This post is a part-4 (and final) of multi-post series by  Barry Bainton on What I am worth. Checkout Part-1, Part-2, Part-3

What can my company afford to pay me?
What can I afford to pay myself?

As an active owner/operator of your business you must accept the conflict inherent in being both the boss and the employee.

The life blood of a business

Revenue is the life blood of a business. Revenue is the money that flows into the company from all sources and is used to pay for the expenses the company incurs doing its business. Revenue consists of three sources. Two of these sources we have discussed earlier. These are the proceeds from equity (sale of shares of ownership), and debt (sale of IOUs) offerings. These sources are critical to getting the business up and running.

The third source of revenue is cash/cash equivalents (sales of goods/services produced by the firm). Cash is cash in the bank. A cash equivalent is a very short term debt — an account receivable — owed to the company by a customer. Revenue in the form of cash/cash equivalents represents the only new money that can be used to sustain (pay expenses and debts) or grow (invest in) the company.
Cash flow is the key measure of success for a start-up. If the company is spending more money than it is taking in then it will eventually “bleed to death.” If it is taking in more cash than it needs to operates, then it can grow. The critical point for a start-up is the “break-even” point where costs and earnings balance out for the period.

The Active Owner and Cash Flow:

The active owner/operator faces a real challenge especially if the owner is a sole proprietor.

In the role of company owner, you want to insure that the business survives and grows. Survival gives your owner’s equity share value. Growth increases the value of that equity. Therefore as an owner you want to preserve and use cash efficiently to increase your revenue or the ROI for every dollar spent. One way is to minimize your cash expenses. In your role as a creditor, you also want the company to succeed so that it can continue make its interest payments and to pay back the loan principal.

In the role of employee, you want the company to pay you a fair wage/salary for your current time and effort. Just like other employees, you want a wage that reflects what you feel is the value of your efforts for the company.   Thus as the owner and creditor, your salary/wage represents an expense to company which increases the cost of doing business and reduces the profits and eats into capital. But as the employee, it pays your bills and supports your life style.

This paradox is especially challenging for the sole proprietor who, when considering taking a salary or wage, must choose between the short term and long term cost and benefits to himself and to the company.

Salary/wage is a taxable event:

As the active investor/owner your decision to take a salary includes subjecting yourself to federal and local personal income tax as well as the employee’s share of FICA (Social Security) taxes. Being a sole proprietor requires you to pay the full self-employment tax — both the worker and employer portions of FICA.

The Questions to ask yourself if you are planning to take a salary:

1. Just how much cash do I require to meet my personal obligations and needs?
2. Do I need a salary?
3. Do I want to pay personal income tax?
4. Do I deserve a salary?
5. What can I afford to pay myself?
6. How much can the company afford to pay me?
7. How much value will the company get for that expense?

Conclusion:

A Start-up business is a birthing process. You invest your time and talent, heart and soul, into an idea. You develop it into a concept, test it, and make a commitment to yourself, and maybe others, to take the next step. At this point you form a “company” to wrap around the concept thereby creating a new entity (a business) which is part of you but also has a separate life of its own. This entity requires revenue and nurturing if it is to grow and survive. Most start-up businesses that fail do so because they do not understand or plan for the financial responsibilities they are going to face when the founder(s) ask themselves — What am I worth? 

This post is a part-3 of multi-post series by  Barry Bainton on What I am worth. Checkout Part-1, Part-2, Part-4

Ownership/Debt
Once you start working full time for the start-up firm, you want to be compensated for the present value of your future contributions to the company and its business. Generally in a mature company this would take the form of a salary or wage based on some industry-wide standard for a particular job description or responsibility level.
A Start-up is not a mature firm. It cannot afford the high overhead such standards would impose. It needs to raise and spend cash in the most efficient and strategic way to achieve its financial objectives.
Debt Financing:
For a start-up, a secondary funding source is debt. The most common source is the personal loan made by the principals to the enterprise. Another source are loans made by friends, family and “angel investors.” These loans are unsecured based on the good faith between borrower and lender, or they may be secured by the pledge of the borrower’s personal assets to the lender in the event of default.
A company uses debt financing to meet an immediate need for cash to achieve a business purpose that it could not achieve without it. It leverages its current assets to acquire the needed cash from a lender based on a promise to repay the loan with interest out of the future earnings.

While established small business firms may obtain financing through SBA backed small business bank loans, commercial loans from banks, micro-lending facilities, among others, these sources are not generally available to the startup company. Start-ups must be more creative.

Debt as part of your Compensation
Active owners/managers are often are expected to accept a compensation package, or salary, which is some combination of cash, and deferred salary or a loan to the company (debt). The cash you take home is payment for your present service and represents a direct cost of doing business to the company. The deferred portion is a loan to the company.

The loan is the compensation you have earned for your services but are willing to defer to a future date. It is a claim on the company’s future earnings. You, as the lender, can demand an interest payment for the company’s use of the money. The interest rate is the added price you charge the company for deferring payment for using your labor/services.. 

How much is that loan worth?
If you really want to work for this start-up then you need to determine what you would be charging (or being paid) for your time if you were to work for someone else in the same position, in a company at the same stage of development?
Don’t try to compare your value to someone in an established, or mature, company! Otherwise you are comparing apples and oranges.
If you are offered a base salary less than what you might expect elsewhere, or less than you valued your equity contribution, then you will be losing the difference between the two.  For example: The company offers you $50.00/hr; your next best offer or opportunity is $60.00/hr; and you valued your original contribution at $75/hr. This is $10 to $25 difference. You need to determine for yourself:  “What are my basic personal requirements?” For example: If the company can only pay you $50/hr in cash, can you afford to live on that rate? Next, “How much can I afford to lend to the company?” “ $25/hr or $10/hr?”The company has to determine: “What it can afford borrow from you?” “$10/hr or $25/hr?” If you both agree that $60.00/hr is fair and agreeable then you have established the base salary rate. The base salary is a starting point for negotiation, NOT the ending point.  Next, you need to negotiate the amount to be paid in cash and the amount to be deferred. If the company can pay $50/hr, you will have to determine and agree how the $10.00 difference will be paid.  In what form of IOU should the loan be made — preferred stock, warrants, options, etc. for the other $10.00/hr deferred income?

Conclusion:
When you consider going to work, full or part time, for a start-up business, you might consider accepting a mixed compensation package that includes a debt component. That is, lending part of the cost of your services to the company in return for an IOU. As the owner of a start-up company, you might consider using debt as part of the package you offer to someone whose services you could otherwise not afford.

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.

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

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:

1. To yourself, you are worth what you want.
2. To the company, you are worth what it can afford.
3. 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

1. Equity (investors’ savings and profits retained in the company),
2. Sales (net profit from sales of goods/services to customers)
3. 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:

1. “As a potential owner how does this business venture fit into my personal life goals?”
2. “Is this business a means to an end, or is it the end itself?”
3. “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.

Sharing knowledge has always been my un-spelled goal of this blog and I think it would be great if readers of my blog also get to hear from people other than just me…its kind a boring to read about what same person did recently or his ideas ..huh

Well, I am opening up my blog for guests posts, where I would allow other folks I know to post on it. There would be some criteria (which would evolve over the time) based on which I would allow posts to appear on my blog.

We can together make sure that this blog remains entertaining and informative. If you have concerns about a particular guest post, feel free to email me or leave a comment on the article and help me know what you think.

Do you want to share something on my blog… let me know at ruchitgarg at gmail dot com