The Value Of A Founder’s Time (with data)
Time is not free. It may feel like time is the cheapest currency you have, but the reality is the opposite. As a founder you only have a handful of opportunities in your life to build companies, which means the opportunity cost is higher for a founder than anyone else involved in the startup ecosystem.
Founders often don’t start a company based on ROI (Return On Investment) analysis. They start them because they believe in something. Even without building a financial model they start iterating on a product, often for months at a time, until it gains customer traction. Starting with a blank piece of paper the only guarantee is that a new company will cost the founder money.
The alternative to starting companies is getting a job. Whether you join an established startup or work for a large company the choice to join versus start has a significantly different financial picture. Founders have the opportunity to become super rich at the risk of being broke. Employees have lower upside in exchange for predictable cash flow.
Working backwards, here is how founders should think about their time.
Calculating A Founder’s ROI
Thinking about the first 35 years of your career, I built a spreadsheet to help understand the cash you will have at the end of the journey. Granted, people work well past 57 years of age (assuming you graduate college at 22), but high growth startups take so much energy I assume you are done starting companies after 5 meaningful attempts. The goal of this spreadsheet is to serve as a template and you are welcome to download a copy of the excel doc here so you can edit it to your own situation.
Before calculating the ROI for a founder lets look at the assumptions in getting a job versus starting companies.
Getting A Job
- I assume your start at $75K per year with an annual increase of 6%. Generally technical roles pay more and non-technical roles pay less, but lets assume you are a hard charging employee that climbs the corporate ladder.
- You save 6% of your income on annual basis.
- You work for a well established company that has a 3% matching program for your 401K
- You invest your money and get an 6% annual return
- You work harder than most at 50 hours per week.
- On average, each company takes 7 years from inception to completion. Some ventures will take longer and some will end in less time, but lets not underestimate how long it takes to build a sustainable company.
- Salary is highly variant, but lets assume the first year you spend on the business comes with zero income. Assuming you are a successful entrepreneur your starting salary the second year is higher with each business you build being better than the last.
- Assuming your companies actually grow, your salary should increase with the growth of the business. This average growth is for modeling purposes only as the real scenario is highly unpredictable. To have consistent cash flow you’ll need to build revenue generating companies or be able to consistently raise investor capital.
- Even though entrepreneurs generally do a poor job of managing their personal finances I assume you buck the trend and save 6% of your income, earning 6% on an annual basis
- Exits are highly volatile and very hard to predict. Because you start a company doesn’t mean you should assume you have a cash positive liquidity event. I built a $30M revenue company that produced $0 in founder and investor liquidity.
Assuming you have zero exits over your career here are the results:
The first thing that jumps out, is that exits matter. They matter for your personal return and the likely hood of people supporting you. The more companies you build that don’t return capital, the lower the probability of people supporting your next venture.
Liquidity events early in your entrepreneurial career can make a huge difference. Even an exit/sale of $250K in your first company can have a compounding affect over years. As they say, a dollar today is worth more than a dollar tomorrow.
Comparing $250K in Company 1 versus $500K in Company 3 versus $1M in Company 5.
Keep in mind, the chance of an exit is incredibly small. Even if founders believe their chances are better with their own hands on the steering wheel, the probability of success is in the single digits. If Y Combinator companies are expected to fail over 90% of the time, what does that say for everyone else?
The collective ego may push you to put all of your chips in the center of the table with each company you build, but when the music stops, the amount you have in your bank account will influence your next move.
Compensation Adds Up
The second driver for an ROI is your salary. Highly unpredictable it’s rare to take a meaningful salary in the early years. In order to do so, you need to build companies that either cash flow in the first year or are consistently successful at raising investor capital.
Assuming your company is successful, it is easy to put everyone else first. Hiring another person versus raising salaries seems like a no brainer until your company fails and you realize you don’t have enough money to start a new venture. Giving your team raises and ignoring yourself is always justifiable at the time, just recognize the potential outcome.
