Pricing your own life
I think that anyone that cares about their time (and EVERYONE should) should develop some sort of framework for figuring out how much their time is worth, or for evaluating a deal in terms of the time you will spend working on it. Assuming I live to be 100, that means that every year is 1% of my overall life. If we wanted to be more discriminating and say that my particularly productive years will span approximately 50 years (20-70), then every six months is 1% of my life. Time truly is a terrible thing to waste!
Let’s take, for example, a startup company that’s offering you a 30% stake as a founder. Wow! Pretty good size of the pie, right? Could be exciting, no? Take a step back and work out the numbers to figure out whether the risk is something you’re interesting in adopting. I’m not going to discuss whether you fit with the team or not, let’s simply explore from a purely financial perspective.
Let’s suppose that this company has reasonable plans to raise a few rounds of funding. After a few rounds of dilution let’s suppose that your 30% is now down to 10%. Let’s also suppose that a comparable company in this same field, Company Z, had a liquidity even that valued their company at $50 million, and it took that team 7 years to get there. There are certainly some fudge factors to include, but that will be highly subjective. (Was their company undervalued? Do you realistically have a way to disrupt the market and reap greater rewards than Company Z? Or does this opportunity keep you up at night and it doesn’t matter what the deal looks like, you’re going for it?)
For simplicity’s sake, we’ll also suppose that your opportunity is probably highly comparable to Company Z.
So, if history repeats itself, a $50 million liquidity event could happen 7 years from now. You’d get 10%, however that may not be 100% liquid immediately (lockout periods, you not wanting/able to cash out immediately, or if acquired you may be locked in for a long period of time). That breaks down to $5 million total upon liquidity, or just over $700k/year for your efforts.
Not bad! While this is all napkin math and there are other factors (taxes, cap gains vs employment tax impact, etc.) is that sort of payout worth it to you to take on the risk of seven years? One can assume that there will be a salary of some kind over the 7 year period, so that rolls in as part of the equation.
Ultimately, it’s up to you to figure out how you evaluate your deals. For me personally, I would want to take the advice I’ve frequently heard about investors looking to 10x their money on payday. If I calculate that my time is worth $100k/annually at a desk job and the risky payout of $700k/annually may show up (plus salary, which may tip the scale), then I’d be a little cautious about signing up. Money is cheap compared to time: money cannot buy time, and if investors expect 10x out of a stack of cash, then I’d be wary to accept less than that after valuing my time and how I choose to invest it - “Never spend your time.” (Thanks Nate for that bit of wisdom from President Murray - sound, sound words).
Check out this great article on Freelancing - he covers some rather interesting points on freelancing and working out your hourly rate based on things like healthcare, time, vacation, insurance, and other things you sometimes take for granted in a real job.
Here’s another article I recently read on the subject: http://jackg.org/the-value-of-time