How should a startup founder value her time?

January 10, 2012 69 Comments

Almost no startup founder values her time properly.

Consultants know exactly what their time is worth: their hourly rate. As they say, it’s how much “the market will bear.” When a consultant intentionally doesn’t work for an hour — whether to be with family or to work on a new startup — they’re clearly giving up an hour of potential earnings.

If being a consultant is your goal, this is indeed how you should value your time. But when you’re in a startup, the math is completely different.

Your time is $1000/hour, and you need to act accordingly. Here’s why:

Let’s say as a consultant who normally charges $150/hour you stumble upon a weird client who asks for the following terms:

“We agree your time is worth $150/hour. However, we can’t pay you for four years, at which time we will pay you in one lump sum.”

How much should you increase your hourly rate to make these terms worthwhile?

It has to be more, not just because of the interest you could be making on it in the bank (which nowadays approaches zero as a limit), but because you can’t live off money you don’t have, which means you’ll need other work too, so you’ll need a nice premium to make this inconvenience worthwhile.

But “lost interest” and a premium doesn’t solve the biggest problem with these terms. The problem is: What if this company goes out of business in four years and doesn’t pay you at all?

Supposing this client is an early-stage startup — even if funded — the most likely event is that they stiff you! Because they’re dead. Let’s suppose for the sake of rhetoric there’s a 15% chance the company will exist in four years and pay their bill.

Like gambling in Vegas, the steeper the odds, the bigger the winnings if you beat the odds. In this case you need to charge $150 ÷ 0.15 = $1000 per hour to account for the risk.

In fact, you need to charge more, because that formula merely brings you back to “even!” To see this, suppose you divided your time between seven companies, all operating on these terms. Chances are all but one would fold, that one would pay you 7x your hourly rate, but you’d be in the same place you’d be if you just charged $150/hour on your standard terms.

But you’re waiting four years for that cash! So it’s worse. So you have to charge even more.

Of course this isn’t hypothetical, this is exactly the terms you’re accepting for yourself when you create a startup. The risk is high, so the potential financial rewards must be commensurate with that risk, which means you have to value your time between $1000 and $2000 per hour, not at your $150/hour consultant rate because of platitudes like “my time is worth what the market will bear.”

What does this mean for your daily life?

It means you don’t have time for projects that have the potential only for small, incremental results.

It means a personal or virtual assistant is worth the money.

It means you should focus on building things that are even more valuable than money.

It means you spend the money on a bookkeeper and CPA instead of messing with receipts, Quickbooks, and taxes.

It means you can’t afford to not work harder than is healthy.

It means you should obsess about doubling your productivity.

What else? Let’s continue this in the comments.

finance, productivity

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http://startupgrognard.tumblr.com Greg Leman
It means you should only work on startups where the payout is huge. I’ve seen a number of founders put in a few years of blood, sweat, and tears and their endgame, if everything was a complete success, was a lifestyle business.

http://twitter.com/sam2themax Sam Bloomquist
It means you should only work on projects where either 1) the payout is huge or 2) the work is enjoyable enough that you feel “paid” even if you never get paid.
http://matthewritter.net Matt Ritter
I don’t have data to disprove it, but it stands to reason that some types of lifestyle business are more likely to reach economic stability than exit-focused startups, which would change the implicit equation. I don’t have numbers, though.
Has anyone seen a well-conducted study on this issue?

http://blog.asmartbear.com Jason Cohen
Certainly there are many more such companies in existence in America, which furthermore employ a large number of people, as evidenced by the Census.
Surely it’s dodgy data and a dodgy conclusion, but it supports your theory.

