
The ROI on being an entrepreneur vs. an employee - jcabala
http://marcbarros.com/the-value-of-a-founders-time/
======
rdl
A VC funded company, assuming you are capable of raising a seed round, can
generally pay sfba founders 50-120k for full time work pretty soon after
(founding, or people going full-time). Those same people are generally
forgoing 100-200k jobs.

The equity value of a founder's shares is an order of magnitude higher than an
early hire, or two orders higher than a late A or B round hire, and 3-4 orders
higher than a pre IPO employee. No one gets rich as a regular IC hire at
series B or C, even at a Google -- it probably tops out at 10-15mm, vs 15b for
the founders. Even more so at companies less successful than Google.

On top of that, founders get supremely preferential tax treatment. Founders
shares are generally bought near nil, and the entirety of gains are long term
capital gains. If you do it right with QSBS and moving to WA before the sale,
it can be taxed at zero. An employee often ends up paying hella AMT on almost
all gain from ISOs since he didn't early exercise (or, early exercises at
substantial out-of-pocket cost), and gets less freedom to sell in later
financings, less return in a sub-optimal exit where the sale is covered with
preference but "retention grants" are given to founders, etc.

I think the optimal strategy is to work for the most prestigious and
successful companies purely as a learning and reputation building exercise,
and then either be a founder or consultant to make money. It might be possible
to enter a slightly earlier (series b) company as a director or better and
still get a reasonable amount of equity (1%+ in a 100-200mm company), but
otherwise either going for the tax advantaged, high variance outcome as a
founder, or the high cash, flexible, also tax optimized outcome as a
consultant, is the best way to actually get paid.

~~~
kyleblarson
10-15mm isn't rich?

~~~
rdl
As the extreme high water mark of success, not really.

~~~
sillysaurus3
It's about how much pg netted from Viaweb, isn't it?

~~~
001sky
in what year? Multiply 1990's money by 3x...for $ today.

~~~
ido
More like 1.45x: [http://data.bls.gov/cgi-
bin/cpicalc.pl?cost1=10%2C000%2C000....](http://data.bls.gov/cgi-
bin/cpicalc.pl?cost1=10%2C000%2C000.00&year1=1998&year2=2014)

~~~
001sky
Not a precise fit for places like SF, NY, or London.

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lacero
This article is basically the conclusion of the book the millionaire next
door. The authors comb through statistics of the rich and interviews with
wealthy people.

Building a business is probably the best way to make a large lump sum of
money. Unfortunately the business is more likely than not to fail before
bearing fruit and even after successfully running the business for large
profits over time competition, laws, and factors out of your control usually
kill the business. Due to the inherent risks and stress involved the book
states that most successful people would not advise their children to start
businesses but to get professional degrees, especially the kind that can work
for themselves or consult such as law, medicine and accounting. Not so much
the non-professional jobs such as business management.

------
mayank
Not sure an unbounded 6% annual salary increase is plausible, especially over
a 35-year period. That makes the "get a job" numbers quite inflated. I think
its clear that the potential payoff from being an entrepreneur is _very_
significantly higher than being an employee; it's a question of when someone's
willingness to accept a higher risk matches their circumstances (luck, market,
idea, etc.)

~~~
ryandrake
Definitely. Average wage growth [1] from 2010 to 2012 has been about 4.7%,
varying heavily on region (and likely profession). And this is the average
(across all levels of experience). If you're not senior management, you're
hitting a wage ceiling after about 10 years, where your pay won't be going up
year after year even if you job hop.

A more realistic model would assume your wage growth starts at, say 8-10% your
first year and then tapers off to 0-1% after 10 years or so.

1:
[http://www.comparebloomington.us/include/reportsmedia_157_15...](http://www.comparebloomington.us/include/reportsmedia_157_1541923639.pdf)

~~~
dvanduzer
At a glance, that suggests the optimal time to start a startup is when you
have 10 years of career behind you.

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shutupalready
There's not a single mention of taxes in the article.

I don't think that the average employee is aware that an
entrepreneur/founder/self-employed person can save a lot of tax if they
structure it right and are meticulous about it.

