I'm trying to understand the context and limits of your advice, in light of the chicken-and-egg problem of getting people to invest in or buy your product before proving it out, which usually requires building something to show it's possible, which usually requires quitting your previous employer so they don't own it. Are you suggesting that forgoing salary shouldn't be a substitute for thinking about your revenue model, which I'd probably agree with? That thinking "I have money in the bank, I'm fine for now" makes you less hungry and less likely to take the actions you need to succeed? That one should know when to quit and should never let dreams get in the way of facts?
Or are you saying that forgoing salary is always a bad idea? If you are, how else are we supposed to start a product company? It seems like it's a worse idea to take investment without having done some minimal homework and prototyping to prove out the market, which usually requires at least building something you can show to customers. It's a very bad idea from a legal standpoint to do that work while you're still employed by somebody else. Consulting -> product conversions can work, but it's often really hard to make time for product development while consulting.
From my own perspective - I started a "founders don't take salary" company when I was 2 years out of college. It failed miserably, predictably - it was a terrible idea to begin with, and I folded it up once I realized I was in over my head. But I think starting it was one of the best decisions I made in my lifetime, because the skills and perspective I gained from it got me a job that paid enough that I made back that year after about a year of employment. I'm now in a position where I have a bunch saved up, and I'm trying to weigh my options rationally. I'd like to avoid making stupid mistakes, but I'm also mindful of how the #1 regret of most elderly people, on their deathbeds, is that they wish they'd taken more risks.
The idea that you should preserve investor's cash is a good notion, but not at the cost of forgoing fair compensation to yourself and the early founding team. In the long run, everyone is better off from this approach.
(1) Good investors run (on average) profitable portfolios, and they are not going to be made or broken by pennies on the dollar from the disposition of the firm's assets in a bakruptcy.
(2) Good founders should have enough 'skin in the game' that the signalling behaviour forgone by avoiding this strategy should not be the make-or-break between succusseful outside investment (or not).
(3) Following up, if (1) and (2) are in place, everyone is best served by having the founding team fully solvent. Preferably before and after the company succeeds or fails. All of the principal founders, investors, and employees want each other to be thinking clearly, rationally, and open-mindedly...with well-understood motives.
I can easily see paying yourself living expenses, once you've taken investment (or have paying customers), as a good thing. That's basically "ramen profitability", and getting to there as fast as possible is important.
I'm wondering about the part before taking investment - when you don't have any money coming in, are still building out a product (or even a prototype), and have cash in your personal bank but none in the corporate bank. Is it appropriate to pay yourself nothing then? Should you make this phase as short as possible? (Well, obviously yes, but in practice this means a lot of different trade-offs, like picking a less ambitious project that you can complete more quickly, or doing consulting to bootstrap the business, or pivoting to a business that focuses on profit more than userbase, or not doing a startup at all. At what point should you be willing to sacrifice future possible gains to ensure that you have money coming in to cover your living expenses?)
I'm sorry I might have misunderstood you. But if you have money in your personal bank and none in the corporate bank, why would you pay yourself (and be taxed on it) rather than just use the money (your money) to cover the living expenses?
That's what I'm trying to understand from tptacek's post. Some hypotheses that come to mind:
1.) Putting money into the corporate bank and then taking it out as a nominal salary keeps you really honest with yourself. You can't say "There's money in my bank account, there's not much need for urgency", instead you see the corporate bank account dribbling dry just as if it were someone else you were paying.
2.) It reduces personal risk in case the startup goes bankrupt.
3.) It makes accounting & record-keeping easier for when the startup actually does start making money, since you already have systems setup.
4.) Minimum wage laws require it. I talked to a (Massachusetts-based) lawyer once that suggested this may be an issue. But then, if it is, how does that square with all the tech company CEOs that take $1 salaries?
5.) It lets you take advantage of certain personal financial products that are only available if you have earned income in a year, eg. Roth IRAs.
Re: 4, my understanding has been that the owner of a company does not have to necessarily be treated like an employee of the company, and that salary issues may be different for them. Also, most of those $1/year CEOs are usually earning many, many dollars in options, which I think count for the compensation rules.
The only time a founder should forego salary is before anyone else has invested a dime. And in that case, the paperwork should specify that you are earning a salary but it is deferred, ie you are lending that money back to the company.
Once a real investor enters the picture, if you can't pay yourself even a reduced salary (say 60% market rate), you're not raising enough money and/or you have a sucky investor. Add to the 60% salary with some of that back pay you are owed, or convert the back pay into equity at a favorable (to you) valuation.
Typically, investors don't like it, and it tends not to be paid out in cash. However, I believe setting your books up that way gives you a better negotiating position when it comes to how low your salary will be, and possibly in relation to equity issues. It's a matter of having that sacrifice (no salary for X months) on paper so it can be respected as a real contribution with a concrete value, rather than just a giveaway that is somehow expected of a founder.
Or are you saying that forgoing salary is always a bad idea? If you are, how else are we supposed to start a product company? It seems like it's a worse idea to take investment without having done some minimal homework and prototyping to prove out the market, which usually requires at least building something you can show to customers. It's a very bad idea from a legal standpoint to do that work while you're still employed by somebody else. Consulting -> product conversions can work, but it's often really hard to make time for product development while consulting.
From my own perspective - I started a "founders don't take salary" company when I was 2 years out of college. It failed miserably, predictably - it was a terrible idea to begin with, and I folded it up once I realized I was in over my head. But I think starting it was one of the best decisions I made in my lifetime, because the skills and perspective I gained from it got me a job that paid enough that I made back that year after about a year of employment. I'm now in a position where I have a bunch saved up, and I'm trying to weigh my options rationally. I'd like to avoid making stupid mistakes, but I'm also mindful of how the #1 regret of most elderly people, on their deathbeds, is that they wish they'd taken more risks.