For many embarking on the thrilling, yet often precarious, journey of launching a start-up in Singapore, a fundamental question quickly arises: when and how do the founders themselves get paid? It's a delicate balancing act, juggling personal financial needs with the often-strained resources of a nascent company. In the early stages, every dollar counts, and the decision of founder compensation can significantly impact the start-up's runway and future growth.
This blog will delve into the various methods Singapore's start-up founders can employ to pay themselves, alongside crucial considerations and the relevant legal landscape they need to navigate.
Should Start-up Founders Pay Themselves at All?
The debate around whether start-up founders should draw a salary from the get-go is a common one.
On one hand, paying yourself, even a modest amount, acknowledges the hard work and dedication you're pouring into the venture. It ensures personal sustainability, allowing you to remain fully committed without facing undue financial strain. A founder who isn't personally secure might find it harder to focus on the long-term success of the company.
Conversely, there's a strong argument for delaying or minimising founder salaries in the initial phases. Every dollar saved can be reinvested back into the business, fuelling growth, product development, and team expansion. This approach prioritises extending the company's runway, giving it more time to achieve profitability and secure further funding.
5 Most Common Methods for Start-ups in Singapore to Establish Founders’ Salary
Once the decision to pay founders has been made, the next step is determining the most suitable method. In Singapore, start-ups commonly employ a few key approaches:
1. Basic Salary
Founders can opt to draw a regular salary, much like any other employee within the company. When deciding on the amount, it's crucial to consider the start-up's current financial standing and ensure it's sustainable. Benchmarking against market rates for comparable roles in Singapore can also provide a useful reference point.
2. Issuing Dividends
Dividends represent a portion of the company's profits distributed to its shareholders, which would include the founders based on their equity stake. Payouts are typically made periodically, depending on the company's profitability and cash flow situation. Founders need to consider the impact of dividends on the company's ability to reinvest for future growth.
3. Equity
In essence, the founders' ownership stake in the company – their equity – serves as a form of long-term compensation. While it doesn't provide immediate cash in hand, the potential future value of that equity, through acquisition or IPO, can be significantly rewarding if the start-up succeeds.
4. Owner’s Draw
The concept of an owner's draw is particularly relevant for start-ups structured as sole proprietorships or partnerships in Singapore.
Unlike a fixed salary, an owner's draw allows founders to withdraw funds from the business as needed, offering a degree of flexibility. However, founders should be mindful of the potential tax implications associated with this method in Singapore.
5. Reinvesting Profits
Founders might choose to minimise their immediate personal payouts, opting instead to reinvest the company's profits back into the business. This strategy prioritises long-term growth and can significantly enhance the company's overall valuation over time, ultimately benefiting the founders as shareholders.
Tax and Legal Implications of Different Payment Methods
Opting for a basic salary allows the start-up to treat these payments as business expenses, which are deductible against the company's taxable income under the Corporate Income Tax (CIT) framework. Currently, Singapore's headline CIT rate is 17%, although various rebates and exemptions might apply.
Furthermore, newly incorporated companies in Singapore might be eligible for the Start-up Tax Exemption Scheme (SUTE), which offers significant tax exemptions on chargeable income for the initial years, potentially impacting the overall financial strategy around founder salaries. Under SUTE, for the first $100,000 of chargeable income, the company enjoys a full exemption from CIT. For the next $100,000 of chargeable income, there's a 50% tax exemption.
Founders must carefully consider these tax implications to optimise their compensation strategy while ensuring full compliance with Singaporean tax laws and regulations set forth by the IRAS (Inland Revenue Authority of Singapore).
How Much Do Singapore’s Start-up Founders Pay Themselves?
There's no magic number when it comes to how much Singapore's start-up founders pay themselves; it varies significantly based on a multitude of factors. While data from Glassdoor suggests that CEO Founders in Singapore reported an average annual salary of around $223,000, this figure likely encompasses a wide spectrum, from well-funded, later-stage start-ups to those just finding their feet. For early-stage ventures, particularly those focused on achieving ramen profitability, founder compensation is often considerably lower.
Ultimately, the key lies in striking a sustainable balance between meeting the founder's personal financial needs and ensuring the company retains sufficient capital for growth and operational stability.
Factors Influencing Start-up Founder Salary in Singapore
When determining a suitable salary, start-up founders in Singapore need to weigh several crucial factors:
- Company stage and runway: Early-stage start-ups with a limited cash runway often necessitate lower founder salaries to conserve capital and extend the time before needing further funding. As the company progresses through funding rounds (seed, Series A, etc.) and secures more capital, there might be more flexibility to increase founder compensation.
- Company revenue and profitability: A start-up that is generating consistent revenue and moving towards profitability has more financial leeway to support founder salaries. Conversely, pre-revenue start-ups or those still in the early stages of monetisation will likely need to keep founder salaries lean. Sustainable revenue streams provide a clearer path for increasing compensation.
- Available funding: The amount of funding a start-up has raised significantly impacts its ability to pay founder salaries. Investors often have expectations around founder compensation, wanting to ensure a balance between rewarding the founders and prioritising the company's growth. A substantial funding round might allow for more comfortable salaries, while bootstrapping or smaller raises demand frugality.
- Number of co-founders: If there are multiple co-founders, the total salary burden on the company increases. Founders need to have open and transparent discussions about salary expectations and ensure that the combined compensation remains sustainable for the business. Clear agreements on equity splits and compensation plans are essential from the outset.
- Roles and responsibilities: The specific roles and responsibilities of each founder within the start-up should also be considered. A founder acting as the full-time CEO with significant operational responsibilities might warrant a higher salary than a founder with a more advisory or part-time role. The level of commitment and the value each founder brings to the day-to-day operations are key determinants.
- Industry standards: Researching salary benchmarks for founders and start-up CEOs in similar industries within Singapore can provide valuable context. Understanding what comparable companies are paying can help founders set realistic expectations and ensure their compensation is competitive, while also being mindful of their own company's financial situation.
Verdict: How Much Should You Pay Yourself as A Start-Up Founder?
business owners behind a window
Ultimately, there's no definitive answer to how much a start-up founder in Singapore should pay themselves. It requires a careful and continuous balancing act between your personal financial needs and the long-term health and growth of your company. Regularly review your salary and compensation structure as your start-up evolves, taking into account the factors discussed.
For start-ups looking for flexible and cost-effective office solutions as they grow, consider a dedicated desk space at The Work Project’s coworking offices in Singapore. Manage overheads while focusing on founder compensation strategies.
