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Barry R. Bainton is founder owner of B R Bainton Associates, a virtual consulting firm. He have been a business consultant and life coach for the past 25 years serving small business start-up, non-profits and firms in transition. Barry have a PhD in anthropology and MBA in international business.Below is a multi-part series about ‘what I am worth’ by Barry a common dilemma faced by many.Also checkout Part-2, Part-3, Part-4
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I have been asked many times, by entrepreneurs and those considering starting their own business, — What should I pay myself? How do I price my services?
It is a question I have had to ask myself, as a sole proprietor/consultant, from time to time as well. My experience with start-ups is that there is no formula for executive compensation, other than the survival of the company. If you are the sole proprietor, or owner of the company, you assume the full risks of the business. This entitles you to the full rewards of the business. If you are part of a group of business founders, then your ownership risks and rights (unless a partnership) are determined by your share of the corporate entity you formed. Partnerships are a special form of business relationship — like a marriage, where each partner is responsible for the debts of the others.
So how do you determine what you are worth when you decide to start a business, alone or with others?
The Simple Answer:
- To yourself, you are worth what you want.
- To the company, you are worth what it can afford.
- To the market, you are worth what you are willing to settle for and the buyer of your services is willing to pay.
How do you value your contribution?
When you start a business alone or with others, you wear many hats — investor, owner, lender, operator, laborer, marketer, financial wizard and broom pusher. Each hat comes with different responsibilities. You will be balancing many conflicting demands on your time. In the broader market place, each of these roles commands a different wage rate. And in a mature company, each would have a different individual performing the role. But in a startup you may perform all of them. In the beginning, everything that you do to build the business is priceless and contributes to the company. Some of it is your time; some of it is your talent; and some of it may be your fortune (savings). These are the elements you need to consider when pricing your contribution. Your contributions will increase the company’s value. This, in turn, will increase the value of your share of the company.
What can the company afford to pay?
The value of the company is measured in terms of equity, or ownership rights to the profits and responsibility for the losses. All startups depend upon an initial equity investment of time, resources and money in order to get started for which it exchanges a share of the ownership. For start-ups cash is king! And only sales create cash. A start-up company can survive only as long as its cash (available funds) and sales can cover the cost of its expenses. A company can only afford to spend cash if that expenditure will be replaced by sales revenue.
What does the market tell you about your worth?
There are only three sources of funds for the company to use to pay you
- Equity (investors’ savings and profits retained in the company),
- Sales (net profit from sales of goods/services to customers)
- Debt (borrowings from you and other creditors)
Of these only Sale produces New Money. Equity and Debt redistribute existing funds borrowed from the past earnings of the investors or future earnings of the company. These are the elements of the company’s business model and should be the elements you consider for your own personal business model.
Planning for your value to a start-up company
The better you plan how you will manage these elements, the better you will be able to determine how to maximize your return from the startup. Questions you should ask yourself are:
- “As a potential owner how does this business venture fit into my personal life goals?”
- “Is this business a means to an end, or is it the end itself?”
- “Will I own the business, or will the business own me?”
Conclusion:
These are daunting questions filled with risks. As a sole proprietor or a member of a team of investor-entrepreneurs, it is an opportunity to be part of something where you can see a real impact that your skills, experience, talents and efforts can have. It is an opportunity full of potential for personal freedom and satisfaction. And it can be financially rewarding.
How you will want to value yourself depends on your personal business model. I am going to discuss how you answers to these questions in Part 2.