Pay thyself: your first decision: when and how much to take.

• Author: Vanek, Jeff
• Position: EntrepreneurEdge

The typical entrepreneur usually has one of two reasons why he or she decided to start a business. The first is that they want to make a boat load of money. In spite of the realities and statistics on how many new businesses fail in the first few years, those who start businesses are usually a pretty confident bunch who believe they can make more money as their own boss than working for someone else. This leads right into the second reason many small business owners make the jump from employee to employer: They want to be the boss.

In either case, at some point, and hopefully sooner than later, new business owners must begin to pay themselves for their efforts. But when should new business owners pay themselves and how much?

Startup Funding

According to several experts, the answer to "when" and "how much" comes down to first determining where the money that will fund the business is going to come from. Will it be revenue that the business itself will generate, or will it be from some outside source such as investors, venture capitalists or lending institutions? Bryce Hansen, technology commercialization adviser at the Small Business Development Center at the SLCC Miller Campus, says when fundraising from outside sources like VCs, you usually don't want to pay yourself if you're raising less than $500,000--at least in the technology sector. "Investors don't want to see their money funding your lifestyle. They expect you to have personal reserves or resources you can live on," he says.

It is wise to plan that for the first year or two, you might expect to take no salary from the business. Be prepared to live on savings or other resources--such as what you can sell or borrow. You might consider taking a second mortgage on your home or cashing in a 401(k).

On the other hand, if you are using revenue from the company to grow, you may be able to take a salary sooner...