Early companies often have below-market founder pay, unpaid invoices, deferred costs and free resources. Normalising the expense base shows what the company will actually cost to run.
10 min read · Level 3
Founders who pay themselves very little are often admirable, and I still think their pay should be normalised in the model. The company you are investing in is one that will eventually need to pay people properly, and its economics should be judged on that basis rather than on its founders' sacrifice.
Reported burn can understate the true cost of running a company. Common adjustments:
Item Why it understates cost Founders paid far below market salaries must rise as the company grows or founders change Unpaid supplier invoices costs incurred but not yet paid Free credits and discounts startup programmes end Contractors outside payroll ongoing costs recorded irregularly Deferred rent or tax payments obligations postponed, not removed
A company reports net burn of 200,000 a month. Normalising:
Reported net burn 200,000 Two founders paid 3,000 each; market rate 12,000 +18,000 Contractor invoices received but unpaid +25,000 Normalised net burn 243,000
With 2,400,000 of cash:
Reported runway: 2,400,000 / 200,000 = 12 months Normalised runway: 2,400,000 / 243,000 = about 9.9 months
Because costs that are hidden or deferred do not disappear. They reappear when the company grows, raises money or needs to hire replacements, often at the worst moment.
It also affects unit economics and margins: a product supported by free cloud credits may look far more profitable than it will be once those credits run out.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Cloud credits expiring.
Current infrastructure cost paid 5,000 per month Actual usage covered by credits 30,000 per month Credits expire in 4 months
After expiry, monthly cost rises by 25,000 (30,000 - 5,000). If monthly revenue is 150,000 and other cost of revenue is 15,000, gross margin moves from (150,000 - 20,000) / 150,000, about 87%, to (150,000 - 45,000) / 150,000 = 70%.
Using reported burn and margins without asking which costs are temporarily absent, deferred or below market.
Estimate what the roles would cost if filled at market pay.
Review accounts payable ageing and overdue amounts.
List credits, free periods and promotional pricing with expiry dates.
Present both reported and normalised figures.
During diligence on early companies, especially those reporting unusually low burn or high margins.
Do not assume every below-market cost will rise immediately; judge timing and likelihood.
Quality of earnings reviews in acquisitions routinely adjust reported profit for owner compensation that differs from market rates, one-off items and costs that are temporarily absent, producing 'normalised' figures on which buyers base prices.
Normalisation is standard practice for buyers of companies, and investors in startups can use the same logic.
Create a free account to read the rest and apply it to your own investing.