Venture Capital Articles

Over the last 10 years as an entrepreneur I have taken many risks and some have panned out and well others…let’s just say that I should have looked before I leaped. Then again, that is one of the truest traits of an entrepreneur, taking risk and making something from nothing.

Recently, I was reading an article called “The Sweat Equity Myth” by George Cloutier, Founder of American Management Systems. In his article he talks about the concept of “sweat equity”:

“The idea that business owners shouldn’t pay themselves a salary while they’re building a business. I call it working for nothing and being a fool.”

I couldn’t agree more with him, because I have done it and it was one of the worst things I ever did. When I started my first business, things were great and we had tons of clients. Sure it was the dotcom boom but we thought it was a whole new world. So when the sky fell and the bubble burst, many clients went out of business so we had to tighten the belt. Instead of swallowing my pride and lay people off I sacrificed my own salary and cut it in half as a message of solidarity, or so I rationalized to myself.

He goes on to mention something that I should have noticed early on, but didn’t:

“The inability to pay yourself is symptomatic of a much deeper financial problem; it’s should serve as a red flag that your business is not working. Lack of sales or quality control, bloated overhead and other financial woes are the real reasons you’re not making a salary.”

When 9/11 happened the clients we did have froze their contracts and put any new business in pipeline on hold for six months or more. My business, like many others, had a “deer in the headlights” look and many collapsed quickly. We did have some cash reserves so we had to make a decision, go on and try our luck or shut almost everything down to fight another day. We chose the later but paying everyone’s severance left me with nothing and extra debt to boot.

Over time, I did recover from that but in another business made the same mistake thinking that it was noble of me to sacrifice my sweat for equity I already had in the first place. Bottom line: Pay yourself first.

I would like to expand on that by including George’s tip to avoid this easy entrepreneurial trap:

Always work to make a good salary. Then cover the expenses. Not the other way around.

Reward yourself (but within reason). Here’s a rough formula: Pay yourself 3 to 4 cents on each dollar of revenue for doing the job of CEO.

Imagine you weren’t in the picture. Ask yourself how much you’d pay a general manager to run your business if you had to go away. That’s the least you should be paying yourself.

Remember your priorities. Don’t lose sight of why you’re running a business in the first place–to improve your quality of life.

Spread pay cuts around. Take a 5 percent cut along with the rest of your staff, but don’t put a 30 percent pay cut on your own back.

Ask yourself this question: If your business doesn’t allow you to pay yourself a living wage, what are you doing wrong?

Remember: There are no rich martyrs.

So what will you decide when this moment occurs in your entrepreneurial journey?