A VC funded company, assuming you are capable of raising a seed round, can generally pay sfba founders 50-120k for full time work pretty soon after (founding, or people going full-time). Those same people are generally forgoing 100-200k jobs.
The equity value of a founder's shares is an order of magnitude higher than an early hire, or two orders higher than a late A or B round hire, and 3-4 orders higher than a pre IPO employee. No one gets rich as a regular IC hire at series B or C, even at a Google -- it probably tops out at 10-15mm, vs 15b for the founders. Even more so at companies less successful than Google.
On top of that, founders get supremely preferential tax treatment. Founders shares are generally bought near nil, and the entirety of gains are long term capital gains. If you do it right with QSBS and moving to WA before the sale, it can be taxed at zero. An employee often ends up paying hella AMT on almost all gain from ISOs since he didn't early exercise (or, early exercises at substantial out-of-pocket cost), and gets less freedom to sell in later financings, less return in a sub-optimal exit where the sale is covered with preference but "retention grants" are given to founders, etc.
I think the optimal strategy is to work for the most prestigious and successful companies purely as a learning and reputation building exercise, and then either be a founder or consultant to make money. It might be possible to enter a slightly earlier (series b) company as a director or better and still get a reasonable amount of equity (1%+ in a 100-200mm company), but otherwise either going for the tax advantaged, high variance outcome as a founder, or the high cash, flexible, also tax optimized outcome as a consultant, is the best way to actually get paid.
I'd like to make a small observation here, $10 - 15MM after taxes is fine. That is where you earn $240K after taxes and fees during a recession, or $20K a month free and clear. You live in a nice single family home that is paid for anywhere in the US, and you spend a lot of time travelling and sight seeing. Or if your more entrepreneurial you spend your time building things, coaching youngsters, collecting old cars or steam locomotives and restoring them to original condition. You never run out of money, you never run out of health care, toys, or shelter. If you're working 9 to 5 somewhere its because its fun and you "like to keep your hand in the game."
Pretty much anyone would call that "rich." The exception are people who have a issues around money and their only definition of rich is 'more than everyone else.'
I'd call that "post economic", but $5-10mm pretax (which is more likely what an employee gets at a Google as an engineer hired before IPO who stays through IPO for 4y) is not enough, after taking care of one's personal expenses, to really fund serious startups.
My definition of "rich" is being able to do something (fund businesses) which you fundamentally can't do while earning a salary. You could do that at an extremely limited scale either as a well paid employee or as 5-15mm exited founder.
It's a pointless semantic argument, though. My real argument is that founders are making 10, 100, or 1000x what others are making in virtually all positive outcomes, and not actually doing badly in negative outcomes (sometimes better, due to soft landings; sometimes worse, due to forgone salary).
I understand your definition, I disagree that it's a pointless semantic argument. Employees at startups, riding an exit or two, can easily get to the point where they have no financial worries for them or their kids. My claim is that this outcome, financial independence, is a much more common definition of rich and a much more common goal, than the one you posit of "being able to fund businesses."
For what its worth I've worked with, and know several dozen people who were non-founders and achieved that goal. I also know a few people who were not founders and got to the ranks of the .01% (the 1% of the 1%). Folks like Dan Warmenhoven who joined NetApp as its CEO after it was founded but before it was public, similarly Tom Mendoza (also at NetApp), Geoff Baehr who I got hired at Sun after it was public and who did quite well for himself.
Being a founder has a bigger payout in a successful exit, being an employee has a better rate of return. The reason is that an employee has the freedom to say "Ok, this isn't working, eject!" and a founder doesn't. As the author points out, Founders that eject at the first sign of trouble find it hard to ever get funded again. Back in the dot com bubble they were the joke entrepreneur the wantrapreneur. They came out in the bubble to found a company and collect a big payout, but they had no idea why people got big payouts. Kind of like cargo cultists making landing signs hoping that somehow that will cause a plane to suddenly appear on final approach.
