Founder Capital Redeployment: When to Start Taking Distributions

You've been working 80-hour weeks for 3 years. Your company is profitable, or nearly there. You've still got a $50K/year salary (if that). Meanwhile, your co-founder who exited last year is making $200K+ in advisory fees.

The question: when is it okay to start taking money out of your company?

The answer: sooner than you think. And there are smart ways to do it that don't jeopardize your business.

Salary vs Distributions: What's the Difference?

First, understand the difference:

Founder Salary

Distributions / Dividends

When to Start Taking Money Out

Here's the framework:

Seed Stage: Minimal to None

You're raising from friends and family, or have a small seed round. Every dollar should go to product. If you need cash to live, that's what your co-founder's savings or part-time work is for. This phase is sacrifice.

Series A: Moderate Salary

You've raised $1M+. Your company is probably 10-20 people. Now founders should take a competitive market salary. Not $200K, but $80-120K depending on role and market. This signals you're serious and have discipline.

Investors expect founders to take fair salaries at Series A. Paying yourself nothing looks desperate, not noble.

Series B+: Competitive Salary + Considerations

By Series B, you should have a market salary (which could be $150-200K+ for experienced founders). Whether to take distributions depends on profitability and cash situation.

Profitable/Sustainable Companies: Salary + Distributions

If you're profitable or have strong unit economics, you can take both salary and distributions. This is when founders actually start making real money.

How Much Should You Take?

Here's a practical guide:

These are guidelines, not rules. Geography, industry, and personal situation matter.

Building a Distribution Policy

If you're profitable and considering distributions, make it structured:

1. Set a Threshold

Example: "We'll distribute 20% of profits after we reach 12 months of cash reserves."

2. Be Consistent

Distribute quarterly or annually, on a set schedule. This creates predictability for yourself and employees.

3. Document It

Have your company's board approve the distribution policy. This protects you if you're ever questioned.

4. Consider Other Shareholders

If you have investors or employees with equity, distributions affect them too. Make sure it's fair and well-communicated.

Tax Implications

Tax treatment depends on your entity structure:

• C-Corp: Distributions taxed at corporate level + personal level (double taxation). Less favorable.
• S-Corp: Pass-through taxation. Better than C-Corp for salary planning.
• LLC: Pass-through taxation. Very flexible. Can elect to be taxed as C or S.
• Partnership: Pass-through. All income flows to partners regardless of distributions.

Talk to a tax professional before setting up distributions. The structure you choose impacts your tax bill significantly.

Common Mistakes

Mistake #1: Taking Too Much Too Soon

You become profitable, then immediately take 50% of profits as distributions. This leaves no cash for growth, ops, or unexpected challenges. Be conservative with distributions early on.

Mistake #2: Not Taking Anything (The Martyr Complex)

You're highly profitable, but take minimal salary because you "believe in the company." This is backwards. You should take competitive salary + distributions. Undercompensating yourself signals lack of confidence.

Mistake #3: Treating Distributions Like Bonus Pay

You take unexpected distributions whenever you feel like it. This creates chaos for your finance team, confuses the cap table, and looks unprofessional to investors.

Mistake #4: Not Thinking About Tax Implications

You take $200K in distributions without planning for tax liability. April rolls around and you owe $80K you don't have. Always reserve 25-30% of distributions for taxes.

What to Do Next