A startup founder's hourly rate(ninjasandrobots.com)
ninjasandrobots.com
A startup founder's hourly rate
http://ninjasandrobots.com/a-startup-founder-s-hourly-rate
26 comments
I agree. I had written a post on my blog similar to your line of tought a while back. More along the lines of people are overestimating what their time is actually worth.
http://news.ycombinator.com/item?id=3376081
Great article! Why isn't THIS on the front page?
Direct link: http://blog.idleworx.com/2011/12/your-time-is-not-worth-that...
Direct link: http://blog.idleworx.com/2011/12/your-time-is-not-worth-that...
Thanks. I submitted it a while back but it didn't make it too far :-(
Agreed , they seem to be considering the mean startup founder per-hour value (which may well be $1000 or whatever) rather than the modal per-hour value (which is probably shockingly close to $0)
Yeah, better consider the median!
Really, this essay sounded like the opposite of the 'lean startup' idea. Remember, cutting expenses is relatively easy. Whats hard, is bringing in real money.
Really, this essay sounded like the opposite of the 'lean startup' idea. Remember, cutting expenses is relatively easy. Whats hard, is bringing in real money.
There's also the issue that, realistically, even in successful startups, only particular hours among all the hours worked created substantial value. Key insights, key moments of negotiation, key meetings. What are the odds that the hours you're driving would have been one of those hours? Probably not all that high, or else you wouldn't have chosen to drive them.
The drive up to Eureka may not even hurt your chances at coming up with one of those key insights if you've been working a lot. Sometimes breaks are good, and as others have pointed out looking at opportunity cost in terms of billable contract hours is deeply flawed.
It should also be pointed out that you probably shouldn't bother with the startup if all you care about is money and the expected value is exactly the same as predictable contract work. If it's worthwhile then either the payout should be significantly higher or there should be some reasons other than money at play that are again going to influence calculations.
It should also be pointed out that you probably shouldn't bother with the startup if all you care about is money and the expected value is exactly the same as predictable contract work. If it's worthwhile then either the payout should be significantly higher or there should be some reasons other than money at play that are again going to influence calculations.
I'm not so sure about that.
The logic certainly applies to time invested in product choices. If you're doing a VC-backed startup, you are playing a high-risk, high-reward game. Early on, unless you are building something crucial to delivering a lot of value to a lot of people, the time spent is waste.
So if I spend $10k of developer time (as measured by, say, salaries) to build a feature that only makes $15k back in revenue or cost savings, then that's a bad move in a VC-funded business, even though most businesses would be happy with that.
Our rule of thumb when making build/buy decisions is to use a number well above loaded developer costs. 3x, I think, for precisely these reasons of opportunity cost.
I agree that startups should still strive to be frugal, but I do note that Google had a chef from early on, and it's pretty standard startup advice to pay up to hire the best people you can get, rather than getting somebody cheap but adequate-ish. Sometimes being frugal requires paying up.
The logic certainly applies to time invested in product choices. If you're doing a VC-backed startup, you are playing a high-risk, high-reward game. Early on, unless you are building something crucial to delivering a lot of value to a lot of people, the time spent is waste.
So if I spend $10k of developer time (as measured by, say, salaries) to build a feature that only makes $15k back in revenue or cost savings, then that's a bad move in a VC-funded business, even though most businesses would be happy with that.
Our rule of thumb when making build/buy decisions is to use a number well above loaded developer costs. 3x, I think, for precisely these reasons of opportunity cost.
I agree that startups should still strive to be frugal, but I do note that Google had a chef from early on, and it's pretty standard startup advice to pay up to hire the best people you can get, rather than getting somebody cheap but adequate-ish. Sometimes being frugal requires paying up.
I agree with the sentiment, but in real life it doesn't work that way.
You get the pots from your parent's house because you don't have pots and you have 10k in the bank. Getting those pots extends your runway by 5%. I do agree with the idea that certain services should be bought, but if anyone really, really believed what they were doing was worth $1000 per hour the first thing they would do would be to hire a do-everything-secretary that would make coffee and lunches, would send emails and do laundry. But people don't do that, what people do is maximize the chance that they can take off.
