This is a counterintuitive point, and I think mostly gets glossed over in a lot of high level thinking. For example, if you're reading some generic advice about valuing a small company, it will usually point out that "profit" needs to be expressed net of the owner/manager's salary, the salary a buyer would need to pay someone to be General manager of this business. Economics textbooks do something similar.
This might give you the impression it's normal to hire general managers for businesses. In reality, it's rare that a "small company" (say a turnover of $1m-$10m, for a typical software or services company, or even 10X that) does this.
A clean break between ownership and management is a difficult thing.
Jacques does an admirable job of breaking it down in a way that gets the message across. To go further, I actually think it could be a great topic for an out-of-the-box young economist to take on. Like a modern Ronald Coase's "Theory of the Firm." It's got tentacles in a lot of interesting questions. The unpopularity (these days) of "adult supervision" investor supplied CEOs, for example. The relative obscureness of SMEs as an investment class outside of high risk VC for another.
It would be very unusual for someone to put his/her net worth (say $2m) into a small business unless they can run it. Does an economist-ic explanation exist?
Human capital - the original owner/manager knows infinitely more about the business than the new manager does.
For example: I recently took a class in college where a team of engineers and business students would pick up and run with a venture from the previous semester. My team was producing mechanical agricultural products for rural women in Ghana. I was technically the "Project Manager" but in reality, I had no idea what was going on for the first two months: who were our contacts in Ghana, why should they trust me, how had the design of our products changed over time, who was supplying our raw materials, what was the state of our financials & grant proposals, how about marketing and sales channels, what even is a Cassava?! It was really disorienting and frustrating. Yes, there was documentation [1], but reading something vs. doing something are completely different.
The most valuable members of these teams are always the ones who have stayed on the project for multiple semesters, with the overseeing professor (6 semesters of experience) being simply indispensable. If he had been replaced, the project would've fallen apart immediately.
Of course, this becomes less and less essential as the company gets larger. Replacing the CEO at a Microsoft or an Apple may change high-level decision making, but most of the human capital is stored within the large, diversified, hierarchical employee base.
As for putting your entire net worth into one investment, that's a simple risk/reward profile. If you're going to put all of your monetary assets into one investment vehicle, you're probably going to put all of your other assets (skills, contacts, time) into this investment as well. Capital attracts capital, be it fiscal capital or human capital.
[1] The documentation was actually excellent as each exiting team had sworn to do a great job so that the next team wouldn't have to go through the same frustration that the exiting team had experienced. Wishful thinking.
The 'economist-ic' explanation is 1) diversification 2) agent-principal problem 3) asymmetric information (books are cooked, owner is selling because something is about to hit the fan).
Investors and business brokers deal with them by 1) low prices / earnings multiples, not putting your entire net worth into a small business 2) as OP suggests, you either manage it yourself or somehow have loyal staff with skin in the game 3) earn-outs for original owner who gets paid out over time from earnings after successful transfer.
Because of the risks, small businesses sell cheap relative to earnings, often fail not long after they are sold.
What size company is he talking about -- 5 employees? 15? 50? 500? 5,000? Public companies are certainly run with ownership being different from management.
But if we're talking about a 15-person company, the author says:
"This means that before long there will be a general feeling of resentment, after all if you (and possibly your co-founders, also lying on the beach) are going to receive all or at least a very large chunk of the profits then why do all the hard work?"
That big chunk of profits comes from the fact that you took the initial risk, you worked the endless hours at the beginning, you created the whole thing in the first place. Why on earth should they resent you continuing to take your fair share of the fruits of your previous labor? If they have a problem with that, the problem isn't with you, it's with capitalism in general.
You do need to make sure everyone continues to be appropriately invested in the company, including the new CEO. But the idea that you should either run a company or not own it at all is ludicrous -- taken to its logical conclusion, this means investors shouldn't exist!
Humans don't behave rationally. It is better to take this into account when planning your own actions as otherwise you open yourself up to risk when humans act like humans.
Even in the really small case of taking only 75% of the salary to work only 75% of the hours due to not needing the money and valuing your time more. It can cause problems in the team because they see the result of you working only 75% of the time but they rarely encounter the effects of being paid only 75% of the amount.
So when you are getting paid far more and working far less because of all the initial investment and taking on the initial risks (something employees are likely not able to see and fully appreciate), then there is going to be resentment.
