Business Rx: When is it okay for start-up founder to give himself a salary?

Elana Fine, the managing director at the Dingman Center for Entrepreneurship at the University of Maryland’s Robert H. Smith School of Business, took questions from readers last week in an online chat. What follows are excerpts, edited for grammar and clarity.

Founder salaries

Q.: Is it okay to pay yourself (and other founders) a salary when you’ve only raised money from friends and family? If so, how much is reasonable? What’s an acceptable salary to pay yourself once a non-family seed round is raised?

Elana Fine: I absolutely think you can pay yourself a minimal salary so you can pay rent/mortgage and feed yourself and your family. Starting a company is stressful, and as an investor, I don’t want my founders worrying about foreclosure. However, the key word is minimal because founders need to be hungry and motivated by upside. This is something you should discuss/negotiate with your investors. You can even think about structuring in a way that any salary you receive is deducted from equity stake. That should keep incentives aligned. There isn’t a magic number, but as you make hires, the founders should be paid less than anyone else in the company. Save cash for rock star employees.

Working with China

Q.: I am working on developing technology involving 3D printing and medical devices. I would be interested in having the product built in China because I can do it more cost-effectively, but I am scared they will see my technology and steal the intellectual property. My friends in the legal sector say there is no IP protection at all in China. What do you recommend?

Fine: This is a very valid concern given China’s history with intellectual property. However, things are changing. China is granting patents at a higher rate and understands that IP is paramount in developing an innovation economy. My suggestion is to consult with an IP lawyer who does work in China to understand the path forward. They can likely introduce you to trusted partners and manufacturers.

Equity

Q.: My business partner and I split the equity in our company 50/50. He now wants to give half of his stake to his girlfriend. We do not have a shareholder’s agreement and did not use a lawyer (we hate lawyers). He has the intellectual property ideas and I was acting as chief executive/chief financial officer. What can we do? I don’t want her as a shareholder.

Fine: Ouch — hate is a strong word — especially for someone who seems to desperately need a lawyer. Since you don’t have any current operating agreement or documentation, you are really starting from square one in negotiating. You’ll need to work with each other and documents off Legal Zoom to duke it out or get a lawyer with experience in these partnership situations. There are a lot of great firms in the area that cater to start-ups and can help you with something like this pretty inexpensively.

Getting set up

Q.: Is there anywhere I can go on the Internet to see what forms, licenses and such I need to set up a small business in Maryland? Does the IRS have an area just for new businesses? I’m not sure what I need to do — I need some sort of a checklist, and I can’t afford a CPA or attorney as I start out.

Fine: ChooseMaryland.org is a great resource for setting up legal entities. That is actually the easiest part of starting a business!

Education technology

Q.: I saw you speak recently at the State of Innovation event. You mentioned that education technology was the hottest market to pursue in the D.C. region. Based on the ed-tech start-ups you’ve already seen, what are some of the problems/issues left to solve in this industry? Similarly, who are some of the most successful ed-tech start-ups around?

Fine: The biggest challenge in EdTech right now is more about finding scalable business models than finding a problem to solve. That being said — there are some new start-ups around K-12 — such as Allovue or Lessoncast — that are solving problems around public school general ledger accounting and teacher continuing education that aren’t as visible as some of the higher ed online learning platforms.

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