You get the pots from your parent's house because you don't have pots and you have 10k in the bank. Getting those pots extends your runway by 5%. I do agree with the idea that certain services should be bought, but if anyone really, really believed what they were doing was worth $1000 per hour the first thing they would do would be to hire a do-everything-secretary that would make coffee and lunches, would send emails and do laundry. But people don't do that, what people do is maximize the chance that they can take off.
I think 'runway extension' is an interesting/better way of treating the early stages. Using fictitious 'hourly rates' to make decisions seems strange and ultimately counter-productive. Only if you've got a clear way of making money (and customers waiting) can I see it making sense.
In general, I'm sure there are plenty of successful people for whom this worked out but there are probably as many unsuccessful people (that we don't hear from) who ended up spending cash they didn't need to. Cashflow matters.
In general, I'm sure there are plenty of successful people for whom this worked out but there are probably as many unsuccessful people (that we don't hear from) who ended up spending cash they didn't need to. Cashflow matters.
I like the runway angle. It's consistent with Fred Wilson's advice about the importance of keeping enough cash in the bank: http://www.avc.com/a_vc/2010/08/what-a-ceo-does.html
Agree completely. Optimizing for some fictitious hourly rate doesn't sound very meaningful.
Personally I try to optimize for "overall lifetime impact". Sometimes that means picking up pots from my parent's house. Most often it means going without pots.
I guess you can also optimize for "likelihood of success in current venture" or even "present value of future earnings" and get similar results.
Personally I try to optimize for "overall lifetime impact". Sometimes that means picking up pots from my parent's house. Most often it means going without pots.
I guess you can also optimize for "likelihood of success in current venture" or even "present value of future earnings" and get similar results.
This reads like a call to manage one's self in the same manner that we were managed before we quit our shitty job to do our own thing.
I don't care how much I was making before. And I don't need to code as if there were a gun to my head. I'm not worried about being beat to market, or about the expectations of capital.
I'm just going to do the work I love, within a relaxed atmosphere, in the way that makes me happiest. This seems like a way to produce good work. And eventually, good company culture.
I don't care how much I was making before. And I don't need to code as if there were a gun to my head. I'm not worried about being beat to market, or about the expectations of capital.
I'm just going to do the work I love, within a relaxed atmosphere, in the way that makes me happiest. This seems like a way to produce good work. And eventually, good company culture.
I agree; I work for equity- not hourly rates. I work towards completing my projects because I believe them and WANT to work on them. Tasks such as talking to users & adding features is fun for me.
I was actually hoping this article would translate the amount of equity most startup founders receive into a per-hour rate. Now that would be an interesting read.
I was actually hoping this article would translate the amount of equity most startup founders receive into a per-hour rate. Now that would be an interesting read.
I _need_ to be making $100, so I'm _worth_ $1000. You know, because I'm very unlikely to succeed.
Something doesn't add up here.
That road trip to see your parents (or going out with friends, or stoping to take in the present) is valuable in itself. It gives you time to center and to regain your balance. Thinking that every hour that you take off is costing you a thousand dollars is a great way to burn out.
Saving that $30 on hosting though, that's probably not worth it.
Something doesn't add up here.
That road trip to see your parents (or going out with friends, or stoping to take in the present) is valuable in itself. It gives you time to center and to regain your balance. Thinking that every hour that you take off is costing you a thousand dollars is a great way to burn out.
Saving that $30 on hosting though, that's probably not worth it.
Surely a lot of this is more about cashflow vs opportunity cost rather than the "value" of your time.
I would imagine many small businesses fail because they are making the decisions that would make a lot of sense if their company was the big established company that they wanted it to be but not the tiny cash strapped thing it is.
Just about any successful small business founder (not necessarily tech founders) I have spoken to has told me stories of staying up entire nights stuffing envelopes, traveling all over the place to beg/borrow expensive equipment that they required but could not afford or trying to learn HTML themselves so that they could get a basic website up.
Of course for an established company it makes no sense for the CEO to do these things but at this point survival is priority #1.
I would imagine many small businesses fail because they are making the decisions that would make a lot of sense if their company was the big established company that they wanted it to be but not the tiny cash strapped thing it is.
Just about any successful small business founder (not necessarily tech founders) I have spoken to has told me stories of staying up entire nights stuffing envelopes, traveling all over the place to beg/borrow expensive equipment that they required but could not afford or trying to learn HTML themselves so that they could get a basic website up.