>taken to its logical conclusion, this means investors shouldn't exist!
And there are groups of people (political and not) who have a negative view of investors compared to employees.
How many investors do you know that put all of their savings into a single company run by someone else without wanting to take control of that company?
You raised a good point in bringing up that phrase "fair share." What is the fair share for someone who doesn't do anything? What should someone get for mere possession?
I'm asking not in the present-day legal sense (where the answer is, whatever's fair is whatever you've clawed out for yourself), but in the moral sense of how much should ownership of anything actually be worth if you're not continuing to put any effort into a venture, but are totally passive--a name on paper.
Where does "setting up and creating a thing and then profiting as an absent owner" cross over into rent-seeking?
"That big chunk of profits comes from the fact that you took the initial risk"
And why do any of the current employees care about that? All they see right now is you sitting on your ass while they're the ones doing the actual work.
"you worked the endless hours at the beginning"
And now you're not, and they're the ones working the endless hours. Or perhaps a number of them were also there at the beginning, working the endless hours.
"you created the whole thing in the first place."
This is not always true.
"Why on earth should they resent you continuing to take your fair share of the fruits of your previous labor?"
Because they don't see it as being a fair share.
"If they have a problem with that, the problem isn't with you, it's with capitalism in general."
Not necessarily. Capitalism doesn't say that one should be able to rest on one's laurels forever.
And quite frankly, if you want your employees to work hard for you, then you need to lead by example. If you're going to sit on your ass, then why shouldn't they?
One way to work this is to have the person who replaces you be "you, but only a few hours a week".
That is, automate your business to the point that it takes substantially less than one full time person to run it. Kill off all manual recurring tasks, automate all the common customer service interaction, get the infrastructure ticking away so that it stops routinely blowing up on you. Get things down to just a handful of customer emails that actually need a human response, then book that flight to Ibiza.
They have wifi, I imagine. Run your business over coffee in the morning, then go off and live your life.
Indeed during the recent dotcom mania a bunch of quack business writers suggested that the company of the future would be totally virtual -- just a trendy couple sipping Chardonnay in their living room outsourcing everything. What these hyperventilating "visionaries" overlooked is that the market pays for value added. Two yuppies in a living room buying an e-commerce engine from company A and selling merchandise made by company B and warehoused and shipped by company C, with customer service from company D, isn't honestly adding much value. In fact, if you've ever had to outsource a critical business function, you realize that outsourcing is hell
To make peace I would suggest that, this approach is perhaps doable at a smallish scale by eccentric individuals, but not on a wider scale. The proverbial $25k p/m T shirt business.
Yet I know several founders who do exactly that and with great success.
I think it comes down to what kind of business, what your business is based on (IP, network, patents, technology, marketing) and if you are the kind of person who understand how to hire the right people and delegate the right kind of jobs.
For every rule there are exceptions. If you're 100% confident that you can do this by all means, go ahead. But my experience to date suggests this is a recipe fraught with all kinds of trouble and just hiring 'the right people' isn't going to cut it (if only because people change over time). In the end you'll either end up returning to recover from some disaster (it's still your problem after all, as a majority shareholder), you might lose the company altogether or you'll end up selling it anyway but in worse shape than when you left.
There is always a middle ground, but sometimes that middle ground isn't quite wide enough to stand on and it's better to go for clarity, have your hands on or have your hands completely free.
The missing piece if the puzzle is that the road to passive income is passive investment. Cashing out and investing the proceeds in suitable syndicates is the what is likely to work. If you retain significant equity, you didn't cash out and you've got a passive investment portfolio with no diversity.
Incidentally, this is also true of renting a condo or house you own. A couple friends have attempted to rent their condo or house and move somewhere else. This has never worked out well. It is possible to hire a company to manage the condo or house, but that is expensive and the profits never quite arrive.
I have seen a couple friends successfully rent places they live near.
> It is possible to hire a company to manage the condo or house, but that is expensive and the profits never quite arrive.
This makes sense if you think about it from a capitalist perspective, though.
Adam owns a condo and rents it out. He makes $500/mo after his expenses. Unless competition for property management is very high (quite the opposite), the "perfect" amount to charge for that service is going to be as close to $500/mo as possible while still getting Adam to pay it.
The most common complaint I've heard about property management firms is that somehow their prices always seem to be somewhere in the 95-105% of net profit for a single well-appointed property.
