How should a startup founder value her time?

Posted by | 17 January, 2012 | Key lessons, Startups

Original post by A Smart Bear

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 andpay 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 acceptingfor 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 hournot at your $150/hour consultant rate because of platitudes like “my time is worth what the market will bear.”

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