http://apprium.ru/ Dmitry Nikolaev
Thank for the article, Jason. Absolutely disagree with you. There is a gap between reasons you’ve mentioned above and $1000/hr price. Risk, no “money back” guarantee – that’s all very characteristically for the startups. And the result’s very depends on when you stop. After your first finance fault ? Second one? The one big thing, you should really love what you do. This makes you happy, this makes you different.
Nel Rivero
I suppose at the end how you price your risk is a numbers game: you can play with several combinations like small monthly fees & large lump sums in 4 years if they still exist or you can actually define the policy of the kind of customers that are in and out of scope. And you might decide that those customers who are non paying in the short term don’t work for you. Or you might decide those customers are only a percentage of your consultancy hours…
Just a strategic decision topped up with the numbers game!
skyladdercoaching.blogspot.com
fendien
Excellent post! I am currently teaching a Skillshare course in NYC titled “The Art of the Night Hustle – Founding a start-up with a day job” (you can check it out here – http://skl.sh/spLBX2) and all of your points are relevant.
My first class was yesterday and I got into a lot of the points about what to focus on, not getting bogged down by menial tasks, etc.
But I hadn’t thought of the $1,000/hr equation — good stuff! I’m definitely going to update my slide deck to include that (and give link back attribution of course).
http://www.bigbadgoose.com Doug Lee
“How should a startup founder value THEIR time?”

http://blog.asmartbear.com Jason Cohen
“Their” is plural. How should startup founderS value THEIR time would be right.
Technically I should use “his time” because it’s a neuter pronoun when used like that but….

http://www.bigbadgoose.com Doug Lee
hey, sorry, not trying to get into a grammar war with you. using ‘her’ always struck me as incredibly ham-fisted, and probably a bit condescending. that’s a whole ‘nother topic.
there is a concept known as ‘singular they’http://en.wikipedia.org/wiki/Singular_they
ymmv

http://blog.asmartbear.com Jason Cohen
You’re right! The explanation is here: http://blog.asmartbear.com/value-time.html#comment-407310992

http://www.bigbadgoose.com Doug Lee
btw — huge fan of ’10 things ive never heard a startup founder say’ — should be exit course material for MBA classes

No
Instead of simply focusing on project where the payout is “huge”, I think a more descriptive way to put it would be to focus on projects that exploit a large market inefficiency in line with your risk threshold and objectives. Some of the easiest market inefficiencies to exploit are that way specifically BECAUSE they do not scale massively and are thus overlooked. There are many more and easier opportunities to make $20k a month, than there are to make $200M a year. Adjusted for time spent, risk of failure, one may make more sense than the other. Most people reading this would be relatively happy with $20k a month, but for many companies/institutions/funds/high net worth individuals, that amount of revenue is so small it’s not even on their radar to exploit the non-scalable inefficiencies that produce it and becomes time wasted.
Bill
Jason, why do you have to put the pussy on a pedestal and use the word ‘her?’
Are you seriously white knighting PC bitches? Hoping to get some?

http://blog.asmartbear.com Jason Cohen
…or it was because I wrote this post after having lunch with a woman entrepreneur, and I had just made this point, and wanted to share it.
You can decide which of those two explanations is more plausible.

Bill
Please re-instate my comment.

http://blog.asmartbear.com Jason Cohen
Done. Apparently someone else flagged it.

Anonymous
for good reason.

Anonymous
Like you are proud of your misogyny. You sir, are an ass.

Embarrassed for my gender
Seriously? This comment makes me feel physically ill. Someone uses a female pronoun instead of a male pronoun and you feel threatened enough to bring out “pussy”, “bitch” and imply that the only reason a man might have done it is to “get some”, implying that the value of not alienating women is to sleep with them.
Anonymous
I wonder if your wife, mother or daughter would agree with your choice of wording.

http://alexrohde.com/ Anfurny22
From a practical standpoint, I’m not sure this way of looking at things is more helpful than it is paralyzing. Regardless of what your value/hour is you should always be doing the thing which provides the most value to your company.
But, you’re correct that an entrepreneur mustn’t get distracted and waste valuable time, energy, and even thinking power on simple delegatable issues.
Funny the way the opposite gender can stimulate our creativity…
http://twitter.com/tednaleid Ted Naleid
It shouldn’t be an hourly rate that you’re comparing it to. It should be a daily rate. So instead of ~$1200/day, you should be charging $8000-$16000 a day.
If you think about it at the hourly level, you concentrate on the wrong things, and have the wrong view of “overtime”, but as you point out “you can’t afford to not work harder than is healthy”. Part of how you can double your productivity is by working more than the 8-hour day/40-hour week that a “regular” person would work.

http://www.pkftexas.com/ Raissa Evans
Research doesn’t really support the “more overtime=increased production” angle, in fact it’s quite the opposite. Yet so few entrepreneurs get their inspiring idea when they’re armed with time and energy management discipline.