In most real estate markets, it's going to be hard to rent out a single family home purchased in the past 5 years with positive cash flow, factoring in a property manager. The profit comes in when you account for appreciation of the property and the accumulation of principal. However, if you have the cash, this can be a good tax strategy -- trading an annual operating loss in return for long-term appreciation of the property.
There are plenty of people who have owned their homes for 10-20 years who can make a decent profit in renting them out.
I think this depends on where you are. Plenty of people in Australia and New Zealand let their houses through agencies and get along just fine.
To be fair, these markets are pretty bubbly, and everyone is just hanging on for capital gain (it's no biggie if you have to "top it up" a little bit). Plus, losses are more or less tax deductible (e.g: http://www.ird.govt.nz/property/property-rental/deductions-y...). This includes agents fees.
> It is possible to hire a company to manage the condo or house, but that is expensive and the profits never quite arrive.
This totally depends on the purchase prices, interest rates, rental rates and other variables in a given scenario. The generalization that you can't profitably rent out a property while also paying a property manager is obviously not true.
This is exactly why I sold my condo instead of doing what a bunch of friend suggested and renting it out. I was moving across country and would not be able to attend to the condo same-day for anything that comes up.
I'm currently working for a smallish family-owned company and I'm tempted to forward this to the owner.
He doesn't want to retire but also doesn't want to commit to the time requirements of the day to day operation of the company. This wouldn't be a big deal because he has set himself up with some great managers and a solid foundation.
However... about once a month he gets an itch and decides to get in the middle of the smoothly running operation he spent decades creating because he "wanted to help." It just causes chaos and anger by the people running the company for him the other 25 days each month.
I don't agree that it's this black and white, but it's likely to be true for most small-scale companies.
The way I always describe it to people is that salary != profit. Let's say that you are making $100k a year running your company. How much would you have to pay someone else to do your job with the same level of effectiveness? If it's $50,000, then you're making $50k a year in profit for being the owner. If it's $150,000, then you are actually giving up $50k per year for the privilege of being your own boss.
It's certainly possible to be a non-participating owner and make a good profit on a business. This is what Warren Buffett does with Berkshire Hathaway -- he buys profitable, well-run companies and usually keeps the former owners on to continue operating them. Doing it from the other direction is much tougher, because you either need to make yourself redundant or hire your replacement.
I might be missing something here, but isn't hiring somebody new to do your job exactly what the new owners of the company have to do if you sell it? Maybe this will be delayed by golden handcuffs, but sooner or later it has to happen.
If you sell it you won't be hovering over whoever gets placed in your position to tell them how to do their job and technically it is now the buyers problem, not yours.
Bill Gates did it with Microsoft and at that level I'm sure that there is enough momentum in the business to keep it moving along or even to improve. But most smaller businesses (say < 30 employees or so) are both culturally and dynamically much more personal and being both gone and still present in the background creates a strange power dynamic (who's the real boss?) and frustration.
Has everyone forgotten about the "family owned business" or the business where you just keep it? I feel like I'm saying something foreign, where it shouldn't be foreign at all. Why does everything have to come down to selling the company
Here's my point: Everyone believes in growth. And everyone believes in small business, but people also believe capitalism is fine the way it is.
And we can believe all of those things at once, and wonder why we have poor people in our society, cheque cashing stores and inequality.
You can believe in those three ideas all you want, but they don't believe in each other.
The assumption is that with a "family owned business," you're still running the business, right?
The OP is actually saying that's one of the viable options -- to keep the business and stay at the helm.
What he's arguing is that you're not likely to ever successfully be able to keep the business (not sell), hire someone else to run it for you, and never have to work again -- the obvious exception being e.g. Bill Gates (and the difference being that Microsoft was so huge and firmly rooted that he could hand it off).
It says 'run it' right there in the title. Keeping it is definitely an option but running it by remote control is something I advocate (strongly) against.
Eventually the owner will retire, so a sale does happen. There's always an exit of some kind, maybe not the glitzy glamorous one written up in the papers.
I know someone who ran a small town diner for decades and eventually sold it to a niece, who had worked there for the last twenty years anyway.
I worked at a company in this situation. Revenues were stagnating and senior employees started leaving. The non-CEO partner was uninvolved and kept pressing for a sale at all business meetings. The atmosphere at the company was pretty dreary.