I really believe its great when people are passionate about something and they invest every fiber in their being to make it happen. It doesn't always work but it is thrilling to be on the journey with them. It it much less fun to work for someone who is "just trying to get rich", they make poor choices. As an employee you can bounce bounce bounce until you find the right fit and the passionate people and ride it to the exit. As a founder you have to ride it and it you have to give it your all and you have to only step off that horse when you've exhausted every possible alternative. Anything less and your done. Yes, when it wins, it wins bigger than the rank and file, and when it loses it can destroy any advantage that extra sized piece of pie gave you because at the end of the day 10% of 0 is still 0.
Founders do much worse in negative outcomes than employees do. I don't know if its two or three orders of magnitude but it is significant.
The people you mention who got hired into successful businesses as non-founders and got rich (by my definition) were not hired as individual contributors.
It's entirely possible (likely, even) to get rich, even by my definition, if hired as a CEO into most unsuccessful large corporations, let alone successful ones.
A guy on another thread stated that he is happy because the NSA is not making people disappear in the USA like the KGB did in cold-war communist Russia.
Now I'm reading that a 15 million personal bank account (where you are practically a millionaire) doesn't make you rich. It's just okay. I guess, if you are not richer than Elon Musk then you're not considered rich.
These days, being an employee at at a profitable series B+ company may not make you rich, but it's a nice balance of risk and reward: you'll almost certainly walk away with the equivalent of a few hundred thousand per year, with a pretty cushy lifestyle on top of that. I know plenty of people who have jumped from one big valley name to another at mid-growth stage, and they're not hurting financially (plus, it makes you supremely marketable -- recruiters/investors/press go irrationally nuts over people who have big names on their resumes).
Entrepreneurship has never been an economically rational decision. You do it because you have to do it, or because you can't force yourself to work for someone else anymore. If you just want to gamble, go to Vegas.
"You'll almost certainly walk away with the equivalent of a few hundred thousand per year"
"Certainly" is an inappropriately strong word. Even if you assume a salary of $150,000/year, in order to reach $300,000/year you would need to make $150,000/year in stock options, which comes out to $450,000 total if you assume it takes 3 years to get from series B+ to an acquisition/IPO. Of course, it could take longer. Or the median outcome could occur and neither event would happen.
So even in the unlikely scenario that the company goes from series B -> liquidation event in 3 years, and you get 0.25% equity (I'm assuming unreasonably generous stock options here for your average engineer, especially given the base salary), the company needs a $180MM liquidation event for the math to work out. This of course assumes that all stock is equal and your investors don't have a liquidation preference or anything like that. It also assumes the company doesn't take additional financing that dilutes the option pool.
If you're in a company that's series B+, a $180M liquidation event is a fail, and you shouldn't expect to make anything.
I'm not counting angel rounds as a series A here. I'm talking about the big rounds that are invested to scale the business of an already-successful product. Companies that take these kinds of rounds can still fail, but the rate is nowhere near the same as for an early stage startup. And there's still upside in it for the employees: if you get .01% at a $100M series B valuation, and the company eventually IPOs for $1B, you've walked away with a grant worth $100,000.
We're only a factor of ~4 apart -- make that .02% and a $2B exit (or .01% at 50M for a $2B exit, or...), and you're basically there. And we haven't even talked about raises and/or retention grants, yet. So perhaps "certainly" was a strong choice of words, but it isn't totally ridiculous, either. Being a later stage employee at a hot company is a pretty good deal.
Yeah, I think we're pretty much on the same page. I think we both agree that established startups probably provide the best balance between risk and reward, but I'm less optimistic about the potential reward, especially for an engineer.
I joined the company I currently work for about a year after they raised a series C round. Most importantly, I get a pretty competitive base salary, but I also have some stock options. Even in the best case scenarios I think I'm looking at new car money, not mid-six figures. From talking with other coworkers, joining shortly after the series B round would have increased my options by roughly a factor of 3, in which case that "new car money" becomes "down payment on a house" money. Which is great, I'm not complaining at all, but it's not enough such that anyone post-series B that I know will be making a few hundred thousand per year.
