My two [million] cents (pt. 1): A founder’s time is worth 5-figures… per hour
This is part one of a two-part post on the value of founder time. In part two I share my thoughts on what the value of founder time means for our ecosystem and how to act accordingly, which you can read here.
Sanity check: I realize that founders can’t actually exchange their time for $10K an hour, nor is founder time likely worth >$10K of equity value per hour in most businesses. But I do feel this is a useful logic exercise for our ecosystem, because, ex-ante, every venture-backed business should target reaching massive scale.
I joined FundersClub nearly 2 years ago to help run the venture side of our online marketplace. It’s been an amazing personal experience to have been a part of investing in nearly 100 awesome young companies and their founding teams. I’ve also been exposed to 1,000’s more companies raising capital in which we did not invest.
Consistently, one of the largest pain points I notice within my customer (the entrepreneur, in this case) is the amount of founder time fundraising soaks up.
So what’s the cost of the fundraising time? Or, generally, what’s the cost of a founder’s time?
Others have covered the idea of valuing founder time, one of my favorites is by Jason Cohen of A Smart Bear: (Tl;dr version: He says founder time is worth $1K to $2k / per hour, and gets there by taking a risk-adjusted salary of a someone of a similar skill level.) It’s helpful, but I think he still may be up to an order of magnitude too low.
I believe, in the best businesses, founder time is worth >$10K in equity value per hour, here’s how I get there:
I wrote a second post for what I believe this calculation means for our ecosystem, both investors and founders alike, and how to act accordingly. You can read it here.
Assumptions from calculation above:
1) Not all startups will become >$1B equity value companies (note: I dislike term “unicorn”, all respect to Aileen Lee and Cowboy Ventures), but if you are raising venture capital, a founder SHOULD believe their business will reach those levels, or at least there is a logical path to get there. If there is one unifying factor among all founders I meet in fundraising discussions, it is the core belief that they will become massive businesses. If a founder is “playing to win” and become a >$1B equity value business, then they should act in a pattern corresponding with a future of a >$1B equity value business. Investors who are backing the founders to possibly become a >$1B equity value business should also act in a pattern corresponding.
2) This one is really tricky, but I think all would agree a founding team is not responsible for 100% of equity value generated (unless founders never raised outside capital nor hired anyone). Thus, I look at the market to tell us what founders are worth to their business at time of exit (in this case, IPO data). For Facebook, Mark Zuckerberg and Dustin Moskovitz, together, held ~30% of the business post IPO.
This is consistent with a “A May 1999 study by the William M. Mercer, Inc. consulting group [of] Internet companies … found the following distribution of median equity stakes among members of the executive team (following an IPO)":
- Founding chairman-20.4%
This feels directionally correct for other businesses I’ve seen with multiple rounds of financing where each round dilutes ~25% of existing equity holders. This is not always the case, though. Some founding teams, like Box, owned substantially less than this amount: (disclosure note: Aaron Levie is an investor in FundersClub). Even still, I think 30% is a conservative figure for the % of equity value created by a founding team for a >$1B business.
3) I assumed 3 co-founders, but the math still delivers 5-figures of equity value per hour at 2 co-founders, and founder hourly time is just under 5-figures with 4 co-founders.
4) Although 3 years to reach >$1B valuation is a very aggressive timeline, it is happening in our market today.
Instacart reached a rumored $2B valuation in 2.5 years (disclosure note: FundersClub is an investor in Instacart).
Slack reached a rumored $2.8B valuation in just over 1 year after public launch (disclosure note: FundersClub is an investor in Slack via the ScreenHero acquisition).
That said, even if you assume a company will reach these levels in double that time, or 6 years, the equity value of a founder’s time is still north of $5K per hour.
5) Some have said 60 hours per week for a founder is optimal. I’m aware of the fact that many founders, especially at early stage, work more than 60 hours a week. Ultimately, sustainability is the name of this game, and what is sustainable is different for each person.