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.
Starting Companies
- 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:
Exits Matter
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.
Conclusion
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.
Thanks for writing such an important post Marc. The points you make about opportunity cost and the value of time are very important. For anyone who wants to “do” a startup, this should be compulsory reading.
While the conclusions you reach may be valid, I would say that I think the analysis you present doesn’t capture a couple of important factors.
Firstly, the security implied in the “get a job” scenario is unrealistic. Ask any senior manager in his late 40’s earning $300k a year how secure he feels and he’ll laugh in your face. Regardless of performance, it’s a quarter-to-quarter proposition to hang onto a job in any company where then next guy on the ladder is 15 years young and half the price. Get canned in your 40’s or 50’s and it’s a big step down in salary for a lot of people.
Secondly, the financial model most analogous to a startup is a deep out of the money option. It’s worth almost nothing today, but if the market moves in your favour quickly enough then it can rapidly escalate in value. If the market moves against you or it moves too slowly, then you can end up with a worthless option. In any startup, market volatility is your friend and this is why disruptive business models can go from nothing to multi-billion dollar companies relatively quickly – the create the volatility that generates the value in the option.
Cheers.
Dave P.
Dave, great points.
I’m sure the employment path is also no guarantee. I’d hope that even if salary and comp isn’t increasing there is still plenty of opportunity for experienced, hard working people to find jobs. Versus startups that can disappear erasing everyone’s jobs.
You are also right that startups can be even more volatile than is reflected. Going without salary entirely to have the equity worth nothing or an unfathomable amount, does happen.
Thanks for the thoughtful comment.
As a CFA and former stock analyst (and now startup CEO) this is a really relevant & accurate way to frame a startup– nicely done! Love the option metaphor. Spot on.
Thanks Nathan.
It says something about the insatiable desire for even more profits when job security of someone earning $300k per year is “laughable”. I bet “downshifting” to $200k would pretty much guarantee the employment.
There is no guarantee of $200, only ‘hope’. And any downshifting breaks life habits and it hurts whole family.
This is the most honest post I’ve ever read about founding… bravo @marcbarros!
Thanks for the kind words.
Excellent post, Marc. Love the opportunity cost perspective in this type of analysis. I think another important, yet hard to calculate portion of this type of analysis is that a typical founder isn’t going to be a “standard” employee at another company. They’d likely be a high level employee (VP) or an early employee at another growth scale startup. In that sense they’re liable to make a generous salary and potentially an even more generous equity grant. In which case it just increases the opportunity cost of founding your own company.
True.
Having grown weary of the constant incubator-driven sentiment that we must all start our own company, this is a breath of fresh air. This is one of the more honest attempts I’ve seen to try to put some believable ballpark numbers behind the various possible employment scenarios tech people face.
One nit is that, subjectively, it seems that the most common “endgame” for failed startups in this day is an acquihire. Of course the payouts for those vary greatly, but it would be very interesting (to me at least) to see what the comparison looked like if at least half the companies you started got acquihired, for say, $1m per engineer? Or whatever numbers you deem reasonable.
I haven’t been through one so I can’t comment on that. I’ve seen a $30M company I built go to zero.
Ouch. That must have been painful.
As a company owner who doesn’t care enough to mention personal figures, I can just say that you’ve got some kind of misguided, but unfortunately common ideas about starting companies. The mere fact that you always talk about exit strategies shows you are a particular kind of company owner (one who is in it for the short term money) and probably a failure at that. But it’s good that you’re discouraging people to start companies, most people really shouldn’t. *stares blankly at post author*
I agree with the fact that you find this analysis of starting a company to be predominantly monetarily focused. If you founding a company purely with the interest of selling it, you’ve got the wrong mentality. I don’t think he’s discouraging people who want to make money to start companies; I think he’s discouraging people who don’t have the balls to grind out the huge amount of work involved in starting one.
Thanks Sebastian. Starting with a spreadsheet definitely isn’t how you should start companies. This is a framework founders can use as they think about their career.
re: you aren’t built to be an employee, you are built to change the environment around you and answer to few. I’m an employee and I answer to my line manager. Surely you answer to investors, customers, employees etc??
First of all, thisdepends on whether there are any investors in the company, which doesn’t have to be the case. Secondly, you answer to your line manager on a completely different level than a founder answers to the stakeholders. An employee usually answers on the operational level, whereas a founder answers on the strategic level.
It’s a different challenge and I agree with the writer that this should be the leading factor in deciding whether you want to start a company, not the money.
This post isn’t about why you start companies. I’ve written a few pieces about “why” and none of them are about money. I even have a post here about “don’t do it for the money.”
This post isn’t about discouraging either, I spent 10 years on my first without an exit and starting my second so clearly I’m personally passionate about. This is just looking at the data and thinking forward about the next 30 years. At the end of the day you do have to be able to put food on the table and if you want support a family.
On top of that if you are going to build startups that rely on investor capital then you do have to understand the expected return. People don’t invest just because.
This is a wonderful essay but unfortunately irrelevant to most “real” founders. I started my company 3.5 years ago and went through the same grind you outline above. Still not out of the woods. Raised a few million in venture but still mostly an unknown toiling away trying to build something out of nothing.