My personal lifestyle, since I don't have kids (hate them), only really work on tech stuff or closely aligned hobbies like tearing down electronics or photography of electronics, travel only for conferences or to investigate potential work, etc., means that as a consultant virtually all of my outgoing expenditures tend to be fully deductible business expenses. I can buy a new HSM or 10GE NIC or something to figure out how it works as a business expense; that makes it ultimately 50% the cost of paying business/corp tax and then personal income tax and then buying it. This is all fully legal.
Being a 1099 consultant is a bit worse; I've always done the "product company which does a lot of client services as well, and usually with multiple principals" -- which solves the PSC-fucking-of-professionals issue. I think if you're smart you can get a lot of this benefit from 1099.
OTOH, a lot of people don't consider living in a government provided trailer, in hotels, etc. and eating on per diem/DFACs/with clients, only going on trips because there's a client engagement or conference, etc. to be a net win vs. ~30% income tax.
(I am not an attorney; I am not your attorney. I am not an accountant. This is not legal, professional, or financial advice.)
This article is basically the conclusion of the book the millionaire next door. The authors comb through statistics of the rich and interviews with wealthy people.
Building a business is probably the best way to make a large lump sum of money. Unfortunately the business is more likely than not to fail before bearing fruit and even after successfully running the business for large profits over time competition, laws, and factors out of your control usually kill the business. Due to the inherent risks and stress involved the book states that most successful people would not advise their children to start businesses but to get professional degrees, especially the kind that can work for themselves or consult such as law, medicine and accounting. Not so much the non-professional jobs such as business management.
Not sure an unbounded 6% annual salary increase is plausible, especially over a 35-year period. That makes the "get a job" numbers quite inflated. I think its clear that the potential payoff from being an entrepreneur is very significantly higher than being an employee; it's a question of when someone's willingness to accept a higher risk matches their circumstances (luck, market, idea, etc.)
Definitely. Average wage growth [1] from 2010 to 2012 has been about 4.7%, varying heavily on region (and likely profession). And this is the average (across all levels of experience). If you're not senior management, you're hitting a wage ceiling after about 10 years, where your pay won't be going up year after year even if you job hop.
A more realistic model would assume your wage growth starts at, say 8-10% your first year and then tapers off to 0-1% after 10 years or so.
There's not a single mention of taxes in the article.
I don't think that the average employee is aware that an entrepreneur/founder/self-employed person can save a lot of tax if they structure it right and are meticulous about it.
A self-employed person earning $70K a year can be better off than an employee earning $100K.
I disagree and think this is completely wrong. I've paid a ton of self-employment tax and the write-offs for a web developer have never made me better off than someone who makes 100K and doesn't pay self employment tax. An employee making 100K and paying regular taxes and low state income tax probably has over 70K left over after taxes. How can someone making 70K pre-tax that has to pay self-employment tax do better than someone who gets > 70K after tax?
(Sorry in advance for this long, rambling response) This applies to the US and forgive me if you have already done some of this. The first step is to get your corporation set up (use an online service or an accountant). It's a bit of paperwork but you can do it for around $400. Once you do that you can open a corporate bank account. At that point you bill your clients as a corporation and provide them with your corporate tax ID instead of your personal SS. The money goes into your business account. Then to pay yourself, the next step is to setup payroll (easiest way is to use an online service like quicken payroll) which will run you about $50/month but will handle all of your withholding and tax filing requirements.
It's somewhat of a pain getting this all going but once you do, you are operating as a corporation. Corporations do not pay income tax as such - they do have some filing fee type of taxes, but basically the taxes you pay come out of your payroll. So you do not pay tax on income that your company earns until you withdraw it from the company account via payroll. However, you can spend directly from the corporate account on anything that is reasonably considered a business expense. Computers and equipment, of course, can be purchased. Your company can pay the phone bills, internet connection, travel expenses, business lunches, etc. You can also charge your company rent as well if you are working out of your home.
