📬 Self Dealing: When founders pay themselves too much

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StartUp Soph from London, UK

I have worked as the Finance Lead in various start-ups since 2013. I recently joined a new AI start-up with a serious cashflow problem. The two co-founders are taking huge salaries, completely inappropriate to the stage of growth and higher than any I've seen before. 

They are first-time founders who previously worked in the private sector and are obsessed with the importance of maintaining the "quality of life for them and their families". 

How do I have a conversation with them about adjusting these down for the financial sustainability of the business (alternative is redundancies in the wider team to cut costs)? Should I bring the board into the conversation?

StartUp Soph,

I have one question: Can you name me one great startup story that began with the founders drawing massive salaries?

I can’t.

Every great startup story starts in a garage, basement, spare room, shared office, or three months behind on rent. My favorite is Jesse Cole of the Savannah Bananas, who sold his house, emptied his savings, and slept on an air mattress while trying to get the business off the ground.

That is the founder mentality.

Now, I am not saying every founder needs to live on noodles and emotional damage. People have families. London is expensive. Founders should not be expected to cosplay poverty just to prove commitment.

But “maintaining quality of life” at any cost, while the business has a serious cashflow problem and the alternative is redundancies? No. That is not founder discipline.

And the real issue is not even the immediate cash position, although that clearly matters. It is the signal and the incentive structure.

Startups need a slightly deranged level of commitment to work. They need founders who move faster, sacrifice more, and accelerate when failure breathes on the window. Part of that comes from the mission. Part of it comes from ambition. The dream…

But a bigger part comes from the consequences of failure being so painful that they simply remove it as an option.

If the founders are protecting their own lifestyle while asking the team, investors, or creditors to absorb the pain, that is a massive incentive problem.

Look at Elon Musk after PayPal. Extreme example, obviously. But he put basically all of his proceeds into SpaceX and Tesla. At the time, that was not obvious genius. It seemed ludicrous. It was ludicrous. But he did that because he did not want failure to be comfortable. He created the incentive structure that meant it had to work.

Your founders are doing the exact opposite.

So how do you have the conversation?

First, I’m not clear from your question whether it is their money or not. If it is their money, then you can point out the problem, but ultimately it’s their call.

I’m going to assume you have some level of outside capital, as that is likely for an AI startup especially with first-time founders.

I think you have to go big here. Make it impossible for them to miss the connection between founder compensation and business survival. I would literally show the runway impact of their current salaries versus a more appropriate level. How many months of runway or jobs does their ‘reasonableness’ buy. (Or their unreasonableness cost …)

I would also be surprised if your funding term sheets do not specify caps on founder salary levels. They often do.

If you cannot get through to the founders, then yes, bring the board into it. They need to see it, and they may need to hear your perspective on how unusual the founder salary level is for the stage of growth.

Do not frame it as “the founders are greedy.” That will turn into politics and you will lose control of the conversation.

Frame it as: “Here is the cash position. Here are the cost levers. Here is the current founder compensation. Here is the redundancy alternative. Here is the runway impact. We need a board-level decision on the appropriate trade-off.”

That is hard to argue with.

And if the board looks at that and says: “Yes, keep paying the founders huge salaries and fire the team instead,” then you have learned something very important about the company you joined.

But honestly, this is not really a cashflow issue. It is a character issue.

TLDR: Your startup will fail if your founders protect their lifestyle before protecting the business, even if it survives the cashflow challenge.

Andreas from Gothenburg, Sweden

I had a difficult CEO relationship in a cash-constrained business.

The new CEO had recently joined after the previous founder-CEO had made hiring decisions that were not anchored to the performance budget. Sales targets were consistently missed, but recruitment continued, and the business was burning through cash.

I raised the need for additional capital. The CEO asked me to explore bank funding and similar credit solutions, but those options would take time, and we were running out of runway. I raised the issue directly in a board meeting, effectively going over my boss’s head. Two weeks later, we received a loan from our PE owner while I worked to slow the cash burn.

There were no easy levers, but I renegotiated better payment terms on our largest customer contract, accelerated overdue collections, and did what I could to keep the business afloat.

The late escalation was not well received. I came under heavy fire from the board and owner, and after returning from vacation the CEO told me that liquidity was my responsibility. Not long after, I resigned.

In my position, what would you have done differently?

Hey Andreas,

Sorry to hear how this played out. It sounds like resigning was probably the right move once you got there. From what you describe, trust had broken down in both directions.

I’ll be blunt, because I think that is why you asked.

Ultimately, liquidity is the responsibility of the board. But the CFO is the exec proxy for that. That means you will be expected to see the problem early, frame the options clearly, and force the hard conversations before it's too late.

So the question I would ask myself is not just: Did I raise the issue?

It is: Did I raise it early enough, loudly enough, and in the right format?

Did you show the board and CEO the actual cash runway? Did you show the consequence of not course-correcting? Did you show the gap between the hiring plan, sales performance, and available liquidity? Did you put the choices on one page: raise capital, cut cost, slow hiring, renegotiate terms, or run out of cash?

This does two things, it forces the conversation, but it’s also your audit trail. So if you find yourself caught offside by a CEO handover, you can prove to the new guy you did your job.

The “going over your boss’s head” point is also worth reflecting on. Why did it have to feel like that? Why could the conversation not happen directly in the boardroom with the CEO sitting there?

It is one thing to flag a problem. It is another to throw your body in front of something you know is wrong. I have done that many times in the past… been prepared to resign on the spot if the right decision wasn’t made.

