Ask HN: Founder comp in dividends? We just raised pre-seed via a convertible note. Two founders are the only shareholders, and we want to pay ourselves a small amount. We can save overhead and get better tax treatment if we issue dividends instead of taking a salary via payroll. Any reason not to do this? Not seeking legal advice - we will talk to our lawyer. Question is whether this is discouraged in the HN community for any reason, i.e. would complicate future fundraising. |
For dividends, it will be taxed as short-term income. So you will still need to pay federal and local income taxes on it (unless you live in like Florida or NH or Texas or etc).
You also won't be contributing anything so Social Security and Medicare, so you will save money here, but you will also affect your eligibility for these programs (if you care about those benefits by the time you are in your 60s, if those benefits exist, etc).
As far as fund-raising, profitability measurements would appear exactly the same (in my estimation). I doubt an investor would care, and would probably applaud the tax efficient use of money.
It would be against the company and personally guaranteed if you were to get a corporate loan (back to checking your personal income again) at best, at worst it'd be a personal loan and their sole criteria would be your salary (ie. $0). Otherwise, dividends usually have (slightly) better tax treatment.
Make sure you have enough share classes that you can each take dividends in different amounts/times, and separate from any investors you bring on, etc. Otherwise future investors might not have flexibility they want.
So classes for: employees, a control class and a dividend / economic benefit class for each co-founder, and a control / economic benefit class for investors. Usually 7+ classes.
If you are certain you don't want a line of credit / mortgage or any other kind of favourable treatment from banks (or don't need it because you have lots of other assets to secure it with) then do dividends because of the tax treatment.
If you want the bank to think you exist economically during the first 24 months and are willing to take a (typically very small) tax haircut, salary. Doesn't necessarily apply in all countries / banks, but definitely North America.
The reason fancy people like Elon Musk and Mark Zuckerburg don't take salaries (or at least, the self-interested one) is that banks will lend against their shares at that level, so paying the extra tax on a salary is pointless and they don't need the cash so it's really just a share value slush fund at that point. They don't need a mortgage / credit card and if they did it would not be the same question.
The big leverage comes from taking a dividend from one company, and rolling it into another company in the same year. Depending on the nature of the companies and how you account for it, you can sometimes avoid tax entirely.
See http://thestartuplawblog.com/startup-compensation-founders-d...
Dividends come from after tax profits and are sometimes taxed as regular income and there might be tax on distribution too.
In some countries, you must pay yourself a fair salary.
I've also heard Mark Zuckerberg pays himself $1 salary.