What happens is that you wind up paying yourself a meager salary on which you pay normal tax just like everybody else. So for instance, your company earns $80. You pay yourself a salary of $15k and the remaining $65k money is spent on operating expenses and is a tax write-off. You only pay tax on that $15k. You're likely to even get a small tax refund check instead of a huge bill from the IRS. In some extreme cases you might pay yourself even less, or even come in at a loss and pay no income tax. There is nothing illegal about this as long as your write-offs can be legitimately considered a business expense.
This is also great because with payroll setup you are in a position to pay employees and sub-contractors via payroll as well and eventually grow your company with the proper financial system in place.
I would highly recommend having an accountant set this up for you and file your taxes though because it is a ton of work and requires understanding the ever-changing tax laws.
The IRS requires that you pay yourself a defensible fair market salary. If you're paying yourself only $15k, you will quite likely get audited, and unless you can defend the idea that your work is truly minimum-wage level work, you will owe quite a lot in fines. If this is advice from your accountant, I think you need a second opinion.
"If most of the gross receipts and profits are associated with the shareholder's personal services [i.e. not from other employees or capital], then most of the profit distribution should be allocated as compensation."
If you're only paying yourself $15k of the %80k your company brings in, and that $80k comes from payment by clients for work that you personally did, then you are definitely on the wrong side of the tax code.
Your tax advice is that if an S-Corporation brought in $80k and incurred $65k of legitimate, legal expenses, that the proprietor should run something more than $15k through payroll because of the "going rate" for developers or for some other reason?
I can't help but notice that your quoted text says "most of the PROFIT distribution" rather than "most of the GROSS INCOME distribution" The company can't pay out more than it brought in.
Obviously if you don't have $65k in expenses then you can't claim them. But, working as a contractor can have a lot of expenses - travel, office rent, utilities, etc. Giant corporations claim these expenses, a single-person company is entitled to the same deductions.
In 15 years of business I have been audited twice by the IRS with very minor amounts due (< $500) and nothing to do with deductions or expenses. The reason I bring it up is simply to illustrate that I'm not just lucky or flying under the radar. One time it was my mistake of a missing payment in my records and I simply paid the amount due. The other time was the IRS's mistake and I successfully contested it. If I had anything to hide I sure as hell would not be contesting an IRS audit for some small amount of money. My point is that I am in no way hiding or trying to sneak around tax codes. I do not encourage anybody to do anything illegal. I only encourage anyone to claim the maximum amount of legitimate deductions that they're entitled to claim. I also highly recommend having an accountant handle it for you who knows the tax laws and ensures that you are operating within them.
Corporations pay tax as a separate person by default. What you describe is a Subchapter S corporation, or an LLC.
In general the deductibility of expenses to the corporation is a huge advantage (of a C, S, or LLC), if you're a "professional" with a lot of expenses. OTOH, going from "dollar earned by C corp" to "salary paid by C corp, with both sides of the various withholdings, UI, etc." to "personal income" to "personal income with taxes paid" is MORE of a tax hit than just regular wage income. S/LLC give you the passthrough tax advantage but still have higher filing costs. It only really becomes worthwhile around $20-30k in side income for purely tax reasons.
There are plenty of non-tax advantages to incorporating, of course -- some level of asset/liability protection (most debts are firewalled at the corporation as long as you correctly treat corporate assets and liabilities as distinct from your own), the ability to take outside financing or do collaborations with other people, etc.
(I am not a lawyer; I am particularly not your lawyer.)
> Corporations do not pay income tax as such - they do have some filing fee type of taxes, but basically the taxes you pay come out of your payroll.
Are you sure that is correct? I am neither an accountant, nor even American, but IRS.gov says:
"The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation."
I think that only applies to C corporations, though I'm curious now about US tax law. Do tax shelters like you propose exist? Do you have any more information??
S corps pass through profits, which are reported only once, on the owner's personal income tax statement. It avoids the double taxation of a C corporation.
Normal corporations pay federal corporate income taxes directly -- and, as employers, they pay the employer share of federal payroll taxes as well.
It is true that there are kinds of corporations whose income is passed through to someone else and assessed against that person (notably S Corps, and T Corps in certain circumstances.)
