Founder Compensation

By Kristopher McEvoy, CPA, CGA

Posted in General

An important discussion to have upfront with your executive team is how and when to compensate yourselves, as well as how much.


Plan Executive Compensation

If you have investors, how, when and how much your executive will be compensated will likely be outlined in your share offering memorandums, so  be sure to plan carefully.

Consider the Priorities of Individual

A large part of this discussion will centre around how necessary each party is to the success of the company, and how to manage their personal obligations in the meantime.

Founder Compensation

For Example:

For instance, one founder may have other sources of income and be more interested in share growth, while another may not have other sources of income and family obligations and need to get paid at least enough to pay their living costs.

Salary or Dividends

The In order to compensate work the founder has the choice of taking either salary or dividends and both have pros and cons.

Seek Professional Advice

It is important to seek the advice of a Chartered Professional Accountant before beginning compensation.

In Writing

Whatever is agreed upon should be written into the shareholders agreement.

Tax Considerations

For tax purposes, it is very advantageous to issue shares to the founders before the value of the company is determined.

At incorporation the value of the company is deemed to be NIL. Once work begins, and the funds are collected, any shareholders, including the founders would have to buy in for the same value as anyone else, or face adverse tax consequences. 

This setup will also ensure a much more favourable capital gains tax down the road, as opposed to the higher rates paid on employment compensation.

Consult with your accountant on how best to compensate your founding executive.

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