What I am worth? Summary:

This is a summary of a 5 part series on business start-ups. It focuses on how to value your role as owner/operator of a business start-up. That is, what are the answers to two simple questions: As owner --“What should I pay myself?” and as employee/operator -- “How do I price my services?”

When you do something because you want to do and are happy to spend money to do it, we call that a hobby. When you expect others to pay you to do it, then that is a business. When your hobby becomes a business, you become the investor, owner, and employee in the company you create to conduct your hobby as a business.

The First Day:

Non-business owners seem to think that there is secret formula that will produce good hard numbers to answer these questions. However in my experience with start-ups, the only executive compensation formula that works is the survival of the company.

On the first day of business, the company owes you, other investors, and lenders every dime that has been put into it. At that moment, before the first sale, the ROI (return on investments) for everyone is zero. So, regardless what salary you set for yourself, the company will not have any money of its own until its first customer has paid its bill.

The Challenge:

The major challenge for the owner/operator is adapting to the responsibilities of all three roles.

As the initial investor you want to know: “When can I start taking my money back out of the company?”

As the owner or co-owner, you want to know: “What can I afford to pay someone to do this job?”

As the employee you want to know: “What can I expect the company to pay me for my services?”


Valuation:

Valuation is a special financial skill. It is more craft than science, filled with subjectivity, uncertainty, and risk.

Difficult even under the best of circumstances, a fair evaluation of a start-up company, with no track record, is impossible. “What are the chances the business plan will work?” Others can only value it based your, and/or your partners’, personally qualities, and not on the company’s.

Starting a business is not about the money you make or will make. It is about investing yourself, your ego, and, yes, your soul in creating something you believe in enough to take the risk of not failing.

The Simple Method:

In Part 1 of this series, I proposed “The Simple Answer” to the initial questions.

As the investor: “To yourself, you are worth what you want.” If you think your investment of $10,000 is worth $20,000 at the end of one year, then you will demand a 100% ROI (return on investment) from the company. If you can wait 2 years, a 50% ROI annually will do.

As the owner of the company, “You are worth what the company can afford to pay after satisfying its other fixed and variable costs.” If you want to earn $10,000 a year as the owner, then you need to generate $10,000 of profits above the gross costs of all other business expenses.”

As an employee of the company, “You are worth what you are willing to settle for, and the company of can afford to pay.” If you want to earn $10,000 a year as an employee, then your services should generate at least $10,000 a year in value to the company.

By combining all three income sources: investment, profit, and salary; you could earn $25,000 to $30,000. This value would be: $5,000 to $10,000 appreciation in the value of your company shares (capital gain), $10,000 in dividends paid on your stock, and $10,000 of salary in cash.

The formula for personal earnings is: Capital Gain + Dividend + Cash = Salary

To apply the examples above to fit your own case, use your own numbers and ratios.

The Detailed or Life cycle Approach:

The main point in Parts 2, 3, and 4 is to show how you have three different ways to monetarize your investment in a start-up company. These can be phases to reflect the life cycle of the start-up process.

Part 2, Equity, explained how you might monetarize your sweat equity by creating a valuation for the company at the time it is transformed from a hobby to a business. This establishes the basis for an exit strategy.

Part 3, Debt, explains how you, and other owners, can prevent an excessive drain on the firm’s cash position, while still paying the owner/employee at a fair or desired salary rate. This is done by paying a salary based on a combination of cash and IOU’s that the owner/employee can cash in at a later time.

Part 4, Cash, explains the impact of cash payments to the owner/employee and the company, and the critical role that cash flow plays in the success of the venture.

I ended with a set of questions that you, as the investor/owner/employee, should consider for your own start-up.

At B. R. Bainton Associates, we can provide more detail to help you answer these questions in your own specific case. Feel free to contact me personally with your questions at brbainton@gmail.com.

How do you spot a fake venture capitalist on the Internet?

Recently someone asked me, "How do you spot a fake venture capitalist?

Apparently, she was concerned by the recent financial scandals and what she could do to avoid being taken. Margaret has a business idea which she has turned into a business plan (BP). She explained, "I have been shopping it around to ALL the VCs on the internet."

She had met a number of Venture Capitalists (VC), or persons she thought were VCs on the internet. They were from the USA, Europe AND Latin America.

She told me, "The US VC's seemed real and had money; but the others ... Well, they seemed fake."

I asked her what she meant by that. She said that the Europeans and Latin Americans (she is Hispanic), she had spoken to seem to be just interested in getting her BP and then trying to sell it to a bank or someone else for a fee.

Others were "Consultants who wanted to charge her a fee just to look at the BP. None of them had any real money to invest."

She asked, "How can I tell? I seem to be waste my time and I'm afraid I going to make a mistake. What can I do?"

I told her the following:


"My experience with the start-ups and start-up funding is that the VC often come in much later than the Business Plan (BP) stage. They are looking for a going concern that has proof of concept, intellectual property protection, a basic corporate structure and systems in place, and some key human capital in place. VC will do a deal for a piece of the action and an active role in the future development of the business. VCs will be there for the 'long term (3 to 5 years)'. They will also own 50% - 80% of the business."

"There are deal makers who may claim or allow you to think that they are authentic VCs. But these are middle men who will shop around your business plan to investors (Angels, and others) for a fee. Their fee is based on successfully matching you with an investor.This is what you will be buying from them."

"Deal makers can be useful in opening doors, but you should not expect more from them than they can deliver. Deal makers invest their special knowledge of the small investor network. Deal makers are not there for the long term."

"Yes, there are the Consultants who are there to earn a fee for their advice. Consultants invest their intellectual and experiential capital in your business plan. They can be a valuable resource to help you identify the strengths and weaknesses in your Business Plan and your marketing strategy for the plan. Again don't expect them to get the funding for you. It is your BP, not theirs."

I then asked her:

"Do you want to spend days, months, or years searching for just the right investor? If so, that is your choice. But if you want to take your dream and turn it into reality, you are going to need help."

"That help comes in many forms and to succeed as a business you will have to learn what help you need, where to look for it, and how to use it to your advantage."

"You have been focusing too much on your idea and not on the job of selling your idea. VCs are only one part ofa complex investor market made up of many different parts."

"What you need to learn is management. Management is the most difficult lesson an innovator like you, hoping to become an entrepreneur, can learn."

Lesson:

Once you decide to turn your idea into a business, you must change your orientation from innovator (the creator of the idea) to manager(the one who guides and nurture the idea through the development process).

Updates: Extended Discussion of "What am I worth?"

I have added a list of the Blogs that I am participating in and following. You will find the them listed at the bottom of the blog.

I have added Siliconverse.com

http://blog.siliconverse.com/

Siliconverse.com is an eclectic site which reflects the ideals of sole/soul proprietorship

An extended discussion of "What am I worth?" in four installments can be found there in the Guest Postings.