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The ROI on being an entrepreneur vs. an employee

marcbarros.com

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Re: The ROI on being an entrepreneur vs. an employee

#81

Post by daemin »

daemin wrote: post #21

Who manages to only save 6% of their salary? For $75,000/year that's a measly $4,500. For someone working in tech on a good salary this should be closer to 50%, easily. Even paying a high rent, and heading out every night one should be saving at least 25%.

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.

Re: The ROI on being an entrepreneur vs. an employee

#82

Post by lacero »

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.

Re: The ROI on being an entrepreneur vs. an employee

#83

Post by snowwrestler »

hluska wrote: post #43
jakejake wrote: post #37

Earlier quoted context omitted.

(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 corpo…

> 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 corpor…

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.

Re: The ROI on being an entrepreneur vs. an employee

#84

Post by ChuckMcM »

rdl wrote: post #70
ChuckMcM wrote: post #64

Earlier quoted context omitted.

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…

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 extre…

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.

Re: The ROI on being an entrepreneur vs. an employee

#85

Post by rdl »

ChuckMcM wrote: post #84
rdl wrote: post #70

Earlier quoted context omitted.

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 extre…

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…

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.

Re: The ROI on being an entrepreneur vs. an employee

#86

Post by stephencanon »

timedoctor wrote: post #18

This is very theoretical and I would say there are a lot of mistakes in the analysis I would look more simply at all the people I know that are entrepreneurs versus those that work in a job. At least 50 percent of the entrepreneurs have over $1 million In assets and in a few cases over $10 million Zero employees that I know have over $1 million in assets I think it is far more likely to be wealthy as an entrepreneur,…

>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?

Re: The ROI on being an entrepreneur vs. an employee

#87

Post by atmosx »

kyleblarson wrote: post #50
rdl wrote: post #19

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 I…

10-15mm isn't rich?

I don't know, I'm losing it.

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.

Re: The ROI on being an entrepreneur vs. an employee

#88

Post by bzbarsky »

hotpockets wrote: post #76
adventured wrote: post #36

Earlier quoted context omitted.

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 g…

Its ridiculously easy to live off about $20,000. You don't even have to try very hard. Source: any graduate student.

It's not too bad if you're single, yes.

If you want a family, it's a different story.

Re: The ROI on being an entrepreneur vs. an employee

#89

Post by majc2 »

adwf wrote: post #35
jhome wrote: post #30

Earlier quoted context omitted.

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.

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