On Entrepreneurship Part I – Fixed Income vs. Equity or Salary vs. Ownership

love my bossA salary is Fixed Income

Earning a salary, working for someone else, is earning ‘fixed income,’ which means you hope it comes close to covering your lifestyle expenses.  Like all fixed income, however, it will be limited.  In the case of your salary, the limitation of your fixed income comes not from prevailing interest rates, but rather from the environment and decisions of people you work for.

Did your company do well this year?  Did your boss decide you are one of her key employees?  Does your company expect to still need your labor and time in another year, or three?  

If you can say yes to all three, then you can continue to earn your fixed income, otherwise known as a salary.  You cannot reasonably expect, however, anything above the minimum that your boss and company guesstimate will be enough to keep you around for as long as they need you.[1]

Business ownership is Equity

Owning and building a business feels completely different.

Owning and building a business is earning ‘equity.’

Equity typically pays less in dividends than does fixed income.   It also pays less often. 

Worse, equity has a nasty habit of losing value periodically.  Equity regularly goes to zero in value, which, if it’s your company, means you lost your investment and your business and your income all at the same time. 

It’s also potentially more costly emotionally to lose your business equity than to lose the fixed income of your salary.  Despite this terrible feeling – I’m speaking from experience here — here’s the surprising part of my strongly held belief:

Everyone in the for-profit world should aspire to build and run his or her own business.

On entrepreneurship vs. working for a salary, my own journey

During most of my college years I did not imagine a life in business, working for profit.  Truth be told, I dismissed working for profit, in my self-righteous college-kid way, as unworthy of serious consideration.

After a few years of actually working for a living, however, I realized I enjoyed it much more than I had imagined I would.  It felt ‘real’ in a way that pure academia did not.  The teamwork involved in the companies I worked for, producing a service for which customers happily paid significant sums, seemed ‘real’ as well, in a way that was new and surprising to me.

Once I decided making money was one of my goals, the next decision about working for a living became whether to work for myself or to work for someone else.

Although I enjoyed working in the for-profit world, I got it into my head that I would rather own my own business rather than work for a salary for someone else.

Please see next post on Entrepreneurship Part II – Ownership vs. Salary: lessons from finance

And Entrepreneurship Part III – Air, Taxes, Retirement

[1] Of course I know of bosses who pay above the minimum amount to keep you around.  But these bosses are relatively rare and therefore remarkable.  Also, they are violating a rule of market efficiency by paying you more than is necessary to retain you.  If they persist in paying you more than necessary, another competitor can pay its employees less and undercut your employer.  Which is what makes overpaying for you unsustainable, in the long run.  You cannot expect it to last.

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2 Replies to “On Entrepreneurship Part I – Fixed Income vs. Equity or Salary vs. Ownership”

  1. I think the American compulsory educational system does a spectacular job at programming children to view the world through the fixed income prism (i.e. wage labor exchange). It wasn’t until I became a landlord that the notion of equity-derived income even became apparent. Reading Kiosaki’s Rich Dad Poor Dad was what got it started for me.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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