A self-employed person earning $70K a year can be better off than an employee
earning $100K.

~~~
jdreaver
Can you expand upon that? I am always looking to reduce my taxes. I got killed
with my 1099s this year.

~~~
jakejake
(Sorry in advance for this long, rambling response) This applies to the US and
forgive me if you have already done some of this. The first step is to get
your corporation set up (use an online service or an accountant). It's a bit
of paperwork but you can do it for around $400. Once you do that you can open
a corporate bank account. At that point you bill your clients as a corporation
and provide them with your corporate tax ID instead of your personal SS. The
money goes into your business account. Then to pay yourself, the next step is
to setup payroll (easiest way is to use an online service like quicken
payroll) which will run you about $50/month but will handle all of your
withholding and tax filing requirements.

It's somewhat of a pain getting this all going but once you do, you are
operating as a corporation. Corporations do not pay income tax as such - they
do have some filing fee type of taxes, but basically the taxes you pay come
out of your payroll. So you do not pay tax on income that your company earns
until you withdraw it from the company account via payroll. However, you can
spend directly from the corporate account on anything that is reasonably
considered a business expense. Computers and equipment, of course, can be
purchased. Your company can pay the phone bills, internet connection, travel
expenses, business lunches, etc. You can also charge your company rent as well
if you are working out of your home.

What happens is that you wind up paying yourself a meager salary on which you
pay normal tax just like everybody else. So for instance, your company earns
$80. You pay yourself a salary of $15k and the remaining $65k money is spent
on operating expenses and is a tax write-off. You only pay tax on that $15k.
You're likely to even get a small tax refund check instead of a huge bill from
the IRS. In some extreme cases you might pay yourself even less, or even come
in at a loss and pay no income tax. There is nothing illegal about this as
long as your write-offs can be legitimately considered a business expense.

This is also great because with payroll setup you are in a position to pay
employees and sub-contractors via payroll as well and eventually grow your
company with the proper financial system in place.

I would highly recommend having an accountant set this up for you and file
your taxes though because it is a ton of work and requires understanding the
ever-changing tax laws.

~~~
curveship
The IRS requires that you pay yourself a defensible fair market salary. If
you're paying yourself only $15k, you will quite likely get audited, and
unless you can defend the idea that your work is truly minimum-wage level
work, you will owe quite a lot in fines. If this is advice from your
accountant, I think you need a second opinion.

Edit to add citation. Also, I'm assuming you're talking about an S-Corp, since
it would make not sense for a C-Corp. From
[http://www.irs.gov/Businesses/Small-Businesses-&-Self-
Employ...](http://www.irs.gov/Businesses/Small-Businesses-&-Self-
Employed/S-Corporation-Compensation-and-Medical-Insurance-Issues) :

"If most of the gross receipts and profits are associated with the
shareholder's personal services [i.e. not from other employees or capital],
then most of the profit distribution should be allocated as compensation."

If you're only paying yourself $15k of the %80k your company brings in, and
that $80k comes from payment by clients for work that you personally did, then
you are definitely on the wrong side of the tax code.

~~~
jakejake
Your tax advice is that if an S-Corporation brought in $80k and incurred $65k
of legitimate, legal expenses, that the proprietor should run something more
than $15k through payroll because of the "going rate" for developers or for
some other reason?

I can't help but notice that your quoted text says "most of the PROFIT
distribution" rather than "most of the GROSS INCOME distribution" The company
can't pay out more than it brought in.

Obviously if you don't have $65k in expenses then you can't claim them. But,
working as a contractor can have a lot of expenses - travel, office rent,
utilities, etc. Giant corporations claim these expenses, a single-person
company is entitled to the same deductions.

In 15 years of business I have been audited twice by the IRS with very minor
amounts due (< $500) and nothing to do with deductions or expenses. The reason
I bring it up is simply to illustrate that I'm not just lucky or flying under
the radar. One time it was my mistake of a missing payment in my records and I
simply paid the amount due. The other time was the IRS's mistake and I
successfully contested it. If I had anything to hide I sure as hell would not
be contesting an IRS audit for some small amount of money. My point is that I
am in no way hiding or trying to sneak around tax codes. I do not encourage
anybody to do anything illegal. I only encourage anyone to claim the maximum
amount of legitimate deductions that they're entitled to claim. I also highly
recommend having an accountant handle it for you who knows the tax laws and
ensures that you are operating within them.