You don't need to setup a corporation or payroll to get these benefits. Anyone can deduct business expenses. You end up paying the same payroll taxes either way.
Is this for an S-Corp / LLC? Because C-Corps pay income tax with a top rate of 35%. And is that how pass-through-taxation works? You only pay it once you withdraw it?
What was described above was basically tax evasion, especially the bit about charging your own company rent to operate out of your house. No form of entity works like that in the U.S.
You get a choice: you can either have a pass-through entity (owners are taxed as if they received the income directly...even if they never actually receive it) or a deferral entity like a corporation (corporation is taxed, but its owner are not taxed until/unless they receive a dividend).
Moreover, even if you choose a pass-through entity like an S-Corp or LLC, the IRS places certain threshold requirements on the amount of income you must pay yourself, and on the self-employment taxes (FICA) you must pay.
If you're legitimately self-employed (see second paragraph), you should be able to deduct all your business expenses - home office, hardware, software, phone, travel, advertising, legal fees, etc. - on your Schedule C. You can also set up a self-employment retirement plan (SEPP IRA) and contribute to it.[1] You'll need good records in case the IRS questions your expenses, and you'll need to keep your work life separate from your private life (e.g., your home office space must be used solely for work; if you use your car for both business and personal trips, you'll need to log your business mileage).
I'm assuming your work is legitimate self-employment, i.e., the people who pay you do not control your hours, tell you how or where to do your job, etc. If that's not the case, the law probably considers you an employee rather than an independent contractor[2], and you should be paid as one (W-2) - and you could get in trouble if you try to deduct expenses that are only valid for an independent contractor.
(I'm assuming you're self-employed, not incorporated.)
I can't speak for American tax law, but in the UK there are some common methods of small business owners reducing taxes on income:
Small payroll income so that you fall within a low income tax bracket.
Top up salary with dividends as they have a much lower rate of tax.
If you have a live at home wife, make sure she's employed by the company in some form, eg. you can pay her the minimum wage for secretarial duties. Ideally falling within the tax-free lower bracket.
Unlike regular employment, you can start claiming a lot of everyday things such as food/transport/home office electricity/internet/etc. as business expenses, thus meaning you can claim 20% VAT (sales taxes) back depending.
Ultimately, there's also the final payout if you manage to sell the company. If it were classed as regular bonus income, you'd be taxed at 45%. Instead you get charged as capital gains at 18-28%. You can also get entrepeneur relief on the first £10m which means you only get charged 10% instead of 28%.
NOTE: Some of these are loopholes like dividends and employing family. They tend to get cracked down on every now and again (I'm not even sure if they're valid now)
But when you get down to it, there are a heck of a lot of potential savings over standard income tax (currently 40% on anything over £32k, 45% over £150k)
I would appreciate if someone could correct me on this as this is mostly from memory.
I believe the using dividends for tax avoidance is either no longer effective or has been cracked down upon.
You can also give less to the government on your VAT if your profit (or revenues, I can't remember which!) is below 150,000 GBP. Rates vary between 9% and 15%.
Yep, they crack down on stuff all the time. Still slightly worth it as far as I know. You pay standard 20% income tax on the first £32k (with first ~£10k tax-free), then 40% upto £150k, 45% over that. Whereas with dividends you pay 10% on the first £32k income (minus allowances), 32.5% on everything upto £150k, 37.5% over that.
So it's still worth it, but not quite as much as it used to be before IR35.
Anyway, anyone going down this line really needs to speak to an accountant, yada yada yada.
For consultants/freelancers/contractors - dividends can be fine, if you can mitigate your exposure to IR35 (typically a bigger issue for contractors). Groups such as the PCG can really help here, but really the key thing is ensuring that any contract can't be thought of as disguised employment (control, substitutability and mutuality of obligation being the keywords) - speak to a Lawyer or a specialist accountant for advice or other clued up contractors for advice.
The tax position on dividends is also a bit more subtle than above; if your total personal income is less than the £32k (minus allowances), then you're going to get the dividend tax credit back so the div is tax free. Granted the company is paying corp tax at 20% on all profits; but also it gives you options to defer company income becoming personal income, building up the company's reserves. As I understand it, you can wind up the company and get entrepreneurs relief which is also a worthwhile target for consultancies.