Dobes Vandermeer
Another perspective is that dollars spent early in the life of a company are more expensive due to risk-adjustment. Using your math above you’d want to multiply every dollar by 7 in the same way you multiply the value of your time, for the same reason.
When you risk-adjust expenditures in the same way as your time, the result is a wash – you can go back to directly comparing your comparable hourly rate to the hourly rate you’re outsourcing at to figure out if you’re getting value for your dollar or not.
Also worth considering is that there’s usually a cash constraint such that you actually can go broke hiring an assistant, book-keeper, etc. whereas the cost of your time (just enough to pay your bills) is quite a bit lower than the cost of outsourcing those tasks. So it’s more cost-effective to do it yourself and this may allow you to extend your runway significantly.
http://profiles.google.com/marcalc Marcos Alcantara
Hi Jason! Good post as always. I’d like to ask you about how one could use this kind of rationale during investment negotiations. There is a money-investor and two other “time”-investors, who will be doing all the hard-work. Can they negotiate their equity using this kind of thinking?

http://blog.asmartbear.com Jason Cohen
Founders and investors have different ways of valuing equity. When they happen to intersect, there’s a chance for an investment.
The part of this argument you can retain is that s a founder you need enough upside to be interested. But all professional investors know that; if you find one who doesn’t, I wouldn’t take their money because either they’re ignorant or usurious.
–
Jason Cohen
http://blog.ASmartBear.com
@asmartbear

http://pulse.yahoo.com/_M6KBF3UOO742HE5F2ZK7QE5NUA RandyZ
I need to lose alot of weight. Each pound is 3500 calories and through exercise alone I can, generously, burn 350/hr. So that’s 10 hrs., $10,000 value, per pound. A person (like me) who needs to lose 100 lbs. is losing $1 million.

http://blog.asmartbear.com Jason Cohen
Awesome analysis. :-)
But actually, perhaps very true. If you lose years of life due to poor health, is that not worth lots of money? If you had the money to trade for longer life or better quality of life, wouldn’t you trade it, and therefore isn’t it worth that?

http://www.pkftexas.com/ Raissa Evans
And you can pay time investors in shares as well, which is what many tech startups do.

http://twitter.com/SeekVest SeekVest
It also means that you need to value your tasks/objectives objectively and focus on the tasks that make the biggest positive difference first.
The question that I’m now posing to you is: Is sitting down and doing the evaluation a task that will make a big difference, instead of say, doing a rough mental evaluation?
Anonymous
I disagree. In cliche terms, your startup is your baby. Would you take a break from raising a child because it wouldn’t be cost-effective to do so, or it would impact your health? Perhaps not. And neither should you do the same with your *baby* – the startup.
Perhaps because I’m young and still full of boundless energy, I feel you should work on your startup as long and as much as is required to make it succeed. I have zero qualms about working weekends or staying up until the first rays of sunlight filter through the windows if that’s what it takes to make the proverbial baby take the first few steps.
But then, I don’t have your experience or hindsight. And you know what they say about hindsight’s perfect 20/20 vision.

http://blog.asmartbear.com Jason Cohen
Where did you get the idea that I don’t think you should work overtime? http://blog.asmartbear.com/sacrifice-your-health-for-your-startup.html

http://www.startupdispatch.com/ Puranjay
Oops. A recurrence of my weekly verbal-blog-comment-diarrhea.