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aaronjg
Google Cache Link

[http://webcache.googleusercontent.com/search?q=cache:kvX1Y03...](http://webcache.googleusercontent.com/search?q=cache:kvX1Y037yzoJ:marcbarros.com/the-
value-of-a-founders-time/+&cd=1&hl=en&ct=clnk&gl=us)

------
Zelphyr
Through Founder Institute I've spoken with several successful entrepreneurs
(reasonably wealthy with at least one successful exit) about this issue and
nearly all of them said if your goal is simply to make money you're better off
getting a job.

However, if you want to build something that you own, are passionate about,
and are comfortable with the possibility of not having much money for many
years then being an entrepreneur is definitely a worthwhile endeavor.

~~~
ermintrude
I picked up "The Founder's Dilemmas" and the first chapter tries to talk you
out of starting a business by telling you that your business will probably
fail, and you'd probably end up wealthier working for other people.

It's good to remember, after the hype surrounding large exits, that the
chances of creating a similarly valuable company are incredibly small. So
yeah, if you're in it for the money it's probably not worth it.

------
sopooneo
A little over halfway through the author mentions a billion dollar sale
netting each of three founders only $300,000. Am I misunderstanding, or is
that a mistake?

~~~
saalweachter
Expected value is the key phrase.

So 0.00006% of the time you start a billion dollar company and take home
$300MM. 67% of the time you fail and take home $0. The rest of the time you
fall somewhere in between, and so your expected value is $300,000. Divide that
into an average of 4 years and your expected value is $75,000.

So if you're perfectly rational, you should be willing to work as an employee
with no equity for an extra $80,000 over whatever you'd pay yourself as a
startup founder, because your expected value is higher.

~~~
robryk
If you're optimizing for the expected value. One can also optimize for the
greatest chance to have more than X$ for some X.

~~~
saalweachter
If your goal is to make at least $100MM, and your chance of founding a billion
dollar company is 0.00006%, then you should go buy a thousand lottery tickets
the next time the powerball is up in the hundred millions. Your odds will be
higher and you'll find out the next day you lost.

------
timedoctor
This is very theoretical and I would say there are a lot of mistakes in the
analysis

I would look more simply at all the people I know that are entrepreneurs
versus those that work in a job.

At least 50 percent of the entrepreneurs have over $1 million In assets and in
a few cases over $10 million

Zero employees that I know have over $1 million in assets

I think it is far more likely to be wealthy as an entrepreneur, it's possibly
a bit safer as an employee.

~~~
nostrademons
I know quite a few employees with over $1M in assets.

Unless you're a relatively close personal friend, there's basically zero
reason for someone who earned over $1M in non-public transactions (notably
salary) to tell you about it, though.

~~~
smm2000
There is zero reason to tell close personal friend that you have more than $1M
in assets unless your friend have comparable assets. People are jealous and
telling somebody that you have much higher salary (especially if are in the
same industry) or you have a lot of assets is the sure way to destroy
friendship.

~~~
nostrademons
Well, there are other ways to infer it if you hang out with someone on a
regular basis, eg. if they say "I'll just work for another 5 years and
retire", or if they own 3 homes in the Bay Area and aren't complaining about
mortgage payments, or if you do an anonymous net-worth survey among many of
your friends and see that some of the top rows are over $1M.

------
Swizec
Great article, two issues:

1\. Instead of looking at averages for entrepreneurs (and stock-holding
employees) it should look at expected values. Those take probabilities into
account. So with a 0.1 chance of a $100MM payout[1] gives you an expected
payout of just $10MM for ~7 years of very hard work. Not too shabby, but not
spectacular either.

2\. _" 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)"_ ...
while I agree that people work this much and more, the funny part is how a lot
of cold hard research proves that working that much makes you less productive
and lowers your chances of a serious payout.

Now can someone make this for freelancers? I feel like we're somewhere between
employees and entrepreneurs. Salary definitely grows quicker than 6% and risk
is definitely smaller than "pure" entrepreneurs.

[1] billion dollar exit, let's say $100MM actually gets into a founder's
pocket

