Deciding whether and how to implement founder compensation is ideally a choice made during your transition to steward-ownership and/or during your first funding round, as this decision needs to be accounted for in the financing structure and liquidity waterfall for your investors and might determine the selection of the most suitable financial instrument(s). It is also possible to agree on founder compensation and document it contractually upfront, while deferring the full legal implementation to a later stage. 

The consideration of founder compensation during the structuring of investments is ideally set up in a way that 1) fairly reflect the contributions of founders, entrepreneurs, early employees, or business owners; 2) the return for founders does not feel excessive to investors (and/or other stakeholder groups), ensuring that their limited return still feels “fair” and “adequate” to them also in comparison to the founder compensation; and that 3) the payout/ redemption structure for founder compensation and its priority or deference in relation to investor redemption / payout is transparent to investors and feels adequate to them.

We have seen various approaches in practice when structuring founder compensation. One key variable is the timing of repayment – it can occur simultaneously with investor returns, shortly thereafter, or only after investors have been fully repaid. Another variable is the proportion of returns allocated to founders in relation to investors – this can range from pro-rata distribution to founders receiving a smaller share of the gains. Below, we outline the most common approaches to structuring the waterfall in founder compensation repayment that we’ve encountered — keeping in mind that these structures are not fixed and can be negotiated based on the specific context and stakeholders involved:

• Deferred founder compensation: In many cases, founders agree to defer their compensation until the initial investment has been repaid to the investors.  This means that any significant payouts or returns to founders are delayed until the investors have recouped, for example, their principal investment with a fair interest rate. 
• Conditional founder payouts: Some investors go further and expect the entire investment, including returns, to be repaid before founder compensation begins. In this arrangement, the company first focuses on generating the necessary returns to satisfy its financial obligations to investors, and only after these conditions are met do founders receive payouts. 
• Tiered profit sharing: In some cases, founder compensation is structured so that a portion of profits – often the majority – is allocated to repaying investors, while the remaining percentage is directed toward compensating the founders. This setup may include the condition that the initial investment be fully repaid first, though this is not always required.
• Equal founder compensation: Although rare, there is also the option for founders to receive payouts on equal terms and timing as investors, allowing them to receive returns equally quickly. This setup is less common but exists as a potential structure for founder and investor alignment.
• A mixture of the above across different stages of the investment process.

In our experience, it is common for investors to be repaid first — either partially or in full — before founders begin receiving compensation. This reflects the intention of many within steward-ownership models to steer their companies toward generating sustainable profits and thus to being able to meet its return commitments. Delaying founder compensation — whether partially or fully —  can thereby serve as an incentive to align focus on the company's financial sustainability, with the understanding that founder payouts may follow once certain return thresholds are reached.