Should I include founder salaries in burn rate calculations?

Should I Include Founder Salaries in Burn Rate Calculations?

You’re tracking every dollar your startup💡 Definition:A small business is a privately owned company that typically has fewer than 500 employees and plays a crucial role in the economy. spends, from software subscriptions to the team's pizza budget💡 Definition:A spending plan that tracks income and expenses to ensure you're living within your means and working toward financial goals.. But are you counting your own salary? If you're not, you might be getting a dangerously misleading picture of your company's health.

The short answer is yes, you absolutely should. Including founder salaries gives you the true cost of running your business. It’s essential for honest financial planning💡 Definition:A strategic approach to managing finances, ensuring a secure future and achieving financial goals. and is exactly what serious investors expect to see.

Why Include Founder Salaries?

Accurate Operating Costs💡 Definition:Costs incurred in running a business that can reduce taxable income and improve cash flow.

Think of it this way: your time isn't free, even if your paycheck is zero for now. Including a founder salary—even a hypothetical one—reveals the real cost of keeping the lights on.

Without it, you're flying blind. This oversight can lead to major cash flow problems down the road when you can no longer afford to work for free.

Investor Expectations

Put yourself in an investor's shoes. A financial model that omits founder pay looks either naive or intentionally misleading. They want to see that you've built a sustainable plan, not just a temporary one.

Showing that you've accounted for your own compensation builds trust💡 Definition:A trust is a legal arrangement that manages assets for beneficiaries, ensuring efficient wealth transfer and tax benefits.. It proves you’re thinking seriously about the long-term financial health of the business and how to pitch your financials to investors effectively.

Planning for Future Salaries

Right now, you might be living on ramen and sheer willpower. That's the founder life! But that can't last forever.

Eventually, you and your co-founders will💡 Definition:A will is a legal document that specifies how your assets should be distributed after your death, ensuring your wishes are honored. need to draw a real salary. Planning for this from day one prevents a future cash flow crisis when you finally decide to pay yourselves what you're worth.

How to Include Founder Salaries in Burn Rate Calculations

So, how does this look in practice? It all comes down to understanding two key metrics for your startup's finances.

Gross vs. Net Burn Rate

• Gross Burn Rate: This is the total of all your monthly operating expenses💡 Definition:Operating expenses are the costs required to run a business, crucial for measuring profitability., including founder salaries. If you spend $50,000 on salaries (founders included), $10,000 on rent, and $15,000 on marketing, your gross burn is $75,000 per month.

• Net Burn Rate: This is your gross burn rate minus any 💡 Definition:Income is the money you earn, essential for budgeting and financial planning.revenue💡 Definition:Revenue is the total income generated by a business, crucial for growth and sustainability. you're generating. Using the example above, if you bring in $20,000 in monthly revenue, your net burn rate is $55,000.

Scenario Planning

This is where you can get really smart with your planning. Don't just calculate one burn rate; calculate two to get a clearer view.

• Current Burn Rate: This shows your actual cash outflow today. It's perfect for managing your day-to-day operations.
• Normalized Burn Rate: This version includes market-rate salaries for founders, showing what your expenses will look like in the future.

Real-World Examples

Let's put some numbers to this. Imagine a startup with these monthly costs:

• Salaries (including founders): $40,000
• Rent and Utilities: $10,000
• Marketing: $15,000
• Total Gross Burn: $65,000

If the company is making $30,000 in revenue each month, its net burn rate is $35,000. This simple calculation, which includes founder pay, gives a realistic assessment of the company's financial runway.

Adjusting Salaries According to Funding Stage

Your salary isn't static; it should evolve as your company grows. Here’s a typical progression based on industry data:

• Pre-Seed: Salary is often minimal or zero to make every dollar last as long as possible.
• Seed Stage: A salary of around $100,000 annually is common.
• Series A and Beyond: Pay can increase to a range of $183,000 to $250,000 as the company scales.

Common Mistakes and Considerations

The Danger of Ignoring Your Salary

The most common mistake is simply leaving founder pay out of the equation. This leads to a wildly optimistic view of your financial runway and can cause you to run out of money unexpectedly.

Staying Realistic with Pay

On the flip side, don't go overboard. Paying yourself an excessive, market-rate salary too early can drain your cash reserves and signal to investors that you're not focused on capital efficiency.

Isolating One-Off Costs

Remember to separate large, one-time costs (like a big legal bill or new equipment) from your regular monthly burn. Lumping them in can make your burn rate look much higher than it actually is, distorting your financial picture.

Get Your Burn Rate Right

Forgetting your own salary isn't just a small oversight—it's a fundamental error in financial planning. Including it gives you, and your investors, a true understanding of what it costs to run your business.

Ready to calculate your true burn rate? Use our free burn rate calculator to get an accurate picture of your finances in minutes.