The CEO remedied this situation by choosing a new CEO from within the remaining senior staff, while giving himself a new position of chief product officer/biz dev.
However, this was all merely a title swap, as the ex-CEO kept tight hold over the finances. So a weird power dynamic formed, as the new CEO was essentially effete. Anything that incurred a cost had to be discussed with the ex-CEO. The new CEO enacted a rigid fiscal policy by reducing headcount and the expenses under his immediate control. Morale fell and the new CEO eventually resigned.
The company is still in existence, and the owner is considering selling it now. Hopefully it's not too late.
This is the exact same lesson I learned, painfully, with rental property. I think it probably applies to everything. In my case, despite owning property in a college town (which you would think would be a sure win), I lost a lot of money and experienced a lot of stress, and finally came to realize that I could either be a landlord, which requires personal skills I didn't have at the time (I think I might have gotten mean enough now - age helps), or I could just sell the damn thing and walk away. Doing the latter was a good move. I wish I had done it a couple of years earlier.
I'm seeing this exact thing at a restaurant I work at during weekends. Owner shows up once a week to drop off pay checks and lives in another city (1.5 hours away).
> if you (and possibly your co-founders, also lying on the beach) are going to receive all or at least a very large chunk of the profits then why do all the hard work?
The stock market applies to companies that have gone 'public', not to privately held companies currently being run by the founders.
The article is not aimed at those that are about to go public or that have already done so but rather at the founders of companies with up to ~30 employees or so and < a few million dollars of turnover per year.
What about moving to a board position, like Bill Gates or Alexis Ohanian? You're still part of the company, but don't have to worry about day-to-day...
You can do that, and with a large company it will probably work. For a smaller company (especially one that is held privately or that only ever received small bits of funding) it likely is not going to work. One of the companies I've invested in went through this whole cycle and now has the original founder back as the CEO after several years of being absent.
The opportunity cost for the founder in that particular case is something I really don't want to think about even if for me as an investor his return to the CEO position is good news.
>take off to Ibiza and watch the money roll in while lying on the beach. Passive income if there ever was, it seems such a good idea!
I wish the blog author would have addressed the employee-empowered hands hands off approach suggested in 4 hour work week by Tim Ferris. That book seems to suggest (mostly) passive income approach is possible if done right, but this blog doesn't address that alternative to its suggested bad-outcomes.
Those are for the most part 'employee free' businesses as far as I understand it. Any company that needs a real person for its day-to-day management will not fit in the '4 hour work week' concept.
If I recall 4HWW correctly, mostly the employees were contractors who worked for distinct companies to which you outsourced that function of the company. You were more there customer than their boss.
This means that before long there will be a general feeling of resentment, after all if you (and possibly your co-founders, also lying on the beach) are going to receive all or at least a very large chunk of the profits then why do all the hard work?
If they like their job and you redistribute a good share of the profits, I don't see how this can happen.
...after all if you (and possibly your co-founders, also lying on the beach) are going to receive all or at least a very large chunk of the profits then why do all the hard work?
This same resentment may (will) occur with early employees if the cofounders are part time. Have same issue at current company.
And the same resentment can happen if the founders are full time. This has happened to me 2x:
The first the sole founder was seen as fiddling while Rome burned, long lunches on with rich friends and always on the phone, never doing anything (and getting paid well for it). Now I recognize he was probably trying to line up another round - but this was dot.com 1.0, we were young and didn’t know how the game was played. Also he just wasn’t good at communicating this downward - or at least as far down as we were.
At the second place the founders were all regarded as incompetent, and thus getting paid well for doing useless work. I think they where just nerds, and bad at interacting people.
I think management is hard and resenting your boss is common.
[+] [-] netcan|10 years ago|reply
This might give you the impression it's normal to hire general managers for businesses. In reality, it's rare that a "small company" (say a turnover of $1m-$10m, for a typical software or services company, or even 10X that) does this.
A clean break between ownership and management is a difficult thing.
Jacques does an admirable job of breaking it down in a way that gets the message across. To go further, I actually think it could be a great topic for an out-of-the-box young economist to take on. Like a modern Ronald Coase's "Theory of the Firm." It's got tentacles in a lot of interesting questions. The unpopularity (these days) of "adult supervision" investor supplied CEOs, for example. The relative obscureness of SMEs as an investment class outside of high risk VC for another.