One last point, not all founders should be compensated the same amount. Creating a compensation plan early in the company’s history is important, especially as founders take different roles within the company. Your compensation should match the role you have in the company.
Start Your Next Idea Before You Quit
Every time you start over, your salary goes back to zero. Even without successful exits you want consistent cash flow, which means moonlighting is a great way to give you a running head start.
Creating new companies takes time, in particular you spend countless hours iterating on an initial product that may or may not gain traction. Rushing the creation process because you are running out of personal cash can result in a wasted opportunity. The more cash you have saved the more time you can take between ideas.
Be Careful Investing Your Own Cash
Founders already invest a lot up front. Even though people don’t translate sweat equity into cash value, the time founders are spending without a salary is costing them. To invest their own cash on top of their time, is a risky place to be.
If you do invest cash, treat it like any other investor’s money. Create a standard seed round and value the cash you put into the business. It will be a stark reminder about the real cost of the opportunity: Salary missed + cash invested.
The spreadsheet I built assumes you don’t spend your own money. If you do, your potential savings at the end of 35 years may be even lower as the probability of getting a return on your money is extremely low.
Not All Income is Equal
The income from a job versus starting a company is NOT equal. The work required to drive a dollar in savings while running a company is infinitely harder. Not only are you working a lot more hours as a founder, but you are carrying the expectations of everyone involved.
When comparing a job to starting a company, the difference in your hourly rate isn’t what really matters. Instead look at the savings per hour, which is the ultimate metric of your personal purchasing power.
Assuming you don’t have any exits and you work 65 hours a week while running a company (compared to 50 hours per week with a regular job), you can see that the savings per hour can be a lot lower than you realize.
What founders often forget….
- The stress of building a company is significant. The larger it gets and the more money you raise the greater the responsibility. The pressure to win doesn’t go away at night, over the weekend, or while on vacation. Never knowing the final outcome of the company you are building, you are constantly concerned.
- You have to work a lot harder. Even though you are running a marathon, the entire journey requires you to hustle for every square inch of progress. Nothing comes easy in a startup.
- It’s all your money. Not able to liquidate your equity, all of your investment is tied up in the company, so its results dramatically impact your financial well being.
- You can’t just walk away. If a founder quits and takes with them a large chunk of equity it puts everyone else in a difficult position. Having to explain these circumstances can taint the company for future buyers/investors.
There Is Nothing Wrong With Going Big
There are plenty of entrepreneurs that swing for the fences every time they step up to the plate. That level of determination takes even more energy, personal commitment, and capital, which means you will only have a handful of swings.
Building billion dollar companies is infinitely more difficult. As recent Billionaire David Frieberg points out, “There’s a 0.00006% chance of building a company that will grow to be worth more than a billion dollars. Even if you do raise money and sell a company or take it public, your median time to doing that is probably 49 months. Assuming there are three founders, your median expected payoff would be $300,000 each — that’s the equivalent of $73,000 a year. And the probability of making nothing is 67%. So if your motivation for doing a startup is financial reward, you’re better off going to Google, a hedge fund, choosing a career with stable income potential.”
Just remember to collect cash along the way or you risk walking away with nothing or worse, a financial disaster on your hands.
You Can’t Calculate Reputation
Numbers on a spreadsheet are helpful, but they are irrelevant when thinking about the most important startup currency you have: your reputation.
Even if the companies you build don’t create liquidity events, it’s critical to leave a positive impact on everyone involved. Being self reflective helps in applying what you learned in the past to the companies you build in the future. But in the end, how you treat people is all that matters.
Startup success is not predictable. Being able to successfully create new companies takes a collection of forces, including luck.
But if you plan to build multiple companies it’s important to recognize that your time is not free. Being incredibly thoughtful about which companies you start is critical. Because the choice to invest your time, energy, reputation, capital, and personal relationships is one of the biggest decisions you can make.
DOWNLOAD a copy of the excel document.
*Thank you Dan Shapiro for helping to make this post better.
*Image Credit: Remi P via Creative Commons.