http://twitter.com/KAMChapman Katie Chapman
I like the ease of recognition of the value of the entrepreneur’s time. However, there are things that are valued highly enough to merit stepping back on occasion. Also, I think those “step back and then come back” moments often open forward moving ideas that might have stayed stuffed in the back corner if you simply keep pushing and never pausing to open on reflection or reevaluation. Push hard – for certain, but also force step back time into the equation for personal well being and even more so, for the best direction in the business’ growth process.
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ganta
I find most of my time goes toward reading blogs instead of actual progress. It’s tough to focus on a project when the “all items” count on google reader gets too high.

http://blog.asmartbear.com Jason Cohen
Then unsubscribe. I’m not joking. It’s easy to get distracted so you need to remove the distractions.
Even if that means removing me too.

Bernd Jendrissek
No, I can’t agree with the valuation proposed here. Suppose that instead of an ordinary consultant, you were a parallel founder: you divided your time between a number of startups. Now instead of earning $150/hr as a consultant, your valuation of a founder’s time would have you earning $1000/hr as a consultant.
One day, a friend asks you to help out in his own startup. You could be earning $1000/hr, so to make this proposition worthwhile, your friend would have to make your time in his startup worth $7000/hr.
I think the mistake here is something like an illusion of control / inverted causality / cargo cult time management. Your time is worth $1000/hr not because you decided by fiat that it is, but as a result of the things that you (or your delegates) do. I don’t even think this sort of valuation is useful as a yardstick of what you should be doing. Just think of Joel Spolsky installing office blinds so that his developers didn’t have to. How much is blinds-installation worth? Also, if you pick a market where failure is even more rife than in others, the value of your time is not magically higher than in another. Hell, why not deliberately stunt your business so that you can apply a higher multiple to compensate for the risk of failure?
If anything, this valuation of your time should inform whether you should stay in the business or exit, not what you should do once you’re in.
Oh, and regarding the question of how one should behave if one’s time is (or should be) worth $1000/hr, refer to http://en.wikipedia.org/wiki/Backward_bending_supply_curve_of_labour

http://blog.asmartbear.com Jason Cohen
Your fallacy is saying “you could be earning $1000/hr.”
Not at all. You could be earning $150/hr. You have to earn a long-term, *effective* rate of $1000/hr to make the *risk* equivalent to actually making what you could be earning.

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Karthik
Visit our site Start Up Mentor for any Startup Help
Meleoben
great article. Another perspective could be to pay yourself monthly as an entrepreneur-employee. Relieves yourself of some pressure and helps for accounting purposes as well. I made this mistake during my entrepreneurial days of not paying myself.
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Jinesh
It means that you should work ON your business not IN your business.
It means that you should outsource, delegate & drive not DIY.
Learnt this the hard way in my startup – http://www.idyllic-software.com
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guest
Fallacy: nobody’s time is worth $1000/hour. Just ask the 19 homeless people that could’ve been making $50/hour if you hadn’t been such a greedy pig. Why are there poor people? Because there are rich people. Value your time as time spent, not as risk-based potential.

waltersear
Won’t someone please, think of the homeless children?
http://jamiesonbecker.com/ Jamieson Becker
There is a myth in certain circles going around that there is a constant amount of wealth in the universe, but wealth is virtual and does not equal matter. Wealth is created every day. If I take your soda cans to the recycler, I just created wealth. You don’t even need air to create wealth — just electrons. We call this constantly growing (or shrinking) amount of wealth The Economy, and thus if I am “worth” $1000/hr and earn that much, then I will spend it on something, which causes others to build wealth. I’m not taking it from others by force. Communism is based on the fallacy that there is a constant amount of wealth and that we need to share it around. The fact is that the mere act of voluntarily transferring wealth in exchange for some good or service actually causes a future effect — more wealth will be created and thus the economy will grow.

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Seb
Just based on this I tried to think about this in a different way – more using finance and accounting concepts: http://www.madintelligence.com/valuing-an-innovators-time-draft/
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How should a startup founder value her time?

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