as a co-founder.
In the table below, we set out key legal documents that you will need.
| Cash-flow Assistance | Legal Document | Key Terms |
|---|---|---|
| Directors’ Loan | Loan Agreement |
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| Authorised Deduction | Addendum to your employment contract |
You should also review these terms every six months. |
When Should I Start Paying Myself a Market-Rate Salary?
If you are funding your startup through external investment instead of bootstrapping, it is unrealistic to expect to pay yourself a market-rate salary until you have secured seed funding. Experienced angel investors and venture capitalists understand the importance of a founder committing themselves 100% to the business’ success, so they will expect you to allocate a portion of the investment towards your salary. It is usually untrue that angel investors and venture capitalists expect founders to pay themselves nothing. Ultimately, a founder’s own financial stability will and often can have a significant impact on their ability and focus to grow their company.
If you are raising capital to pay yourself and your co-founder a salary, remember that you will need to accept an equity dilution, which will impact your return on your business. Hence, you should weigh up whether it is worth giving away a significant ownership percentage of your company for cash in your bank account.
How Do I Know How Much is Reasonable?
If you are raising from a VC, you might see a founder salary cap included in the deal. This cap will depend on the round. In our experience, a standard cap for a seed round is $100,000, and between $100,000 and $150,000 for a Series A. However, these figures are negotiable.
When deciding how much to pay yourself, you should ask yourself the following questions:
- How much money have you raised to date?
- Do you have, or intend to bring on board, any co-founders? and
- When will you raise your next round?
- Are there any Alternative Ways of Getting Cash out of the Business before an Exit?
One option for founders conducting later-stage capital raising rounds is the use of secondary sales. A secondary sale allows an existing shareholder to sell some or all of its shares to investors in the primary capital raising round, to enable those new investors to acquire a larger stake than would otherwise be available to them.
Whilst a Founder would generally be limited with regard to the number of shares it is able to sell as part of a secondary (because the incoming new investors want to ensure they retain a sufficient stake in the company to keep them motivated), by the time they do sell down, even a small portion of their shares can be worth a lot of money. As such, a secondary sale can help a Founder gain some early liquidity and also reduce the personal financial risk they are facing.
Key Takeaways
When determining how much to pay yourself, it helps to look to other startup founders and see what is standard for your type of business and industry. If you are working in the business as an employee, ensure that you are receiving the minimum wage. And if you choose to pay your co-founders and employees through a ‘sweat for equity’ arrangement, ensure that you seek legal and tax advice to avoid falling foul of Australia’s employment laws.
For more information on the right time to pay yourself a salary as a startup founder, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Yes, in the early stages, founders can receive equity instead of a salary. However, under Australian law, if you are classified as an employee, you must be paid at least the national minimum wage. Always have a clear agreement in place about your role and compensation.
You should consider paying yourself a market-rate salary after securing seed funding. Investors typically expect you to allocate a portion of the investment towards your salary. However, be aware that paying yourself a salary will result in equity dilution, which may affect your ownership percentage.
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