~~~
taurath
Whats the actual probability of a $1bil exit? Something more like .00001 I'd
imagine, nowhere near that $100MM payout. Granted, nobody becomes an
entrepreneur looking at that math - they have some reason to believe they're
better than the rest, and as long as it looks good rather than poor on a
resume to have your own failed company there's little reason not to try for
it.

------
wallflower
"This unexpected success is just unbelievable. When we video chat, we still
want to pinch ourselves through the monitor.

Peldi started Balsamiq on nights and weekends, and now it is supporting half a
dozen families.

We were lucky to able to learn so much in our former jobs at Macromedia and
Adobe. If he hadn't had the courage to leave, if the stars hadn't aligned just
right"

If that is not a real, tangible definition of a successful startup, I do not
know what one would be. Having been part of at least one failed side venture
startup, I know how hard it is to build a product and how much harder it is to
build the right team.

[https://blog.supportbee.com//2010/12/02/delivering-wow-
custo...](https://blog.supportbee.com//2010/12/02/delivering-wow-customer-
service-an-interview-with-valerie-liberty-from-balsamiq/)

------
eruditely
Small probabilities trend towards incomputability in tail events. The rate of
error for the measure becomes so explosive that in that arena individual
parameters seem to be more relevant, among many other things. We'd be better
off with PG's intuition than this.

------
adamzerner
80,000 Hours did a write-up on this: [http://80000hours.org/blog/12-salary-or-
startup-how-do-goode...](http://80000hours.org/blog/12-salary-or-startup-how-
do-gooders-can-gain-more-from-risky-careers)

------
richardking
There seems to be so much variance in starting a company that I'm not sure how
valid it is to use the 'averages' to create an earnings graph.

~~~
MattSayar
That's the entire purpose of averages, though.

~~~
richardking
Not in this case, because a lot of business fail in a year or two, and a lot
businesses survive for 10, 20+ years.

I'll bet there's a lot of '$ made' graphs for entrepreneurs that don't go up
much, or even go down; and a few that are hockey-sticks. There's really no
point of averaging the two out into a scenario that rarely/never happens.

------
romaster
negative skew & fat tails vs. fixed income stream.

------
daemin
Who manages to only save 6% of their salary? For $75,000/year that's a measly
$4,500.

For someone working in tech on a good salary this should be closer to 50%,
easily.

Even paying a high rent, and heading out every night one should be saving at
least 25%.

~~~
adventured
I've never met a person that could save 50% of their income that wasn't making
$250k+.

If you're living in California and making $125,000 per year at a job, you're
paying $33,000 in income taxes alone. Your 50% savings rate would be $62,500 -
after taxes you have $92,000, so the person can live off of $30,000 per year.
Rent alone can easily run $1,500 to $2,500 per month. This is an impossible
scenario without even getting into the real costs of existing (ie bills,
families, debts, vehicle & getting to work, accidents, problems, charity,
social life, doing things).

My ex, who lives in Los Angeles, and makes $70k per year in the medical field,
can't save more than $400 to $500 per month max after all costs and taxes.
That savings is inevitably slashed in half due to once-per-year events that
cost a few thousand dollars to fix. Her only salvation is her 401k.

~~~
hotpockets
Its ridiculously easy to live off about $20,000. You don't even have to try
very hard. Source: any graduate student.

~~~
phlyingpenguin
As a successfully graduated grad student, I disagree. It is possible, but not
at all easy, healthy or sustainable.

~~~
hotpockets
I've never seen anyone fail at it?

~~~
phlyingpenguin
Fail at being a grad student? Tons of folks do. Grad degrees have a fairly low
success rate and living conditions are certainly one of the reasons people
drop out or leave early (the case where the student goes for a PhD and leaves
after getting a masters). I'm not claiming it's the only reason, but it's
certainly on the list.

