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.