What kind of returns to expect as a successful startup founder?
There are many reasons to get involved in or launch a startup. Financial gain can certainly be a big one. It is definitely hard to ignore the headlines of so many entrepreneurs raising enormous amounts of funding and rapidly building billion-dollar businesses.
So, how much can founders really expect to see as rewards for their efforts, risk, and willingness to do what others won’t?
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Here is the content that we will cover in this post. Let’s get started.
- 1. What Type Of Return Are You Setting Out To Get?
- 2. Impact & Mission
- 3. Your Purpose
- 4. What You’ll Regret Forever If You Don’t Try
- 5. Income & Lifestyle
- 6. Creating Wealth
- 7. Achieving The Best ROI On Your Personal Capital & Financial Resources
- 8. Calculating The Financial Returns On A Startup
- 9. How Much Startup Investors Expect To Get In Returns
- 10. Factors That Will Impact Your Returns & Financial Outcome
- 11. How Big Your Venture Grows
- 12. Ability To Generate & Maintain A Salaried Position In Your Company
- 13. How Much Equity You Give Away To Investors
- 14. The Terms You Give Investors
- 15. The Terms Of Your Exit
- 16. What You Do With The Money You Get
- 17. Summary
What Type Of Return Are You Setting Out To Get?
There is more than one type of return you may hope to get in exchange for venturing on the startup journey.
It is important to be very clear with yourself about what you really want out of this.
Impact & Mission
Impact and creating value can mean very different things to different people. Though for many, this is what drives them into startups.
Perhaps you just want to have the biggest possible impact on the world, and on as many people as possible. The mission may be more important than the money for you (even though you’ll need plenty of money on this journey).
They say that if you help as many people as possible, and really give them value, the money will come relative to that.
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Maybe you were made to do this. Perhaps you are the best qualified in the world. There’s nothing worse than wasted potential.
If you are uniquely qualified to bring this product or service into existence and successfully share it, then you should absolutely do it.
Knowing that you’ve given everything you’ve got, and you’ve lived out a life of purpose is truly priceless. And, this may the kind of returns to expect as a successful founder.
What You’ll Regret Forever If You Don’t Try
If this is something you will regret for the rest of your life for not trying, even if it doesn’t work, then you should try it.
Sometimes, optimizing to minimize regrets in life, and not just success, is the best course of action, and the most rewarding.
The last thing you want is to be on your deathbed, wishing you had tried this startup, but it is too late. Nothing else may compensate for that.
Income & Lifestyle
For some, starting a business of their own is about upgrading their income and lifestyle.
This may be what is referred to in the industry as more of a ‘lifestyle business’ rather than a true startup that is designed for hyper-growth, going huge, and achieving a grand exit.
There is nothing wrong with this; just understand the difference. As well as what it will mean for the decisions you make, and the path you take with this business.
Know how much money you want to make each year to count this as a success. Maybe it’s just $1M. Or it might be $10M, or $100M.
In this case, you are also counting your rewards in terms of the lifestyle you will get to live while you run this business. For example, making all the money you need, being able to choose to only work on it four days a week, living well, and being able to take a month of international vacation each year.
That may be a better return for some people than having a piece of a billion-dollar company, but high stress, and having to work 100 hours a week, and being on call seven days a week.
Others go into startups with the goal of creating huge amounts of wealth for themselves and all of the perceived success that is tied to that.
They want to build $50B, $100B, and $1T businesses.
That does not mean that you are going to put that much disposable money in your personal pocket. Though you may enjoy a good slice of it if you structure your business and financing well.
There are certainly notable entrepreneurs and business leaders that have created a net worth of $100B or more. Though that is normally from a combination of businesses and smart investments.
When working out the returns you can expect from selling the company, the first thing you need to know is how to value your company. To get you started off in the right direction, I have created this video. Check it out. You’re sure to find it helpful.
Achieving The Best ROI On Your Personal Capital & Financial Resources
You may just be looking for the best possible return on your personal capital and financial resources.
Given how much has been created by entrepreneurs, compared to just executives, or even pure investors, it’s hard to find a way to get a better return on investment than to start a business. Especially a fast-growth startup. That could be the kind of returns to expect as a successful startup founder.
Calculating The Financial Returns On A Startup
Calculating and predicting the financial returns for a startup certainly isn’t simple. There are so many incredibly diverse experiences.
The vast majority of startups and new business attempts fail. Usually within the first few years. Note that this doesn’t have to mean you don’t make any money during that time, or when you liquidate the business.
Most companies that do survive do not become unicorns, or $100B businesses.
