I had written a long post back in September about my perspective on valuing time as a founder after a discussion with another founder/CEO in town that I filed away to be posted at some point. Just recently, I ran across Jason Cohen’s phenomenal post on the exact same topic, coincidentally with nearly the same conclusion: value your time at $1000/hr. I recommend reading his post first before continuing on to read some of my thoughts below.
Founders work insane hours. I’ve been asked during numerous interviews with candidates for openings we have on our team how many hours per week I work and its hard for me to seriously contemplate an answer to that question. Getting a company off the ground requires immense dedication and most importantly, it usually doesn’t feel like work. I worked on Mobilisafe in nearly all of my waking hours, and even in my sleep where I go to bed with an unsolved problem on my mind and let my subconscious at it. Counting hours, at first blush, just doesn’t seem like a meaningful or uplifting exercise.
It’s easy to believe that the sheer number of hours put in to getting a company started dilutes the value of your time but I would strongly disagree with that belief. When I actually sat down to think about how to value my time and run the numbers before bringing on help to take care of work where my time would be better spent elsewhere, it became clear that the means are second to the ends. So I took a big step back and thought about what kind of value I wanted my hard work to generate.
This is typically an area where you see founders wax philosophically about changing the world, and never selling out and other idyllic and ambiguous goals. I don’t mean to slight these aspirations, but I think its also very important to keep value (and wealth) creation in one’s sights as well. After all, you are building a business for which you have a meaningful stake (hopefully) and if you have to choose between changing the world and having no material wealth to show for it versus changing the world and having it significantly change your financial position in life, most of us are going to choose the latter scenario. The other important reality is that in decreasing order of likelihood, venture-backed startups die (66%), get acquired (33%) or go public (<1%).
Let’s walk through a hypothetical scenario. PinbookBnB is a hot new startup that just raised 500k at a 2m pre money valuation off a prototype that is gaining traction with consumers. The investors hold 20% of the company, there is a 15% option pool post financing, and the founders Sally and John have 35% and 30% respectively. The financing has been raised to grow the team to 4 people and provide salaries for roughly 18 months. Sally and John believe they can raise their valuation 4x to $10m going into their next financing. They believe that to sell prior to completing their next financing a premium has to be placed on the future value of PinbookBnB in exchange for pursuing the opportunity and its potential upside.
If startup valuations were the outcome of a perfect process, then you could conclude that there is nearly a 100% chance that PinbookBnB could sell for $2.5m sometime after raising their seed round and prior to completing a major milestone going into the next round of fundraising. Of course, valuations are far from perfect and frequently fail to account for the lack of a market for a company at its earliest stages. Lately, the acqui-hire/talent acquisition trend suggests that there may always be a market for great teams even when the product flops but its been widely discussed that the stories we read on TechCrunch and other sites overrepresent the likelihood of these outcomes. In this kind of exit, Sally and John net 875k and 750k respectively. Returning 1x back to the investors doesn’t render this exit a total failure but its far from a success given the opportunity cost and cost of capital. Sally and John may think of this possible outcome as an absolute floor within their realm of acceptable scenarios.
Let’s look at the more optimistic scenario – PinbookBnB increasing their valuation by 4x to $10m by achieving/exceeding their milestones. Depending on your perspective, you may like or dislike the idea that valuation in subsequent financings is largely a function of the amount being raised, the tolerance for dilution and a little bit of market comps. This is an important consideration with relatively illiquid assets like early stage startup equity. Let’s say that based on some contemplation of this information, Sally and John believe there is a 33% probability of PinbookBnB getting the uptick in valuation prior to raising their next $5m round AND having a suitable buyer at that pricepoint. This puts the expected value of this scenario at $3.3m.
As we move up the valuation scale, there is a decreasing likelihood of a buyer at higher and higher prices, which will impact expected value calculations. Every segment is different, so the founders need to gut check these valuations and probabilities with the market, advisors, investors, etc. to come up with a plausible model. It may not be accurate but it can provide a framework. I’ll handwave through this part a bit and bring it back to Sally and John arriving at $1m each as their number. Since John has a smaller stake at 30%, this would mean that if PinbookBnB had an exit opportunity at $3.3m or better, this would net the $1m each that would make them seriously consider an exit. (Sometimes co-founders will have different numbers that will need to be reconciled during exit scenarios.)
Getting back to how this relates to how founders should value their time, you can now start to run the numbers. Let’s say founders average roughly 75 hours a week of work across 52 weeks of the year. At ~4000 hours into PinbookAirBnB with a personal exit value at $1m and a 1 in 3 chance of exiting, Sally and John could be valuing their time at roughly $750 per hour. This is well north of what they currently pay themselves (roughly $35/hr) and can help justify why it makes sense to hire an admin to do less value creating tasks like managing calendars and stocking the office. Of course, this all depends on having the capital available, the prevalent need and the ability to retain someone at an appropriate level of work.
As an aside, a great side effect of this process is evaluating what, if any, number would make you contemplate an exit. Some will base their number on a exit multiple for their investors, which I would argue is potentially more important than any other basis once you take outside capital. The multiple may depend also on the type of outside capital you have taken on (angel vs. institutional vs. strategic).