I would also like to see some examples. If you're just writing code all day, you have an awfully low overhead. I lose over half of my side income after I hit a certain point that's covered by my deductions, at which point I simply stop doing side work.
Which puts you in the same position as an employee paying top tax rates. It's the pre-tax deductions (cost of doing business expenses) that differentiate working for yourself or for someone else.
Elaboration time... I did this in the UK, similar likely applies in the states.
I used to be an 'independent contractor'. I work for companies doing ecommerce / Java / Consulting work. I work a fixed term contract and leave when the project is complete.
I set up a limited liability company with me as the director and the only employee. When I get a contract (work), the client hires my company rather than hiring me directly. Depending on your specific tax laws, you pay a lot less tax using this kind of setup i.e. you pay yourself a low salary and the rest in (low tax) dividends.
This is the standard way most IT contractors operate.
There is another trick not mentioned here. If you live outside US and have an LLC with only one person you don't pay taxes in US. This works assuming your work is done outside US.
So, say you live in a very relaxed tax environment, you can incorporate your LLC, sell software services to US companies and pay small taxes in your country.
It's not a CFC. He's described an NRA residing in a foreign country selling software to US customers from a location outside the US. This is foreign-source income that is generally not taxed in the US unless you have citizenship or tax residency (i.e., a green card, or a company that is incorporated or physically does business in the U.S.).
In fact, what he's described works even better without the LLC, as the organizing an LLC in a state gives that state jurisdiction to tax sales to customers in that state! (State tax laws work differently than federal tax laws and are generally not affected by tax treaties.)
NAME_OF_COMPANY LLC is a single member LLC, and as such disregarded for federal tax purposes as a separate entity from its owner, FULLNAME, a resident of COUNTRY and a nonresident alien for US tax purposes. According to Section 1.1441-1 of Treasury Regulations (page 3 of the attachment) , payments made to a whole owned domestic entity that is disregarded for federal tax purposes and whose single owner is a foreign person, shall be treated as payments made to the owner of the entity. This means that payments made to NAME_OF_COMPANY LLC for federal tax purposes are considered to have been made to FULLNAME. The Regs go on to explain that the single owner of the US disregarded entity must furnish a From W-8 with his name and address to the US payor . An ITIN is required only to claim a reduced rate of withholding under treaty, but since in this case the payments were made for income from sources WITHOUT the United States, no withholding is required to begin with, so there is no need to claim any treaty benefits at all and provide an ITIN as a result.
If you want I can contact you with an specific accountant and you can discuss the details with her.
Are you talking about a non citizen doing this, or a citizen/permanent resident?
A noncitizen actually can use the USA as a tax haven in ways similar to this (I'm not sure of the specifics of this particular situation). IMO there isn't a whole lot special about non US people not owning US taxes when outside the US.
A US citizen or permanent resident is taxed on global income (you do get around your first 95k/yr deducted if you are out of the country enough, which is why I went diving for 4 months at the end of a contract and net made more money than returning to the US that year). A corporate entity being treated as disregarded just exposes that income the us person's global us tax liability.
(Again, I am absolutely not a lawyer; this is not tax advice)
Noting that if you're expecting to lose money on the business initially, I believe you can't write that off on your personal taxes if you're not taxed as a partnership. I think it is common to have an LLC taxed as a partnership initially and switch to being taxed as a corporation (which you can do I think within the first few months of each year) after it becomes profitable.
Through Founder Institute I've spoken with several successful entrepreneurs (reasonably wealthy with at least one successful exit) about this issue and nearly all of them said if your goal is simply to make money you're better off getting a job.
However, if you want to build something that you own, are passionate about, and are comfortable with the possibility of not having much money for many years then being an entrepreneur is definitely a worthwhile endeavor.
I picked up "The Founder's Dilemmas" and the first chapter tries to talk you out of starting a business by telling you that your business will probably fail, and you'd probably end up wealthier working for other people.