Still, in comparison to whatever amount most entrepreneurs put into their own ventures, the returns can be pretty extreme. Consider that Facebook was originally started for $10,000, and now is valued at over $100B.
How Much Startup Investors Expect To Get In Returns
One way to gauge the kind of returns you might expect as a founder is to look at the returns that startup investors expect and demand.
It is now quite common knowledge that professional startup investors and venture capitalists are really looking for that 100x return. They are in this because they want to hit those Facebook-like home runs.
They also need these returns to balance out their fund and portfolio performance due to the high chance that 99% of those investments will fail, and the capital will be lost.
So, if you put $100,000 of your own money into a venture at the beginning, you might also hope to walk away with at least $10M by the time you cash out.
Though, of course, many have put in much less of their own money, and have seen far greater returns.
The earlier the stage investors are getting in at, the bigger the returns they are generally looking for. Late-stage investors and acquirers like private equity firms may be happy with far lower returns, in exchange for far less risk, and more stability and predictability.
Given that you might just put your money into a savings account, CD, the stock market, or real estate, and hope to make 5% to 20% annual returns with no time involved, you should be aiming to make a lot more in your own startup.
Factors That Will Impact Your Returns & Financial Outcome
There are a variety of factors that will impact the actual returns you get as against the returns to expect as a successful founder. And, what the ultimate financial outcome is for you.
This includes the following.
How Big Your Venture Grows
How large your company grows is certainly one of the most influential factors in the financial returns you will see.
The bigger the pie, the more money there is to go around. At least in theory.
Once you get into the multi-billion dollar range you have probably had to bring in outside investors. This means you’ve traded a substantial amount of ownership, and slices of that pie with others for their cash.
Your slice of the pie will be much smaller. Yet, the dollar amount can be much higher than if you simply try to bootstrap and keep a white knuckle grip on all of the equity. So, the size of the venture can influence the returns to expect as a successful startup founder.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Ability To Generate & Maintain A Salaried Position In Your Company
Obviously, the longer you stay employed by your company in an active role, the more likely you are to be able to add income to your total returns from this venture.
This may be in the form of salary, benefits, bonuses, and other compensation.
So, don’t get fired from your own company by your investors.
You may go on to earn other income from your startup in the form of dividends from your stocks. Even well after you’ve parted the company. Or have stepped aside from an active role.
How Much Equity You Give Away To Investors
When you ultimately sell your startup, the share that you get is generally in relation to the percentage of ownership and shares you still own.
So, how much you give up in equity at each fundraising round can impact this in a big way. For example, if you give up 50% of your company in your Seed round, and 25% in a Series A, you are already down to owning just 25% of your company. If you go through raising a Series B, C, and D round (which isn’t uncommon anymore), then you may hold far less stock.
It is wise to be watching this dilution as you strategize each round, and keep an eye on the end game. Be watchful of the equity you give away since it will ultimately influence the returns to expect as a successful founder on exiting.
The Terms You Give Investors
In reality, raising capital isn’t just the simple exchange of shares for cash. There are a lot of terms and legal clauses and fine print in these agreements.
Some of them may seem meaningless at the time. Especially in early rounds when you may feel like nothing matters unless you get some money in the bank immediately. However, this can have the same result if you are not careful.
You might build a $2B company after five years of 100-hour work weeks and stress, only to find you get nothing in the sale due to these legal provisions and fine print.
Be sure you understand everything before you sign.
The Terms Of Your Exit
When you sell a company it isn’t uncommon that you won’t get the entire purchase price at the time of closing. Especially not all in cash.
You may be given stocks in the acquiring company instead of cash. Be sure you know the limitations on when you can sell this stock and turn it into usable cash.
You may finance some of the purchase price for your buyers. In this case, you’ll get payments over time. Unless they stop paying and default on that.
Or a significant percentage of the sale may be held in escrow for a variety of reasons, as well as money being held for earnouts. Which can require you to keep working for your new employer for several years, and achieve specific milestones. If you don’t stick it out, you may not get everything you hoped for.
What You Do With The Money You Get
If you sell your startup and then lose the $10M you got in the stock market or Vegas, that isn’t going to be fun.
So, you might multiply it in a new startup, invest in other startups, check off your bucket list items by buying a cabin, going on world travels, or putting away a sizable inheritance for your kids.
What kind of returns can entrepreneurs expect as successful founders?
In addition to the obvious financial returns, there are many other rewards entrepreneurs hope for when venturing into the startup world. Some are even more valuable than just dollars and cents.
When it comes to doing the math, there are a number of factors that will play into how much you can expect to financially gain from your company. Fortunately, you have a lot of control over them. Providing you know what they are, and are proactive about staying ahead of them.
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