It would be very unusual for someone to put his/her net worth (say $2m) into a small business unless they can run it. Does an economist-ic explanation exist?
[+] [-] roymurdock|10 years ago|reply
For example: I recently took a class in college where a team of engineers and business students would pick up and run with a venture from the previous semester. My team was producing mechanical agricultural products for rural women in Ghana. I was technically the "Project Manager" but in reality, I had no idea what was going on for the first two months: who were our contacts in Ghana, why should they trust me, how had the design of our products changed over time, who was supplying our raw materials, what was the state of our financials & grant proposals, how about marketing and sales channels, what even is a Cassava?! It was really disorienting and frustrating. Yes, there was documentation [1], but reading something vs. doing something are completely different.
The most valuable members of these teams are always the ones who have stayed on the project for multiple semesters, with the overseeing professor (6 semesters of experience) being simply indispensable. If he had been replaced, the project would've fallen apart immediately.
Of course, this becomes less and less essential as the company gets larger. Replacing the CEO at a Microsoft or an Apple may change high-level decision making, but most of the human capital is stored within the large, diversified, hierarchical employee base.
As for putting your entire net worth into one investment, that's a simple risk/reward profile. If you're going to put all of your monetary assets into one investment vehicle, you're probably going to put all of your other assets (skills, contacts, time) into this investment as well. Capital attracts capital, be it fiscal capital or human capital.
[1] The documentation was actually excellent as each exiting team had sworn to do a great job so that the next team wouldn't have to go through the same frustration that the exiting team had experienced. Wishful thinking.
[+] [-] RockyMcNuts|10 years ago|reply
Investors and business brokers deal with them by 1) low prices / earnings multiples, not putting your entire net worth into a small business 2) as OP suggests, you either manage it yourself or somehow have loyal staff with skin in the game 3) earn-outs for original owner who gets paid out over time from earnings after successful transfer.
Because of the risks, small businesses sell cheap relative to earnings, often fail not long after they are sold.
[+] [-] crazygringo|10 years ago|reply
But if we're talking about a 15-person company, the author says:
"This means that before long there will be a general feeling of resentment, after all if you (and possibly your co-founders, also lying on the beach) are going to receive all or at least a very large chunk of the profits then why do all the hard work?"
That big chunk of profits comes from the fact that you took the initial risk, you worked the endless hours at the beginning, you created the whole thing in the first place. Why on earth should they resent you continuing to take your fair share of the fruits of your previous labor? If they have a problem with that, the problem isn't with you, it's with capitalism in general.
You do need to make sure everyone continues to be appropriately invested in the company, including the new CEO. But the idea that you should either run a company or not own it at all is ludicrous -- taken to its logical conclusion, this means investors shouldn't exist!
[+] [-] Lawtonfogle|10 years ago|reply
Even in the really small case of taking only 75% of the salary to work only 75% of the hours due to not needing the money and valuing your time more. It can cause problems in the team because they see the result of you working only 75% of the time but they rarely encounter the effects of being paid only 75% of the amount.
So when you are getting paid far more and working far less because of all the initial investment and taking on the initial risks (something employees are likely not able to see and fully appreciate), then there is going to be resentment.
>taken to its logical conclusion, this means investors shouldn't exist!
And there are groups of people (political and not) who have a negative view of investors compared to employees.
[+] [-] jacquesm|10 years ago|reply
How many investors do you know that put all of their savings into a single company run by someone else without wanting to take control of that company?
[+] [-] Frondo|10 years ago|reply
I'm asking not in the present-day legal sense (where the answer is, whatever's fair is whatever you've clawed out for yourself), but in the moral sense of how much should ownership of anything actually be worth if you're not continuing to put any effort into a venture, but are totally passive--a name on paper.
Where does "setting up and creating a thing and then profiting as an absent owner" cross over into rent-seeking?
[+] [-] s73v3r|10 years ago|reply
And why do any of the current employees care about that? All they see right now is you sitting on your ass while they're the ones doing the actual work.
"you worked the endless hours at the beginning"
And now you're not, and they're the ones working the endless hours. Or perhaps a number of them were also there at the beginning, working the endless hours.
"you created the whole thing in the first place."
This is not always true.
"Why on earth should they resent you continuing to take your fair share of the fruits of your previous labor?"
Because they don't see it as being a fair share.
"If they have a problem with that, the problem isn't with you, it's with capitalism in general."