When I read this and things like this my essential thoughts are:
a) What we do is intuitively irrational so no math is needed to convince us that we’re taking on lots of risks and are mostly likely to fail and be poorer in dollars but richer in experience.
b) Charts do a poor job of capturing the “richer in experience” bit. In 3.5 years I’ve hired 40 people and fired ~10. I’ve built teams. I’ve shipped products. I’ve grown the business from 0 to a few million dollars in revenue. I’ve raised a few million dollars in outside capital (not an achievement, really, but for most of us raising capital is hard work). I’ve learned how to sniff for culture fit. I know how to motivate salespeople AND engineers AND marketers AND copywriters AND product managers. I know how to sell. I know how to survive the constant emotional distress and the constant setbacks. I’m 31 years old. 3 years ago I was a successful employee at what wound up becoming a successful exit. What would have taken me 10+ years to learn in a more staid environment I packed into 3.5 years of forced learning. How many other 31 year olds can say the same? Yeah sure, I’m a few hundred thousand poorer than them but if I had to enter the job market as an employee (god forbid) I’m 1000% confident that I can run circles around *most* of those that took the safe path and climb the ladder quicker than most of those that stayed in their functional silos and took the path more traveled.
And if I want to start a company again (which I will) I can do that much faster and much better next time around.
If you aren’t afraid of the work, the charts are irrelevant – I’ll go for it every single time *after* knowing what I know after 3.5 years of busting my ass at it.
Article aside, based on your description, I am pretty sure we know each other. Man startup worlds is a pretty small world!
I started my first company out of college and ran it for 10 years. At 31 went through everything you have listed plus more. This post isn’t saying you have to be rich or do it for the money. It’s just putting some data and a template down as you think about your entire career. I assume you will be building companies for a long time and when this one ends and you want to start the next, how much is in your bank account does affect your decision. Starting company 2 based on personal financial pressure can be stressful, let alone running it for several years.
Keep cranking!
Miss the point entirely. Fail.
What point is that?
People seem to be confused that this post is about why to start companies. It’s not. It’s merely looking at the potential personal return in starting companies. At the end of the day founders, including myself, don’t start companies with spreadsheets, but they do care about the end result.
People aren’t confused. You are. (I mean that in the nicest way). If the primary motivation a founder has is money – then great, read your post. (and don’t start a company) But no good founder I know of is motivated by money first and foremost, rendering your entire point at best minor, at worst irrelevant.
I’d agree with you. This post isn’t about why to start companies. The posts I have written about ‘why’ has nothing to do with money. Including a piece I wrote about ‘not doing it for the money.’
https://marcbarros.com/finding-your-purpose/
https://marcbarros.com/dont-do-it-for-the-money/
This post is a framework to think about your career as a founder. If you don’t find it useful than don’t use it.
Of course I won’t use it.
The premise of the article though is that the value of your time is measured in dollars. That is incorrect.
Ah now I understand what you’re getting at. Yes this is about the potential financial return and measuring value against dollars. It doesn’t argue that money is how you measure your life, happiness, or impact as an entrepreneur.
Alright – so I guess my objection is just to the title then. This article does NOT reflect the ‘value’ of my time. Because a lot more than money comes into play in determining the value of anything. ESPECIALLY founding v being an employee. Had the title been more accurate (about financial returns, not value), then I would agree with it all. If you take the averages – of course you’re better off as an employee. Fails to consider that not many people consider themselves average. Everyone thinks they’re the exception. That’s what makes it fun.
That’s probably a better title. I agree with your perspective being about more than money.
Enjoyed your article, but wanted to chime in. I’ve done both. Been an employee and done multiple startups. You failed to mention the stress and misery of being an employee. I’ve never worked at a job where most lunches didn’t devolve into ‘bitch-fests’ about something. Being your own boss is worth a lot compared to building someone else’s dream or helping someone else get rich.
–
Bruce Shankle
Founder
http://www.ba3.us/
Makes sense. Good point.
Real founders does not start company doing the equation of revenue and profit. They try to bring in a change in the current environment, which has long term effect than just money.
Correct. This post isn’t about “why” you start a company. This post is just about potential aftermath.
I have several posts on this blog about ‘why’ and none of them are about the money. I even have a post about ‘why you shouldn’t do it for the money.”
I think you missed the aspect of tax savings with regard to owning your own business vs being an employee at a job.
Even though he technically did, nothing stops you from from taking advantage of tax savings while having a job. The reality is, like with startups, most people don’t. Sure, you can’t write off lunches as ‘business expense’ when you work at 925, but you most definitely can invest your money and turn them into profit instead of loss. Plenty of people do, but again, the majority don’t.
Thanks for this post Marc. In my opinion, entrepreneur’s don’t necessarily “plan to build multiple companies”–they plan on building one and if that fails, they must assess their next step in life.
You mention that in fact: “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.”
Oftentimes, the skills/network gained from even a single failed startup is enough to land someone an excellent job in the ‘corporate world’–even if it is just for a few years to pay off debt, build savings etc.
Then when the next great idea comes along (and I stress great idea because that and quality of team are the crux of any successful company), the individual can analyze the state of their finances and personal life and decide whether to throw their hat in the ring again.
Hey Nayeem, all great points. Starting each one definitely requires a magical combination of the right elements (people, timing, problem to solve, etc). It will be interesting to see how my second company goes versus my first. I’m definitely still learning a lot the second time around. Thanks for the comment!
Wow this is a great analysis, I have been thinking about adding a module to our financial projection app to help entrepreneurs determine when it is time to jump ship at their employer or keep their job. I also think it is important to remember to treat my own cash investment as any other investor money and put a high value on it. Thanks for the work on this!
I think you are right on the money (pun intended:). Where you place your time is important and will change as your priorities change. When you are younger, not married, etc. then you can take huge risk and see what happens. If your life and priorities change then the time, energy, and what return you are getting for your effort changes. A lot of people believe they can hit home runs in business (windfalls of money), but there are not a lot of people who do. Running totally on passion and belief is naive. One final thought, I have been a bankruptcy attorney and wrapped-up my fair share of businesses. The downside of a failed business can be extremely hard on people.
Totally agree. I now have a 10 month old and have been married for two years. I think about the next company very different than the first one at 22 years old and single.
I can imagine that wrapping up companies never gets easy.