Ask HN: How do startup founders get rich?
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If you take on investor money you'll have bosses, so don't expect to get rich before an exit (caveat - not strictly true, if company is doing really well, investors can be incentivized to let the founder sell off some of the equity early).
With a lifestyle business, you're your own boss and can set your own terms. There are tons of small businesses with CEO's making low seven figure salaries. These typically do not grow fast because the owners pay themselves rather than reinvest into the business. Of course the potential maximum payout of a VC-backed business is also exponentially higher than that of a lifestyle business, so pick your tradeoff.
With a lifestyle business, you're your own boss and can set your own terms. There are tons of small businesses with CEO's making low seven figure salaries. These typically do not grow fast because the owners pay themselves rather than reinvest into the business. Of course the potential maximum payout of a VC-backed business is also exponentially higher than that of a lifestyle business, so pick your tradeoff.
I know this goes against the Horatio Alger bootstraps narrative, but most startup founders are already well-off. How do you think they can afford to attend Stanford, MIT, Harvard, Cornell, etc?
They run the company. If the business is cash flow positive, they can just set their salary to be whatever they want.
Your VC will be very unhappy if you overtly cash out, and you can be subject to a minority-shareholder lawsuit if you stop reinvesting and direct 100% of the profit into your own pockets, and it is tax-inefficient to direct most of your profit as salary instead of long-term capital gains (which in the US are taxed lower than regular income) but nothing stops a founder from making their salary be $1MM a year or whatever.
Your VC will be very unhappy if you overtly cash out, and you can be subject to a minority-shareholder lawsuit if you stop reinvesting and direct 100% of the profit into your own pockets, and it is tax-inefficient to direct most of your profit as salary instead of long-term capital gains (which in the US are taxed lower than regular income) but nothing stops a founder from making their salary be $1MM a year or whatever.
Which is basically what Adam Neumann did @WeWork after the SoftBank investment.
Aren't there states in USA with no income tax?
There are US states with no state income tax, but the federal income tax still applies. LTCG ranges from 0 to 20%, but the 22% federal income tax bracket starts at $41,775 a year, depending on marital status.
For any significant sum in the US, it's always going to be cheaper to book income as sales of stock held longer than a year than as ordinary income.
For any significant sum in the US, it's always going to be cheaper to book income as sales of stock held longer than a year than as ordinary income.
The main mechanism to become 'well-off' is through 'secondaries': founders sell some shares instead of the entire investment going to the company's bank account.
When a company gets to series A/B, VCs are incentivized to give founders enough money so they can focus solely on the company. From what I've seen, they give you enough money to be the poorest kind of rich (say, 1-5M depending on the raise). This keeps you hungry, arguably a bit more than before, as you now have peers who have net worths in the 10s-100s millions.
When a company gets to series A/B, VCs are incentivized to give founders enough money so they can focus solely on the company. From what I've seen, they give you enough money to be the poorest kind of rich (say, 1-5M depending on the raise). This keeps you hungry, arguably a bit more than before, as you now have peers who have net worths in the 10s-100s millions.
Sometimes they aren't rich.
Sometimes they're allowed to sell some stock during later funding rounds. Investors realized that when founders have to make all-or-nothing decisions, they're likely to sell for lower but certain amounts, but letting founders sell a small percentage of their equity for millions means the founders are more likely to try to get the company to be worth billions.
Sometimes they can take out loans against their equity. Now they have millions in cash, and can go buy homes and cars and stuff. I'm not sure what happens if the startup goes under though!
Sometimes they're allowed to sell some stock during later funding rounds. Investors realized that when founders have to make all-or-nothing decisions, they're likely to sell for lower but certain amounts, but letting founders sell a small percentage of their equity for millions means the founders are more likely to try to get the company to be worth billions.
Sometimes they can take out loans against their equity. Now they have millions in cash, and can go buy homes and cars and stuff. I'm not sure what happens if the startup goes under though!
Typically investors will be comfortable with founders getting a few million dollars of liquidity once the growth trajectory is clear so they’re not eating ramen in a rented apartment. This allows them to focus on the business and have a more comfortable ride from secondary to IPO/exit.
Salary through company fundings. I think the average startup founder salary is 150K
"... or with company profits?"
What profits?
What profits?
QSBS though it might be gone soon. Also selling shares in secondaries.
Do they pay themselves with investor money or with company profits? Do they sell their shares to get liquidity?
Or is it a huge misconception that startup founders are rich before IPO/acquirement and startup founders are actually extremely poor during the first few years of startups?