The Startup Riches Myth: You Could Sell for Millions and Still Not Be a Millionaire!
There’s a common misconception that selling your startup for millions instantly secures your financial future. Many of us, including myself, fall for this when we meet someone who has sold their business to a big tech company. Even if they’re still living modestly years later, we assume they’re just being careful with their spending.
In the entrepreneurial hotspot of San Francisco Bay Area, startup fever runs high with tales of staggering returns from companies like Google, Facebook, and Airbnb, fueling daydreams of similar success. This frenzy makes it easy to overlook that most startups don’t survive past three years, and fewer still sell for millions.
Let’s discuss a conversation I had with someone who sold his startup for a hefty sum. You’d think he’d be living it up on a private island, but that’s far from the truth. But before we dive into his story, let’s consider the options of running a lifestyle business versus chasing the startup dream.
In 2010, I posed a question to my readers: would you prefer a relaxed lifestyle business earning a decent monthly income with minimal hours, or would you take a grueling schedule with a small chance at a massive payday? The responses varied, reflecting the high costs and lifestyle sacrifices in major cities like San Francisco and New York.
Fast forward to today, and I’ve managed to establish a lifestyle business that meets my needs without the relentless grind. It’s interesting how setting your intentions in writing can bring clarity and increase your chances of success. When I revisited this dilemma with a former startup owner who sold his business for about $25 million, he surprisingly preferred the more stable lifestyle business, valuing quality of life over potential mega-millions.
The Reality of Selling a Startup
Imagine you start a business and after five years of hard work, long hours, and considerable stress, you manage to sell it to a company like Google for $25 million. Here’s a breakdown of how this might typically unfold:
1. Initial Funding: You raise $1 million in exchange for 10% of your company, setting your valuation at $10 million.
2. Further Investment: As your business grows, you secure an additional $3 million for 25% more of your company, diluting your own share but gaining crucial capital to expand.
3. Building the Team: You distribute 20% of the equity to your employees as part of their compensation, reducing your own stake further.
4. Additional Rounds: More funding rounds follow as you chase growth, each one diluting your share further until you’re left with a small portion of the business.
5. The Sale: You finally sell the company for $25 million, but by now, your share is significantly reduced. After taxes and considering the below-market salary you drew for years, your net gain might be less than a million dollars.
The Sacrifices Along the Way
Creating a business involves much more than financial challenges. The journey includes stress, personal sacrifices, and relentless work, which can strain relationships and personal health. Despite the eventual financial gain, many founders, like the individual I spoke with, would not choose to go through it again.
Choosing Between Startup Dreams and Lifestyle Businesses
If you’re thinking about starting a business, consider whether you’re more interested in potentially making millions or would prefer a balanced life with a steady income. While the lure of startup wealth is strong, the reality often involves much more sacrifice and risk than expected.
Starting Your Own Business
For those inclined towards entrepreneurship but wary of the startup grind, consider a lifestyle business. You can manage such a business on your own terms, balancing work with personal life, which can be especially appealing if you have other responsibilities or interests.
If you’re considering leaving your job to pursue entrepreneurship, try negotiating a severance package that could give you a financial cushion to explore new opportunities without immediate financial pressure.
Investing in Startups
If direct entrepreneurship isn’t for you, investing in startups could be an alternative. Platforms like Fundrise offer opportunities to invest in emerging companies with relatively small amounts of capital, allowing you to participate in potential growth without the need to run a company yourself.
In summary, while the stories of startup millionaires can be inspiring, the realities are often much more complex and challenging. Each path, whether building a startup or a lifestyle business, has its own set of risks and rewards, and it’s crucial to choose the one that aligns with your personal goals and lifestyle.
