Equity is the hidden paycheck, even in early stages…

When you’re working for someone else, you tend to focus on your paycheck.  Promotions, raises, bonuses…it’s all part of the INCOME STATEMENT lifestyle.  Money in - money out = savings/fun/whatever.

It’s no surprise that when people who have “normal jobs” start looking at going off on their own, they have a difficult time justifying the risk of a drastically reduced paycheck, likely even negative for a while.  

"How long will it take before I’m even making as much as I make now?"

Wrong question.

The entrepreneur must be focused on the BALANCE SHEET lifestyle.  Paychecks are there to keep you afloat while you build the value of the equity you own in your startup.  That’s the hidden paycheck…and it should be bigger than your actual paycheck….and it could be huge.

Example:

Joe makes $100,000/year as a Director of Social Incentives Outreach for ABC company.

He has an idea for a software tool that he is sure he could sell for $1,000.  It will cost him $50,000 and one year of full-time effort to produce the tool and have it ready for prime-time.

"That’s $150,000 in development and opportunity cost.  Then another $100k in year two.  Joe would have to sell $250,000 worth of the tool in year two just to break even!"

Wrong.

Joe will have to sell about 10-20.   Because that’s what it takes to prove his tool has a market.  That’s what it takes to prove that his company is worth $250,000.

Now in year three, Joe sells 80 units for $80,000.  Pure profit.  Joe pays himself $60,000 while the person that took his job is making $110k.   But Joe’s company is worth $400,000 now.  Maybe $1,000,000 to a bigger company that could sell 1000/year with ease.

You get my point.  

And I’m not saying that this is a lock.  If your startup is a consulting-firm that completely relies on YOUR labor, then the equity value is going to be almost zero.  If your idea sucks, or (more likely), you execute poorly, your equity will be close to zero.

I’m just saying you have to include “wealth created in the form of equity” in your thinking….not just in terms of hitting a $100m home-run…. but even in the first few years as well.

Cash-flow crunches are easier to swallow when you know you’re building long-term value.

Win.

  1. klusterr reblogged this from andyswan