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Ask yourself how much money your startup could eventually be sold for. $5 Million? $10 Million? Now divide that by the number of years, divided by 2000. For a

Ask yourself how much money your startup could eventually be sold for. $5 Million? $10 Million? Now divide that by the number of years, divided by 2000. For a $10M exit, working on the startup for 5 years, that works out to $1000 per hour. If you really think your startup can be sold for $10M or more within 5 years then you should think twice before taking on any contract work for less than $1000 per hour.

melvinram 15y ago
That's just completely faulty logic for so many reasons: a) Future value is not equal to current value. b) $10M exit in the future is not set in stone. It'll take longer and be more painful than you think it will be. The chances that you'll have a $10M exit are low. You're doing well if you're pocketing $1M. c) People won't fund you for free. You're giving up a chunk of your company. At 20% of $10M, that's $2M you're giving up. If you're getting more capital, you can expect to give up more. d) Having full control and agility is more important than most people realize unless you have some really smart entrepreneurs who are your investors guiding you.
- jsatok 15y ago
  Agreed, and chances are that you won't create a $10M company on your own. Include a reasonable ESOP, a chunk for investors, etc., you're at a lot less than $10M. Also, building a $10M startup isn't exactly guaranteed. When you factor in the future value, expected exit, dilution and the risk, I think it'll work out to a lot less than $1000/hour. But I don't think that's such a bad thing. I'd bet if you talk to most founders, they'd tell you that they didn't start their company with a big number in their head - they started it because of passion, drive and the desire to make a difference. $1000/hour consulting doesn't equal that sort of lifestyle.
- wavephorm 15y ago
  But it gives you a basis for further consideration. Surely nobody will pay $1000/hr for your services. If they pay $100/hr and you think you have a 1 in 10 chance of exiting for $10M then maybe that's break even. Really, if you don't think your startup is going to be worth even $5M at some point in the future, I think you have to take a hard look at what you're really trying to accomplish.
notahacker 15y ago
As others have pointed out, a $10 million exit will tend to require a lot more man hours and dilution for a much lower effective hourly rate But even if we take your figures, assuming like the original question that you actually need the money, you're choosing between giving away time or giving away equity. Assuming that delaying a couple of months doesn't diminish the value of your $10 million exit, then giving away even a only couple of percentage points in equity instead is giving away the difference between the ramen money and $200,000 in five years' time; that's the nominal gross return to the investor if you succeed. Taking it further, if you take a ~$20,000 investment for ~5% of the company to save you ~200 billable hours of contract work at ~$100 per hour, in the event of a $10 million exit the opportunity cost of giving away equity instead of contracting (without any additional funding it's approx $500,000-$20,000 in this example) will have most likely been well in excess of $1000 per hour. That's why people's chief motivation for joining incubators is seldom the seed money.
symkat 15y ago
Years / 2000? I recall `yearly_salary / 2080 = hourly rate` for 8 hours / 5 days. I think running a start up typically takes more than a 40-hour work week.

melvinram 15y ago

That's just completely faulty logic for so many reasons: a) Future value is not equal to current value. b) $10M exit in the future is not set in stone. It'll take longer and be more painful than you think it will be. The chances that you'll have a $10M exit are low. You're doing well if you're pocketing $1M. c) People won't fund you for free. You're giving up a chunk of your company. At 20% of $10M, that's $2M you're giving up. If you're getting more capital, you can expect to give up more. d) Having full control and agility is more important than most people realize unless you have some really smart entrepreneurs who are your investors guiding you.

jsatok 15y ago
Agreed, and chances are that you won't create a $10M company on your own. Include a reasonable ESOP, a chunk for investors, etc., you're at a lot less than $10M. Also, building a $10M startup isn't exactly guaranteed. When you factor in the future value, expected exit, dilution and the risk, I think it'll work out to a lot less than $1000/hour. But I don't think that's such a bad thing. I'd bet if you talk to most founders, they'd tell you that they didn't start their company with a big number in their head - they started it because of passion, drive and the desire to make a difference. $1000/hour consulting doesn't equal that sort of lifestyle.
wavephorm 15y ago
But it gives you a basis for further consideration. Surely nobody will pay $1000/hr for your services. If they pay $100/hr and you think you have a 1 in 10 chance of exiting for $10M then maybe that's break even. Really, if you don't think your startup is going to be worth even $5M at some point in the future, I think you have to take a hard look at what you're really trying to accomplish.

notahacker 15y ago

As others have pointed out, a $10 million exit will tend to require a lot more man hours and dilution for a much lower effective hourly rate But even if we take your figures, assuming like the original question that you actually need the money, you're choosing between giving away time or giving away equity. Assuming that delaying a couple of months doesn't diminish the value of your $10 million exit, then giving away even a only couple of percentage points in equity instead is giving away the difference between the ramen money and $200,000 in five years' time; that's the nominal gross return to the investor if you succeed. Taking it further, if you take a ~$20,000 investment for ~5% of the company to save you ~200 billable hours of contract work at ~$100 per hour, in the event of a $10 million exit the opportunity cost of giving away equity instead of contracting (without any additional funding it's approx $500,000-$20,000 in this example) will have most likely been well in excess of $1000 per hour. That's why people's chief motivation for joining incubators is seldom the seed money.

symkat 15y ago

Years / 2000? I recall `yearly_salary / 2080 = hourly rate` for 8 hours / 5 days. I think running a start up typically takes more than a 40-hour work week.