It's good to remember, after the hype surrounding large exits, that the chances of creating a similarly valuable company are incredibly small. So yeah, if you're in it for the money it's probably not worth it.
A little over halfway through the author mentions a billion dollar sale netting each of three founders only $300,000. Am I misunderstanding, or is that a mistake?
So 0.00006% of the time you start a billion dollar company and take home $300MM. 67% of the time you fail and take home $0. The rest of the time you fall somewhere in between, and so your expected value is $300,000. Divide that into an average of 4 years and your expected value is $75,000.
So if you're perfectly rational, you should be willing to work as an employee with no equity for an extra $80,000 over whatever you'd pay yourself as a startup founder, because your expected value is higher.
If your goal is to make at least $100MM, and your chance of founding a billion dollar company is 0.00006%, then you should go buy a thousand lottery tickets the next time the powerball is up in the hundred millions. Your odds will be higher and you'll find out the next day you lost.
That line threw me off as well. I think he was switching thoughts between sentences. He mentions Billion dollar companies,and then I believe he's saying "for any company exit [not Billion exit] - your average gain is $300k"
I know quite a few employees with over $1M in assets.
Unless you're a relatively close personal friend, there's basically zero reason for someone who earned over $1M in non-public transactions (notably salary) to tell you about it, though.
There is zero reason to tell close personal friend that you have more than $1M in assets unless your friend have comparable assets. People are jealous and telling somebody that you have much higher salary (especially if are in the same industry) or you have a lot of assets is the sure way to destroy friendship.
Well, there are other ways to infer it if you hang out with someone on a regular basis, eg. if they say "I'll just work for another 5 years and retire", or if they own 3 homes in the Bay Area and aren't complaining about mortgage payments, or if you do an anonymous net-worth survey among many of your friends and see that some of the top rows are over $1M.
It may depend on the ages of the employees that you know, since investments grow over time. Someone with a developer's salary can get a good fraction of a million dollars just by steadily contributing the maximum amount to their 401-K (plus company match) for 25 years. And, of course, you can save more of your salary in additional investments.
>Zero employees that I know have over $1 million in assets
You don't know anyone who has been at google / apple / facebook / amazon / microsoft / etc for more than a couple years, had a few notable accomplishments, and been promoted once or twice?
1. Instead of looking at averages for entrepreneurs (and stock-holding employees) it should look at expected values. Those take probabilities into account. So with a 0.1 chance of a $100MM payout[1] gives you an expected payout of just $10MM for ~7 years of very hard work. Not too shabby, but not spectacular either.
2. "Assuming you don’t have any exits and you work 65 hours a week while running a company (compared to 50 hours per week with a regular job)" ... while I agree that people work this much and more, the funny part is how a lot of cold hard research proves that working that much makes you less productive and lowers your chances of a serious payout.
Now can someone make this for freelancers? I feel like we're somewhere between employees and entrepreneurs. Salary definitely grows quicker than 6% and risk is definitely smaller than "pure" entrepreneurs.
[1] billion dollar exit, let's say $100MM actually gets into a founder's pocket
Whats the actual probability of a $1bil exit? Something more like .00001 I'd imagine, nowhere near that $100MM payout. Granted, nobody becomes an entrepreneur looking at that math - they have some reason to believe they're better than the rest, and as long as it looks good rather than poor on a resume to have your own failed company there's little reason not to try for it.
"This unexpected success is just unbelievable. When we video chat, we still want to pinch ourselves through the monitor.
Peldi started Balsamiq on nights and weekends, and now it is supporting half a dozen families.
We were lucky to able to learn so much in our former jobs at Macromedia and Adobe. If he hadn't had the courage to leave, if the stars hadn't aligned just right"
If that is not a real, tangible definition of a successful startup, I do not know what one would be. Having been part of at least one failed side venture startup, I know how hard it is to build a product and how much harder it is to build the right team.
Small probabilities trend towards incomputability in tail events. The rate of error for the measure becomes so explosive that in that arena individual parameters seem to be more relevant, among many other things. We'd be better off with PG's intuition than this.
