How to Make Wealth as a Startup Founder

Having been in the startup space for quite some time and seen a bunch of engineers graduating from top schools and making it big, these are some thoughts on how founders might consider looking at liquidity. This might be more relevant for serial entrepreneurs who plan on starting and running companies for a long time. 

Some of the early thoughts on the topic came from Paul Graham himself in the “How to Make Wealth” article. The premise was simple: start a startup, make something customers want, and get acquired by a big company. That’s how he got rich, and so did many other founders who are prominent in the media. Should be true.

However, seeing the careers of over a hundred people in my network—many of whom graduated from top engineering schools—this narrative seems broadly inaccurate. A more reliable path to achieving moderate wealth it seems, over the last  decade or so, has been to either join early in a FAANG level company, or an early employee at a startup which eventually gets acquired by FAANG, and to stick there and save it out. 

The best example I know is a couple who were early employees at two different startups. Both startups achieved billion-dollar acquisitions and landed in FAANG. The lucky couple cashed out and now run a boutique investment firm. However, even if they seem the outliers, the trend still seems true. The ones who did not join an early stage startup which got acquired by FAANG, also did pretty well. The other example is someone who got incredibly rich just working at Nvidia for pretty much most of his career. But Nvidia is FAANG now. And there are countless examples in between - but working and staying in big tech seems to have been the surest way to make wealth.

Almost all of the founders I know, who came from similar top notch engineering colleges (read IIT), and whose startups span the spectrum from getting acquired, shutting down, raising a few rounds, raising multiple rounds have broadly done worse than the above set. The ones who stayed in the startup world as founders for longer periods seem to have done worse than those who alternated between jobs and startups. The longer you stay in startups, it seems, the less money you make. 

How do you as a founder, or serial entrepreneur navigate these odds? I think the biggest trick here is to probably have a scrappy lifestyle and be content with it. Probably not scrappy in the way Paul Graham meant—eating noodles for a few years then caviar for the rest of your life. But being happy in a scrappy lifestyle - spend less to eat healthy assuming that money will never come. Avoid lifestyle inflation as much as you can and stay lean with your personal costs. If this is too much of a compromise, maybe doing a startup is not a good idea. But doing a startup is probably a bad idea in a lot of different ways. This is just another one. 

The other way that I have found might be helpful for founders to think about cash flow and liquidity is to assume that a payday will come only once a decade. For employees, payday happens almost at the end of every month. This predictability helps in financial planning. For founders, I think it is helpful to imagine that any sufficiently big payday which can deliver a meaningful bank balance would typically materialize once every decade you spend being a founder. 

What this means is that if you can’t be in the race for too long, you might not see a payday. You might need to reconsider whether startups make sense for you. 

The other way to look at this is that perhaps founders should take a pay day whenever it is possible. If there is a round of funding raised and there is a possibility to do a small exit, founders should exercise that option and de risk. Just because your company raised a big round doesn’t mean that a big payday will definitely come. It may or may not. The entrepreneur I know who has raised the largest rounds is precariously close to 100% of his portfolio in a single company. This keeps him awake at night, but the mistake here is he avoided the partial exits which were possible in the previous funding rounds.

If exits don’t materialize, consider negotiating a higher salary with your investors. Let the money hit your bank and adopt a lean lifestyle to save for the many rainy days  - of which there would be many. There is a certain fascination with not taking a big salary with founders from early startups. They would want to invest in their companies and demonstrate commitment. But I would encourage young founders to imagine a potential zero pay day for the next decade and plan accordingly.

One of the other situations that I saw recently was a founder at a 5 year old startup which makes $2mn an year. The business has stagnated. Investor interest has waned. And all of the revenue goes in paying the infrastructure and employee costs, leaving little for the founder. I would argue that the right approach here is to cut costs dramatically. This would allow the founder to take a $500k/year salary. This will help create a corpus and create capacity to get to the next payday, which might be a long time away.