The idea that you should preserve investor's cash is a good notion, but not at the cost of forgoing fair compensation to yourself and the early founding team. In the long run, everyone is better off from this approach.
(1) Good investors run (on average) profitable portfolios, and they are not going to be made or broken by pennies on the dollar from the disposition of the firm's assets in a bakruptcy.
(2) Good founders should have enough 'skin in the game' that the signalling behaviour forgone by avoiding this strategy should not be the make-or-break between succusseful outside investment (or not).
(3) Following up, if (1) and (2) are in place, everyone is best served by having the founding team fully solvent. Preferably before and after the company succeeds or fails. All of the principal founders, investors, and employees want each other to be thinking clearly, rationally, and open-mindedly...with well-understood motives.
I can easily see paying yourself living expenses, once you've taken investment (or have paying customers), as a good thing. That's basically "ramen profitability", and getting to there as fast as possible is important.
I'm wondering about the part before taking investment - when you don't have any money coming in, are still building out a product (or even a prototype), and have cash in your personal bank but none in the corporate bank. Is it appropriate to pay yourself nothing then? Should you make this phase as short as possible? (Well, obviously yes, but in practice this means a lot of different trade-offs, like picking a less ambitious project that you can complete more quickly, or doing consulting to bootstrap the business, or pivoting to a business that focuses on profit more than userbase, or not doing a startup at all. At what point should you be willing to sacrifice future possible gains to ensure that you have money coming in to cover your living expenses?)
I'm sorry I might have misunderstood you. But if you have money in your personal bank and none in the corporate bank, why would you pay yourself (and be taxed on it) rather than just use the money (your money) to cover the living expenses?
That's what I'm trying to understand from tptacek's post. Some hypotheses that come to mind:
1.) Putting money into the corporate bank and then taking it out as a nominal salary keeps you really honest with yourself. You can't say "There's money in my bank account, there's not much need for urgency", instead you see the corporate bank account dribbling dry just as if it were someone else you were paying.
2.) It reduces personal risk in case the startup goes bankrupt.
3.) It makes accounting & record-keeping easier for when the startup actually does start making money, since you already have systems setup.
4.) Minimum wage laws require it. I talked to a (Massachusetts-based) lawyer once that suggested this may be an issue. But then, if it is, how does that square with all the tech company CEOs that take $1 salaries?
5.) It lets you take advantage of certain personal financial products that are only available if you have earned income in a year, eg. Roth IRAs.
Re: 4, my understanding has been that the owner of a company does not have to necessarily be treated like an employee of the company, and that salary issues may be different for them. Also, most of those $1/year CEOs are usually earning many, many dollars in options, which I think count for the compensation rules.
(1) Good investors run (on average) profitable portfolios, and they are not going to be made or broken by pennies on the dollar from the disposition of the firm's assets in a bakruptcy.
(2) Good founders should have enough 'skin in the game' that the signalling behaviour forgone by avoiding this strategy should not be the make-or-break between succusseful outside investment (or not).
(3) Following up, if (1) and (2) are in place, everyone is best served by having the founding team fully solvent. Preferably before and after the company succeeds or fails. All of the principal founders, investors, and employees want each other to be thinking clearly, rationally, and open-mindedly...with well-understood motives.