What is a living wage? How much should you pay yourself as a startup founder? When you’re running a startup, every cent counts! You might recall our article here in which we pointed out that the main reason startups fail is that they run out of cash. Sometimes it’s because of the founders’ lifestyles, more than it is because the startup didn’t make any money.
In this article you will learn how to work out your living wage, and will (hopefully!) understand what this really means for you and for your co-founders.
What is a ‘living wage’?
If you’re from the UK, you might confuse this with what we in Australia call ‘minimum wage’. When it comes to your startup, what we call the ‘living wage’ is not equivalent to minimum wages set by governments.
It’s actually much less attractive than this. A living wage for a startup means exactly what it says: It’s whatever you can live on that keeps you and your startup alive.
How to work out your living wage
A living wage is a wage that enables you to live. It is not a wage that lets you live well. It is not a wage that lets you have all the bells and whistles.
It is something that lets you live. Living, by definition, is not all that sexy when you get down to the nuts and bolts of what it means.
What do we need to live? Shelter, water, at three decent meals a day, enough money to cover healthcare if you get sick, and transport when you need it. (No, instant noodles doesn’t count as a decent meal; and transport means buses or pedal power rather taking every trip in an Uber – unless of course you live centrally in a small city like Adelaide.)
What don’t we need to live? Netflix, coworking fees, beer money, cinema, holidays overseas, dessert, junk food, gym memberships… Pretty well anything that doesn’t fit in the paragraph above. All the things that are extra to living and working are over and above a living wage.
The living wage, for you and your cofounders, means that if you’re earning small amounts from the company right now, you can’t allow yourself to bleed them out on things that aren’t necessary.
The living wage means putting your startup before everything else.
On a living wage your startup might reach ramen profitability
Ramen profitability is a phrase that many startup founders know well. If you don’t know it, it was coined by Y Combinator as a shorthand way of explaining a stage of early money-making experienced by a tech startup that has the absolute minimum of expenses. Paul Graham, co-founder at Y Combinator, explains the phrase as saying that ‘it’s a trick for not dying’ en route to your destination. A startup that is ramen profitable is making enough money to cover the (almost absent) living expenses of a 25-year-old programmer who is still living at home.
In a practical sense, ramen profitability means that you are doing two things. The first is that your fledgling company is actually making money. The second is that the money you’re making is just enough to cover the barest of essentials. The important thing about it is that if you can reach ramen profitability on your own – without investment, without grants, without any additional help – then your startup will be more likely to succeed.
The idea of ramen profitability isn’t for every startup. It really only applies to tech startups, where the costs of running the business are extremely low, in a situation where any other responsibility is pretty well absent. It’s the kind of startup you run in your shed, where your only expenses are crappy instant noodles (which, by the way, is a really terrible diet).
Moving to a startup living wage
If you’re not in your 20s, and you have other responsibilities, like a house or a family, then when you are considering leaving a job to focus on your startup full-time, a shift to a living wage can have unforeseen impacts. This is especially the case if you’re living with a partner or married. Make sure that you know what you’re getting into. Make sure that your family and/or partner knows what they are agreeing to, and (hopefully) supporting.
And make sure that your cofounders are on board with what a ‘living wage’ really means.
If you have been living a particularly social lifestyle, know that if you’re serious about your startup a lot of that will have to stop. Think seriously about everything that you buy: Do you really need it? Or do you just want it because you can’t scale back your lifestyle?
Put the financial health of your startup first
As CFO, we see a lot of startups in which one or more founders draws heavily on the startup’s funds. It’s most often because they don’t put the financial health of the startup first. It’s always something that is easily fixed, but if you’re not watching your balance sheet carefully – because you’re focused on developing your product – you can miss it.
If you want guidance or help with your startup’s finances, click here and book a time to talk to one of our startup finance guys.
In our next article, we will show you the good financial habits of healthy startups. These free startup finance tools will help you until then.