Of course for an established company it makes no sense for the CEO to do these things but at this point survival is priority #1.
yup a little sacrifice and scrappiness goes a long way vs. chaining yourself to a desk and coding 24/7. I did however like the underlying message of "quit effing around and get stuff done" - thats advice everyone can use.
The only time your actual hourly value matches your potential hourly value is when 1) You have significant funding, 2) You have a time-to-market deadline, 3) You have either an income model OR a continued funding potential based on point 2. If you have all of these things, then a day trip to save $600 bucks is a waste, otherwise saving $600 dollar today gives you $600 more for tomorrow. This blog entry is naive.
I'll be first to admit, that I don't get the maths.
If a startup founder's hourly rate is <potential value of work per hour> / 10 (using Author's logic).
The saving of $600 is guaranteed, assuming it takes 10 hours, the founder would be "making" $60/hour. Making it more "profitable" than working on something that could potentially worth $5000 for 10 hours (given 0.1 probability, that ends up being $50/hour).
If a startup founder's hourly rate is <potential value of work per hour> / 10 (using Author's logic).
The saving of $600 is guaranteed, assuming it takes 10 hours, the founder would be "making" $60/hour. Making it more "profitable" than working on something that could potentially worth $5000 for 10 hours (given 0.1 probability, that ends up being $50/hour).
Great post and points. BUT most founders (including myself when we started) rarely follow this at least until profitability or funding. (note: I still fall into this trap from time to time)
The reality is that founders, before they have money in the bank, value money more highly than time. Money seems finite vs. time which doesn't seem to be (that's obviously wrong). It's easy to spend extra time doing something vs paying for it to be done because it feels like time is the asset you have plenty of (vs money).
In addition, doing anything can make you feel like you're making progress. When actuality, you're just mistaking activity for progress.
The reality is that founders, before they have money in the bank, value money more highly than time. Money seems finite vs. time which doesn't seem to be (that's obviously wrong). It's easy to spend extra time doing something vs paying for it to be done because it feels like time is the asset you have plenty of (vs money).
In addition, doing anything can make you feel like you're making progress. When actuality, you're just mistaking activity for progress.
The problem is that spending money also spends time, whereas spending time does not also spend money.
Hypothetically, if as a one person startup, spend $1000 on rent and $1000 on food a month, and can expect to work 8 productive hours a day every day in a month (Just imaginary numbers here!)
That means we have an hourly cost of about $8 dollars an hour. Which is to say, for every 8 dollars you spend you have one less hour of time.
P.S the counter intuitive property of looking at it like this, is that if you are spending more monthly, it also takes more money to loose an hour. But this is due to the fact that you have fewer hours to start with, and thus each hour is worth more.
Hypothetically, if as a one person startup, spend $1000 on rent and $1000 on food a month, and can expect to work 8 productive hours a day every day in a month (Just imaginary numbers here!)
That means we have an hourly cost of about $8 dollars an hour. Which is to say, for every 8 dollars you spend you have one less hour of time.
P.S the counter intuitive property of looking at it like this, is that if you are spending more monthly, it also takes more money to loose an hour. But this is due to the fact that you have fewer hours to start with, and thus each hour is worth more.
I really like the sentiment of the post, and the quotes. It's easy to waste time on things that are not important when starting a business.
However, from a bootstrapping perspective, I think it is useful to look at the value of your time in a different way. If you are thinking about leaving a job that pays $100K at big company X to bootstrap something, you might think of your opportunity cost as $100K. But a lot of that $100K will go to taxes, so when you quit your job you really only loose $60K. What's more, you might spend more on living expenses with your big company job (vacations, etc), that you would give up while bootstrapping but not really miss. So, maybe you are really giving up something like $30K/year in true lost value.
I quit my big company job about 9 years ago to bootstrap a very small company. It has worked out well, and proved quite profitable by whatever measure of opportunity cost you'd like to use. But because when I quit, my taxes went to zero and my expenses went way down, I found that the actual cost to me of forgoing income for a period was much lower than I had imagined.
However, from a bootstrapping perspective, I think it is useful to look at the value of your time in a different way. If you are thinking about leaving a job that pays $100K at big company X to bootstrap something, you might think of your opportunity cost as $100K. But a lot of that $100K will go to taxes, so when you quit your job you really only loose $60K. What's more, you might spend more on living expenses with your big company job (vacations, etc), that you would give up while bootstrapping but not really miss. So, maybe you are really giving up something like $30K/year in true lost value.