Not in this case, because a lot of business fail in a year or two, and a lot businesses survive for 10, 20+ years.
I'll bet there's a lot of '$ made' graphs for entrepreneurs that don't go up much, or even go down; and a few that are hockey-sticks. There's really no point of averaging the two out into a scenario that rarely/never happens.
I've never met a person that could save 50% of their income that wasn't making $250k+.
If you're living in California and making $125,000 per year at a job, you're paying $33,000 in income taxes alone. Your 50% savings rate would be $62,500 - after taxes you have $92,000, so the person can live off of $30,000 per year. Rent alone can easily run $1,500 to $2,500 per month. This is an impossible scenario without even getting into the real costs of existing (ie bills, families, debts, vehicle & getting to work, accidents, problems, charity, social life, doing things).
My ex, who lives in Los Angeles, and makes $70k per year in the medical field, can't save more than $400 to $500 per month max after all costs and taxes. That savings is inevitably slashed in half due to once-per-year events that cost a few thousand dollars to fix. Her only salvation is her 401k.
Fail at being a grad student? Tons of folks do. Grad degrees have a fairly low success rate and living conditions are certainly one of the reasons people drop out or leave early (the case where the student goes for a PhD and leaves after getting a masters). I'm not claiming it's the only reason, but it's certainly on the list.
Looking at pre-tax saving rate for high income individuals in California is useless - top marginal tax rate is ~53% so often it's mathematically impossible to save 50% pre tax. Looking at saving rate post tax makes much more sense. Though you should always utilize 401k, 529k and other tax-efficient methods to save of course.
In Texas salaries average around 80% of what they are in CA. No state income tax. Rent is around 1k (albeit higher in Austin). Food, gas, etc is less expensive. Saving 50% of post-tax income is very doable.
People who have expenses like child care, mortgages, car payments, unexpected medical bills, don't contribute to a 401K through automatic payroll deductions, or who just don't budget as well as they might.
The average savings rate from 1959 to 2014 was 6.82%. [1]
I suppose a single person with no debts whatsoever might be able to save 25% and live in a high rent area, or 50% and live in a lower cost of living area, assuming they are living in a no-income-tax state. But fewer than 25% of the population is debt free[1], and I'd guess the percentage of debt-free individuals capable of landing a $75,000 job out of college is even lower. Taking on any debt, or having any kind of "major" expense blows your computation apart.
I probably should have made myself clearer, and I guess I didn't take the US situation into account (I'm living in Sydney).
When I ran the numbers through my head before making the original comment I assumed the savings would be 25-50% of take-home pay, so with the necessary taxes taken out. Which I would argue should still be more than a measly 6% of the total.
The other point to make is that a mortgage would count as savings, since you're paying off a rather large purchase as opposed to paying rent. That and most people would be putting the savings away to buy a residence in the first place.
The equity value of a founder's shares is an order of magnitude higher than an early hire, or two orders higher than a late A or B round hire, and 3-4 orders higher than a pre IPO employee. No one gets rich as a regular IC hire at series B or C, even at a Google -- it probably tops out at 10-15mm, vs 15b for the founders. Even more so at companies less successful than Google.
On top of that, founders get supremely preferential tax treatment. Founders shares are generally bought near nil, and the entirety of gains are long term capital gains. If you do it right with QSBS and moving to WA before the sale, it can be taxed at zero. An employee often ends up paying hella AMT on almost all gain from ISOs since he didn't early exercise (or, early exercises at substantial out-of-pocket cost), and gets less freedom to sell in later financings, less return in a sub-optimal exit where the sale is covered with preference but "retention grants" are given to founders, etc.
I think the optimal strategy is to work for the most prestigious and successful companies purely as a learning and reputation building exercise, and then either be a founder or consultant to make money. It might be possible to enter a slightly earlier (series b) company as a director or better and still get a reasonable amount of equity (1%+ in a 100-200mm company), but otherwise either going for the tax advantaged, high variance outcome as a founder, or the high cash, flexible, also tax optimized outcome as a consultant, is the best way to actually get paid.