Not necessarily. Capitalism doesn't say that one should be able to rest on one's laurels forever.
And quite frankly, if you want your employees to work hard for you, then you need to lead by example. If you're going to sit on your ass, then why shouldn't they?
[+] [-] jasonkester|10 years ago|reply
That is, automate your business to the point that it takes substantially less than one full time person to run it. Kill off all manual recurring tasks, automate all the common customer service interaction, get the infrastructure ticking away so that it stops routinely blowing up on you. Get things down to just a handful of customer emails that actually need a human response, then book that flight to Ibiza.
They have wifi, I imagine. Run your business over coffee in the morning, then go off and live your life.
[+] [-] netcan|10 years ago|reply
Indeed during the recent dotcom mania a bunch of quack business writers suggested that the company of the future would be totally virtual -- just a trendy couple sipping Chardonnay in their living room outsourcing everything. What these hyperventilating "visionaries" overlooked is that the market pays for value added. Two yuppies in a living room buying an e-commerce engine from company A and selling merchandise made by company B and warehoused and shipped by company C, with customer service from company D, isn't honestly adding much value. In fact, if you've ever had to outsource a critical business function, you realize that outsourcing is hell
http://www.joelonsoftware.com/articles/fog0000000007.html
To make peace I would suggest that, this approach is perhaps doable at a smallish scale by eccentric individuals, but not on a wider scale. The proverbial $25k p/m T shirt business.
[+] [-] URSpider94|10 years ago|reply
[+] [-] TorKlingberg|10 years ago|reply
[+] [-] s73v3r|10 years ago|reply
[+] [-] mcdougle|10 years ago|reply
[+] [-] ThomPete|10 years ago|reply
I think it comes down to what kind of business, what your business is based on (IP, network, patents, technology, marketing) and if you are the kind of person who understand how to hire the right people and delegate the right kind of jobs.
There is always a middle ground.
[+] [-] jacquesm|10 years ago|reply
There is always a middle ground, but sometimes that middle ground isn't quite wide enough to stand on and it's better to go for clarity, have your hands on or have your hands completely free.
[+] [-] brudgers|10 years ago|reply
[+] [-] jacquesm|10 years ago|reply
[+] [-] jseliger|10 years ago|reply
I have seen a couple friends successfully rent places they live near.
[+] [-] pc86|10 years ago|reply
This makes sense if you think about it from a capitalist perspective, though.
Adam owns a condo and rents it out. He makes $500/mo after his expenses. Unless competition for property management is very high (quite the opposite), the "perfect" amount to charge for that service is going to be as close to $500/mo as possible while still getting Adam to pay it.
The most common complaint I've heard about property management firms is that somehow their prices always seem to be somewhere in the 95-105% of net profit for a single well-appointed property.
[+] [-] URSpider94|10 years ago|reply
There are plenty of people who have owned their homes for 10-20 years who can make a decent profit in renting them out.
[+] [-] xyzzy123|10 years ago|reply
To be fair, these markets are pretty bubbly, and everyone is just hanging on for capital gain (it's no biggie if you have to "top it up" a little bit). Plus, losses are more or less tax deductible (e.g: http://www.ird.govt.nz/property/property-rental/deductions-y...). This includes agents fees.
[+] [-] kohanz|10 years ago|reply
This totally depends on the purchase prices, interest rates, rental rates and other variables in a given scenario. The generalization that you can't profitably rent out a property while also paying a property manager is obviously not true.
[+] [-] acveilleux|10 years ago|reply
[+] [-] sehugg|10 years ago|reply
[+] [-] JoblessWonder|10 years ago|reply
He doesn't want to retire but also doesn't want to commit to the time requirements of the day to day operation of the company. This wouldn't be a big deal because he has set himself up with some great managers and a solid foundation.
However... about once a month he gets an itch and decides to get in the middle of the smoothly running operation he spent decades creating because he "wanted to help." It just causes chaos and anger by the people running the company for him the other 25 days each month.
[+] [-] URSpider94|10 years ago|reply
The way I always describe it to people is that salary != profit. Let's say that you are making $100k a year running your company. How much would you have to pay someone else to do your job with the same level of effectiveness? If it's $50,000, then you're making $50k a year in profit for being the owner. If it's $150,000, then you are actually giving up $50k per year for the privilege of being your own boss.
