Employee-Investor writes:

I’ve been invited to join as startup as employee #1. They’re giving me a salary and an OK stock grant, but I want more stock.

I have $95,000 saved from a previous exit. I don’t need the money in savings because I’ve been making $150/hour as a consultant so my “plan B” is fine.

Should I invest my $95k at a $1m valuation to bring my total stock allocation into the double-digits?  Or should I keep that money as an investment in my next venture?

Since make $150/hour, you probably think that’s what you’re time is worth. And the question is: Will you get enough of a return on that $95k to be worth it?

First I need to negate your assumption. Your time is actually worth $1000/hour. Go read that linked article so you truly believe this in your gut.

Once you understand this, the decision becomes quite clear, because the $95k is actually not your primary investment. The time you invest in this company is worth far more than the $95k.

Let’s do the math.

The $1000/hour thing is based on 100% risk with no salary, which is not your situation. So let’s re-do it:

Say you’ll make $75k/year salary but you were making $150k/year as a consultant, so your nominal opportunity cost of being with this company for four years is $300k. Assuming a 15% chance of success (like in the other article), you need a potential payout of at least $300k ÷ 0.15 = $2m on a successful exit.

Assuming you’re granted something like 2% in stock, the company would need a $100m exit in four years to cover that. That sounds unlikely. Bad bet.

But now let’s consider the $95k investment which brings you up to 10% in stock. Now your total investment is $395k. (See how the $95k is only 1/4 of your true investment?) Now you need a potential payout of at least $395k ÷ 0.15 = $2.6m, but with 10% of the company that’s an exit of $26m in four years, which sounds quite reasonable.

In short, your $95k investment buys you far more equity than your time does, whereas your time is much more valuable to you than your money.

So here’s the answer to your question:

If you believe this company has a good shot, you must invest your $95k, because it’s the only logical way to make the finances work!

If you don’t think the company has a good shot, you should not “work there but save the $95k” because you’re wasting your most valuable asset — your time. You’re better off spending time with your family and making a good living, or doing just enough consulting to fund a startup where you can own a big chunk of the company.

You might argue that you’re already putting yourself at risk by working at the company, so you should save your $95k as a cushion for your family. But actually you’re still doing your family a disservice, because it’s almost impossible for you to earn back the reward on your time. You’d serve them better by making $150k/year consulting at 20 hours/week and spend all that extra time with your family. Besides, if it all fails, you can make so much as a consultant — especially if you work the same hours of a startup founder — that you can put your savings back easily.

Of course the value of working at a startup isn’t just financial. It’s more fulfilling, more exciting, more fun, and nowhere else will you learn as much about as many things. That absolutely counts, perhaps even more than the potential for making money!