This post is a part-2 of multi-post series by Barry Bainton on What I am worth. Also checkout Part-1, Part-3, Part-4
Starting a business, whether as the founder or a member of the founding group, is more than an adventure; it is an investment. No matter how exciting, challenging, romantic, fun, or brilliant the idea behind the business, unless it produces a financial return for the owners, it is nothing more than hobby.
Generally, a start-up business cannot afford to pay its owner(s) a salary/wage. Rather than paying salary or wages, compensation is often in the form of equity (ownership) based on past performance or debt (creditor) a promise of future earnings. Ownership is divided into two types: Active and Passive. Debt can be divided internal debt or external debt.
If you are asked, or decide, to work for a firm in a start-up situation, you should consider that the amount you can demand for your services falls into two parts, equity (value invested) and debt (value to be invested). What the company can afford to pay you at the beginning in ownership rights is your equity in the company.
Ownership Active or Passive
Ownership conveys the right to determine what the company will do with the assets its controls. Ownership is the right to benefit from, and the obligation to assume the risk for the acquisition, control and disposal of the company?s assets. The owners have a choice to actively participating in the day to day acquisition, control, or disposal of assets or they can simply participate in the benefits and risks resulting from this activity by hiring others to manage the assets. Active owners are both investors and managers of the company. Passive owners are simply investors. A Start-up is an investment.
Equity:
A start-up business is funded through the savings, sweat, and any other intellectual and material assets the founders bring and donate to the venture. This is the equity one has put into the acquisition of assets that the company uses for conducting its business.
To determine the value of your investment, start by determining what your donation (investment) has been to the business.
For example: If you contributed, or donated, 80 hours a week for four months to get the business up and running, you would have contributed 1280 hours. The question is: ?What was my time worth when I agreed to “donate” 80 hours a week for 4 months?” Assume that you would have earned $75.00/hr elsewhere and you can justify this fee by past earnings records, then you have donated $96,000 of time to the company.
In addition, add any out of pocket expenses you incurred during that period and any material contributions you donated that you have not been reimbursed for, say, $4,000. Your total investment in the company is $100,000. This is your equity investment. This is what you should capitalize in terms of determining your equity position (ownership) in the company. That is, whatever portion of the company ownership you receive is worth $ 100,000 to you (but not necessarily anyone else).
Equity is the value you have risk. It is your share of the ownership in the venture and what you can loss if the business fails. Therefore it is critical that you value your contribution at the beginning.
As a sole proprietor, you will own 100% of your investment.
If you have active partners and/or other passive investors, then you will want to translate the monetary values of each into a number of shares or a percentage of ownership rights in the corporate entity. Check with your accountant and lawyer for the best way to set this up.
Conclusion:
If you consider working for a start-up company, your own or with others, don’t look at it as a job. Look at it as an investment. The true value of your initial contribution will come in the form of your share of the company?s equity.
In parts 3 and 4, I will discuss how debt (lending your present value to the company) and salary (demanding immediate payment for the current value of your services) can be determined as portions of your total value to the start-up company.