It's certainly possible to be a non-participating owner and make a good profit on a business. This is what Warren Buffett does with Berkshire Hathaway -- he buys profitable, well-run companies and usually keeps the former owners on to continue operating them. Doing it from the other direction is much tougher, because you either need to make yourself redundant or hire your replacement.
[+] [-] hobofan|10 years ago|reply
[+] [-] jacquesm|10 years ago|reply
Bill Gates did it with Microsoft and at that level I'm sure that there is enough momentum in the business to keep it moving along or even to improve. But most smaller businesses (say < 30 employees or so) are both culturally and dynamically much more personal and being both gone and still present in the background creates a strange power dynamic (who's the real boss?) and frustration.
[+] [-] notahacker|10 years ago|reply
[edit: confirmed whilst I had the comment window open]
[+] [-] tomkin|10 years ago|reply
Here's my point: Everyone believes in growth. And everyone believes in small business, but people also believe capitalism is fine the way it is.
And we can believe all of those things at once, and wonder why we have poor people in our society, cheque cashing stores and inequality.
You can believe in those three ideas all you want, but they don't believe in each other.
[+] [-] mcdougle|10 years ago|reply
The OP is actually saying that's one of the viable options -- to keep the business and stay at the helm.
What he's arguing is that you're not likely to ever successfully be able to keep the business (not sell), hire someone else to run it for you, and never have to work again -- the obvious exception being e.g. Bill Gates (and the difference being that Microsoft was so huge and firmly rooted that he could hand it off).
[+] [-] jacquesm|10 years ago|reply
[+] [-] wangarific|10 years ago|reply
I know someone who ran a small town diner for decades and eventually sold it to a niece, who had worked there for the last twenty years anyway.
[+] [-] krigi|10 years ago|reply
The CEO remedied this situation by choosing a new CEO from within the remaining senior staff, while giving himself a new position of chief product officer/biz dev.
However, this was all merely a title swap, as the ex-CEO kept tight hold over the finances. So a weird power dynamic formed, as the new CEO was essentially effete. Anything that incurred a cost had to be discussed with the ex-CEO. The new CEO enacted a rigid fiscal policy by reducing headcount and the expenses under his immediate control. Morale fell and the new CEO eventually resigned.
The company is still in existence, and the owner is considering selling it now. Hopefully it's not too late.
[+] [-] unknown|10 years ago|reply
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[+] [-] Vivtek|10 years ago|reply
[+] [-] SG-|10 years ago|reply
All those points pretty much apply.
[+] [-] Xcelerate|10 years ago|reply
So... basically the stock market?
[+] [-] jacquesm|10 years ago|reply
The article is not aimed at those that are about to go public or that have already done so but rather at the founders of companies with up to ~30 employees or so and < a few million dollars of turnover per year.
[+] [-] anfedorov|10 years ago|reply
[+] [-] jacquesm|10 years ago|reply
The opportunity cost for the founder in that particular case is something I really don't want to think about even if for me as an investor his return to the CEO position is good news.
[+] [-] voidlogic|10 years ago|reply
I wish the blog author would have addressed the employee-empowered hands hands off approach suggested in 4 hour work week by Tim Ferris. That book seems to suggest (mostly) passive income approach is possible if done right, but this blog doesn't address that alternative to its suggested bad-outcomes.
[+] [-] jacquesm|10 years ago|reply
[+] [-] imgabe|10 years ago|reply
[+] [-] shin_lao|10 years ago|reply
If they like their job and you redistribute a good share of the profits, I don't see how this can happen.
[+] [-] angersock|10 years ago|reply
This same resentment may (will) occur with early employees if the cofounders are part time. Have same issue at current company.
[+] [-] nmcfarl|10 years ago|reply
The first the sole founder was seen as fiddling while Rome burned, long lunches on with rich friends and always on the phone, never doing anything (and getting paid well for it). Now I recognize he was probably trying to line up another round - but this was dot.com 1.0, we were young and didn’t know how the game was played. Also he just wasn’t good at communicating this downward - or at least as far down as we were.
At the second place the founders were all regarded as incompetent, and thus getting paid well for doing useless work. I think they where just nerds, and bad at interacting people.
I think management is hard and resenting your boss is common.
[+] [-] sampo|10 years ago|reply
I remember reading a blog post by Derek Sivers, of CD Baby fame, how he did just that. But I cannot find it now.
[+] [-] unknown|10 years ago|reply
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