We watched two founders pay themselves nothing for two years
A reasonable-comp story from the back-office seat — watching two founders skip their paychecks and quietly distort every decision after.
One of the first companies we ever worked with had two founders who paid themselves nothing for most of the first two years. Not a small salary. Not a token draw. Nothing. They told themselves they were investing in the business. They told their families they were being responsible. The truth, as we learned later sitting across the table from them in budget reviews, was that they had no plan, and “nothing” felt safer than picking a number they could not defend.
It cost the business more than the line items will ever show. Not in the P&L — that part is easy. In the way it warped every decision the company made for two years.
The math nobody warned them about
When the founders did not pay themselves, every dollar of profit looked bigger than it was. The books said the business was margin-positive when really it was absorbing the cost of two unpaid co-founders’ time. Hiring decisions, lease decisions, equipment-purchase decisions — all of them were made against a number that did not include the two people doing the most work.
An owner we know who runs a coffee chain said it best later: the moment we started paying ourselves, half our growth turned out to be a mirage. It was true for this company too. The day the first founder salary hit the books, the gross-margin story collapsed into a much smaller, much more honest number.
Not paying yourself is not a tax strategy. It is a bookkeeping habit that hides the real shape of the business.
What we wish they had done differently
One — pick a number on day one, even if it’s $1,000 a month. Not because the business can afford it. Because the books need to reflect what the founder’s time is actually worth, and because the discipline of cutting yourself a check forces every cash-flow conversation to happen earlier, not later.
Two — separate “founder pay” from “owner distribution” in your head. They are not the same thing. Founder pay is what the role would cost to fill — a market salary. Owner distribution is what is left after the business has paid all its costs, including that salary. This company collapsed them for two years, and from the back-office seat we could not tell anyone whether the business was making money or merely existing.
Three — talk to your CPA about reasonable compensation in year one, not year three. When the company finally elected S-corp status in year three, the reasonable-compensation conversation was retroactively impossible. The books had no salary history, no W-2s, no documentation of what the founders did for the company. Their CPA had to reconstruct two years of activity in a memo to the file. It worked. It was also expensive in a way the tax savings did not fully cover.
The conversation we wish someone had had with them
Looking back, we wish someone had sat across the table in month three and said to both of them: “You are 40-hour-a-week operators in this business. The market would pay each of you $70,000 to do this job. The fact that you are choosing not to take that money is fine — but the books need to see the salary anyway, and you need to be honest about whether the business actually pays for itself when you account for what you’re worth.”
They would have said the business couldn’t afford it. The hypothetical CPA would have nodded and said: “That’s the most important sentence you’ve said all year.”
What we tell founders now
If you can’t pay yourself $4,000 a month for the work you are doing, the business is not yet a business. It is a job you are subsidizing with your savings, your nights, and your relationships. That is fine for a season. It is dangerous for a decade. The number you choose matters less than the fact that you chose one — and the day you stop being able to afford it is the day you owe yourself a real conversation about whether the business is working.
What Hoyos Baker tells clients
For every new client we onboard, we model the reasonable-compensation number in the first 30 days. Not because the business has to take it — that is the founder’s call. Because the books need to know. If you want that number for your business, book a call and bring last year’s P&L.