From your description, I wonder if you could have been more brutal on cost sooner. Rather than flagging the hiring issue, could you have stopped the hiring? Put in a full hiring freeze? Forced every requisition back through the cash runway? Made the CEO and board explicitly approve every new hire against a deteriorating revenue picture?

You did some good things. Renegotiating customer payment terms, chasing overdue invoices, and hustling cash in the door are all exactly the sort of scrappy actions a CFO needs to take in a tight liquidity spot.

But those are rescue moves. The lesson is probably that the hard governance conversation needed to happen earlier.

So, what would I have done differently?

I would have put a 13-week cashflow in front of the CEO and board every week from the moment I sniffed the problem. I would have shown the downside case very clearly. I would have forced every new hire specifically up to the CEO and board. I would have documented the liquidity choices in writing. And if the CEO still refused to act, I would have escalated formally, as the logical next step.

Finally, the very fact that you are reflecting in this way shows the kind of maturity and emotional intelligence you need to keep growing and improving. I’ve no doubt there’ll be bigger and better things ahead for you. Good luck.

TLDR: You were right to escalate cash. The lesson is to force the hard choices earlier, clearer, and in writing.

Jack from Italy

Where do you draw the line when calculating hourly rates?

Whether in manufacturing or consulting, building an hourly rate seems straightforward at first, but in practice the answer varies significantly from company to company.

Some organizations build their hourly rates using only direct labour costs, while others progressively absorb indirect ​c​osts, management​'s salaries, facilities, and ​other corporate overheads.

Even in consulting, I've seen different approaches​. For example, whether non-billable time should be recovered through billable hours or treated separately.​ Or SG&A allocated to the rate vs kept out and included in the bids as a markup to total cost.

​How do you decide what belongs inside an hourly rate and what should remain outside of it?

​Does your approach change depending on whether you're in a manufacturing business or a professional services firm?

I think this is one of those topics where there isn't a single "correct" answer, but understanding how experienced CFOs think about it would be incredibly valuable.

This is an interesting question, Jack.

And yes, the short answer is: it depends on the business model.

A professional services business sells hours. I would argue they shouldn’t, but that is a different rant for a different day.

A manufacturing business sells things. Units of product. Labor hours may be a material part of COGS, but they are not the whole of COGS.

I keep this stuff simple. Bring it back to cost behavior and cost attribution.

First, understand which costs vary directly, or can be reasonably assumed to vary directly, with the thing you are selling. In manufacturing, that might be materials, direct labor, variable overhead, scrap, yield, freight, energy, machine time, or other conversion costs. In professional services, it might be delivery labor, subcontractors, travel, commissions, or delivery-specific tools.

That gives you a unit contribution margin. Or engagement contribution margin. Or whatever the equivalent is in your business. You need to understand that intimately. It’s how your business makes money.

Then separately, you need to understand the hurdle required to cover fixed costs and generate the margin or return target the business needs.

That is where people get themselves in trouble.

I am generally not a fan of absorbing arbitrary fixed overhead assumptions into product costings and then pretending the answer is scientifically precise. It can drive terrible behavior.

A product can look unprofitable because someone loaded it with a random share of corporate overhead. A customer can look unattractive because they have been allocated someone else’s complexity. A factory can reject incremental volume because the fully absorbed margin looks ugly, even though the contribution is strong.

Absorption costing melts brains.

To be clear, there are accounting reasons to absorb overhead into inventory costing in a manufacturing business. Fine. Those rules exist for a reason. But accounting cost and decision basis are not the same thing.

For decision-making, I want to know the true incremental economics first. Then I want to know whether the portfolio, customer, site, or business as a whole is carrying enough contribution to cover the fixed cost base and hit the required return. It’s not a wholly mathematical question, it’s more strategic than that.

Professional services are a bit different because time is much closer to the product. If you sell billable hours, then non-billable time matters. You cannot simply price off salary cost per hour and pretend the rest of the week does not exist. Utilization and recovery are the key KPIs.

So yes, in a consulting business, the billable hour usually has to recover some share of non-billable time, supervision, training, tools, facilities, and margin. But I would still be careful about blindly shoving all SG&A into the rate and calling it “cost.”

Sometimes SG&A belongs in the rate. Sometimes it belongs as a bid markup. Sometimes it belongs in the portfolio hurdle. The right answer depends on how the business sells, how customers buy, and where pricing power actually sits.

I covered some of this recently here.

TLDR: Keep decision cost clean, understand full cost separately, and never confuse costing with pricing.

A few of the biggest stories that every CFO is paying close attention to. This is the section you might not want to see your name in.

PayPal tells $53bn suitor to sit down and wait its turn

Three CEOs in four years, a market cap that's down two-thirds from its 2021 peak, and Apple Pay eating its lunch in the US... PayPal think they are being undervalued.

OpenAI's CFO wants you to grade your AI like a report card

Some interesting stuff on Sarah Friar’s CFO role too … although if I were being cynical it sounds to me like she’s making a public pitch for the CEO role

...And OpenAI's models escaped the sandbox and went a-hacking

Meanwhile OpenAI this week reported an "unprecedented cyber incident." Actually quite scary…

ICYMI, here are some of my favorite finance/business social media posts from this week.

Genuinely the cleverest thing I've seen with AI yet…

Let me know what you thought of today’s Mailbag. Just hit reply… I read every message.

Last weekend’s Playbook was the grand finale of our series: Building FP&A. In part IV, we explore the long-term (uncertain?) future of the FP&A function.

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need