I quit my big company job about 9 years ago to bootstrap a very small company. It has worked out well, and proved quite profitable by whatever measure of opportunity cost you'd like to use. But because when I quit, my taxes went to zero and my expenses went way down, I found that the actual cost to me of forgoing income for a period was much lower than I had imagined.
Sometimes All You Have is Time. Sometimes, there is never enough time. The reality is, there are always limited resources of one kind or another, and your primary job as a founder is to maximize the usage of those resources in every way shape and form.
The real practical value of this should be applied to maximizing your time when you are actually "working."
Asking yourself is this coffee break, phone call, friendly chat, HN comment, or whatever else you do at work, "Directly Contributing to Making Money (i.e. talking to users, building features,etc...)"
As a consultant, I set a goal how much money I want to make this year. I assume I get about 800 actual productive work hours a year(being honest with myself) and divide it by the goal of what I want to make and now i have a minimum value of my time.
In this context, when I stay true to it, I eliminate a ton of wasted time at work because I know every moment I waste is another dollar i need to make up elsewhere.
The real practical value of this should be applied to maximizing your time when you are actually "working."
Asking yourself is this coffee break, phone call, friendly chat, HN comment, or whatever else you do at work, "Directly Contributing to Making Money (i.e. talking to users, building features,etc...)"
As a consultant, I set a goal how much money I want to make this year. I assume I get about 800 actual productive work hours a year(being honest with myself) and divide it by the goal of what I want to make and now i have a minimum value of my time.
In this context, when I stay true to it, I eliminate a ton of wasted time at work because I know every moment I waste is another dollar i need to make up elsewhere.
This post completely contradicts the incentives behind founding a company in the first place.
A founder should only get (truly) paid on a liquidation event, be it an IPO, acquisition, or a new round of funding (this last one being a very big no-no).
No founder should ever be paying themselves market rate. If you hire a CEO from the outside and you need them for your company to succeed, _that's_ an instance when pay market value. But, if it's just you running the company, you should be keeping cash in the company, deferring to when it really pays off.
Should you be eating ramen for 10 years until you sell a billion-dollar company? Of course not. You also shouldn't be squeezing every penny into your salary until you hit "market value."
I have a trick for how much you should pay yourself: figure out how much you need to make per month so your company focus isn't interrupted with "how am I going to pay rent this month?"
A founder should only get (truly) paid on a liquidation event, be it an IPO, acquisition, or a new round of funding (this last one being a very big no-no).
No founder should ever be paying themselves market rate. If you hire a CEO from the outside and you need them for your company to succeed, _that's_ an instance when pay market value. But, if it's just you running the company, you should be keeping cash in the company, deferring to when it really pays off.
Should you be eating ramen for 10 years until you sell a billion-dollar company? Of course not. You also shouldn't be squeezing every penny into your salary until you hit "market value."
I have a trick for how much you should pay yourself: figure out how much you need to make per month so your company focus isn't interrupted with "how am I going to pay rent this month?"
What if your not building your business with the intention of (necessarily) selling it or getting IPO?
There needs to be some point at which you say "ok, I've done well so I'm going to reward myself by upgrading my lifestyle"
There needs to be some point at which you say "ok, I've done well so I'm going to reward myself by upgrading my lifestyle"
To me, the occasional two-day road trip is necessary to preserve my sanity. Even if it's based on a thinly veiled excuse.
While I think it's important not to waste time away on twitter, reddit, hackernews et al: if you start running a tally of how much $$$ every one of your waking hours is worth, you'll drive yourself crazy.
A related issue I'm having right now though - I only want to spend my productive hours creating and developing. I don't want to do the "social media expert" work as well (test-marketing and promoting my sites, etc.) I feel that my "developer hours" are worth considerably more than the non-development work, especially given that I'm not very good at the latter. I've been thinking how I could engage my unemployed friends to help me out with testing, promoting, etc. and make it a fair deal (based on future success/web statistics) but haven't gotten very far.
While I think it's important not to waste time away on twitter, reddit, hackernews et al: if you start running a tally of how much $$$ every one of your waking hours is worth, you'll drive yourself crazy.
A related issue I'm having right now though - I only want to spend my productive hours creating and developing. I don't want to do the "social media expert" work as well (test-marketing and promoting my sites, etc.) I feel that my "developer hours" are worth considerably more than the non-development work, especially given that I'm not very good at the latter. I've been thinking how I could engage my unemployed friends to help me out with testing, promoting, etc. and make it a fair deal (based on future success/web statistics) but haven't gotten very far.
This line of thinking can be good motivation sometimes (like when you're wasting time commenting on HN and should be working instead, oops), but other times it can be a burden on your psyche.
If you always think in terms of "how much is this activity costing me per hour?" then you will never let yourself do anything fun or relaxing because the guilt will be too much to let yourself enjoy it.
Having fun and relaxing to prevent burnout is equally important to making your startup work, otherwise you will drive yourself (and the business) into the ground, in which case everything is worth $0 anyway.
If you always think in terms of "how much is this activity costing me per hour?" then you will never let yourself do anything fun or relaxing because the guilt will be too much to let yourself enjoy it.
Having fun and relaxing to prevent burnout is equally important to making your startup work, otherwise you will drive yourself (and the business) into the ground, in which case everything is worth $0 anyway.
Wow, thanks for including my tweet. :) I wrote that after being annoyed that a good friend, who had finally taken the leap from his full-time engineering job and quit to do a startup with friends wasn't really doing it 100%. In fact, he got bored or something and picked up a part-time job at a clothing store.. for the "discount" he said. Even though he had about $100k already saved up and was living outside of the bay area.
I've thought this way before, and it's a mistake if your bankroll isn't gigantic. Cashflow comes before hourly rate (though both are worth thinking about).
I like how the articles here flip-flop between "you should be doing nothing but slaving yourself to your company" and "you gotta take some time for yourself, or you'll burn out".
I don't think this post is valuable if you take it to the extreme. Obviously hiring a private chef, or limo service for a small startup is not a good idea and you will quickly run out of money. However, if you are smart with your money. Know how much runway you have, and can easily send off simpler tasks to things like Mechanical turk, etc. You can focus on what really matters... building a great product that people actually want to use.
Value your time appropriately is good advice, but it does not exist in a vacuum-- the author is just working backwards here to post-justify his decision.
If anyone actually used this logic (note the expectation of 4-9 failures per success that brings about this time valuation), they would be broke very damn quickly. Good luck getting funded the next time after 4+ failures.
If anyone actually used this logic (note the expectation of 4-9 failures per success that brings about this time valuation), they would be broke very damn quickly. Good luck getting funded the next time after 4+ failures.
Sbvtle has made it very difficult to distinguish visually if I have seen something from a particular writer or not. This is bad.
I love this line:
You should only be working on two things. Talking to users. And making features.
:)
You should only be working on two things. Talking to users. And making features.
:)
Regarding the pots example, you could divide the cost of pots by your burn rate then figure out how much time getting the pots would buy before you ran out of money.
Hindsight is 20/20. For the first 18 months when I was workin for sweat equity, it turns out that, thus far, my time was worth $400 /hr then. If things continue to go well, it will have been worth even more. Also, equity is taxed at a much lower rate than salary, so when you include that consideration, it's even more. Of course, had we failed the equity would have been worth $0 :) ... So the question is like what's your time worth at the card table in Vegas? A Silly question without a crystal ball!
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Nice article, aside from the fact it should be proofread.
i just raised a $200k round in 2 weeks, hourly rate = $595/hour. beat that, hot shot
The fact that on the 10% chance that a startup is successful the founder's time will need to ultimately have been worth $1000/hour in order to make the gamble worthwhile does not by any stretch of the imagination justify your making decisions as if your time was actually worth that much. Because nine out of ten times, your time is actually worth nothing. [Not to mention that the market doesn't care one bit what your time would need to have been worth to make the gamble worth it for you, nor the fact that increasing your burn rate actually decreases the chance that you'll succeed at all]
Your time is only worth whatever you can reasonably expect it to be worth, and that has to include the chance that it's worth $0. If you start only considering the upside, then you can start justifying all manner of stupid purchases: why walk when you can save six minutes ($100) per trip by keeping a limo service on-call? Why bother cooking for yourself when you can hire a private chef? Hell, why bother coding when you can "only" pay $500/hour and get a best-in-the-business programmer to do it for you? You're still "saving money".
Please don't think like this. It's a recipe for failure.