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Paycheck vs. Ownership: One Entrepreneur’s Secret for Building Wealth

·6 min read

When I was a kid, I saw successful businessmen create big, impressive companies. So, I dreamt that one day, I, too, could create something big and become successful.

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At the time, it was more aspirational than anything, since my reality was very different. Growing up, my parents divorced when I was 7. My single mother couldn’t afford denim jeans, so I wore polyester pants to school. My lunch was subsidized.

Thanks to my education and some incredible friends—whose parents became tutors to me—and later through my father, I learned a lot about the world of business. I understood early on that if I created a business and generated value for my fellow shareholders, then I’d be rewarded, too. A few years later, that’s exactly what happened.

I made my first million as an investor, not an employee. After taking a minority share in a company, I joined the team as an executive and helped build and grow the business. As its value went up, I was rewarded with more stock. Later, when we took the company public, its value rose significantly, and so did the value of my stock.

Thanks to my previous learnings, I knew that creating value for others would create value for myself, but it was only after that first exit that I realized how true this was. I realized that it’s less about the paycheck and more about the ownership of businesses you’re involved with.

It is true that ownership comes with its own set of challenges and responsibilities. It goes without saying that it demands hard work and continuous commitment—so much that business owners have to forgo most hobbies or activities, and sometimes even family, for a long time. But when it comes to building wealth, full or partial ownership of your business is the only way to accomplish that.

Creating ways for employees to have a stake in your company is an excellent way for employees to demonstrate commitment to a company’s long-term vision while building wealth. When one of my employees expresses interest, not just in making money, but in truly investing in a business’ vision, I will do whatever I can to make it happen.

There are two main ways to help employees build ownership within your company. You don’t really have to be public for either option, although it makes some things easier. The first option is an employee stock ownership plan (ESOP), which allows employees to acquire stock quarterly (usually at a discount, so as to encourage them to participate). The second is through a stock option plan, or in the case of a private organization, a Phantom Stock Option Plan, which mimics or creates synthetic shares within the company. At the end of a measurement period, you get the dollar value increase if you owned shares and the price went up.

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All too often, we tend to focus on the paycheck, which is the instant reward, instead of ownership, which is a delayed reward and the true secret to building wealth. All too often, people negotiate a higher salary and forego stock options or sell them too early. What helped me achieve my goal was that I kept my stock and didn’t sell. If you believe in the power of compounding, then the longer you stay committed to your investment—particularly if you were the steward of it—the more likely you are to create real value for shareholders and yourself.

Don’t get caught in the present and how much you can spend today. Most people don’t have a clear line of sight of what the future can look like in the businesses they’re involved with, or how the compounding effect can work to their advantage. Living from paycheck to paycheck is often compared to the hamster on the wheel: We get so busy with daily work that it’s hard to stop and think about the future. It takes a conscious effort and a lot of courage to break the cycle.

Nowadays, building value is easier than ever, as entrepreneurial opportunities abound in tech, digital and more. In the last few years, the barriers to starting a business have been falling, including the necessity of having significant financial capital.

Take intellectual capital, for instance. If you have a good idea and want to start from scratch, you can find investors, pitch your idea and get them onboard. Most of the time, you can stay as the majority shareholder, too. In case you don’t have an idea yet, look around you for common problems or for a problem you’re facing that you can solve. Chances are, a lot of people are also facing the same problem.

When entrepreneurs start businesses today, they’re not expected to invest their own money—except in the beginning in order to get the business off the ground. In fact, the global venture funding data on this speaks for itself, as it has been steadily increasing for years. By the end of 2020, it was up four percent to $300 billion, despite the pandemic.

Typically, entrepreneurs start by raising money early on from friends and family, then they raise a seed round, and so on. In each instance, they’re collecting and leveraging other peoples’ money—people who also believe in them—so they can pursue their idea and build the company. In other words, entrepreneurs give away a minority share in order to get working capital so they can start building their company, all the while maintaining their shares and ownership.

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Another form of capital is hard work, or sweat equity. This does not mean clocking time or repeating the same tasks over and over, but rather working smart. There are several ways to achieve this, but in general it means receiving a share of the company for the value you create. More specifically, we live in a knowledge worker economy, and as our knowledge set grows, our expertise in the industry grows as well. When knowledge and expertise become so valuable, we can trade them for ownership in companies that appreciate their value. In essence, if you take your time to thoroughly learn your craft, so to speak, you could trade it for ownership. This is increasingly happening with startups, but also in established businesses—when seasoned professionals join a company, they’re often offered a meaningful equity position in lieu of a robust cash compensation package.

Today, ambitious entrepreneurs who combine intellectual capital with sweat equity end up finding and generating financial capital. After all, a lot of today’s investors also started out as entrepreneurs with a dream, a plan and a lot of hard work. In my experience, it’s the investors who started out as entrepreneurs (or at least as business leaders) that are the best investment partners because they’ve been there. They know more than just the ins and outs of the investment world; they know what it takes to grow a business.

In my case, that’s exactly what happened—after achieving my own childhood goal, I decided to help other entrepreneurs meet their goals by investing in their businesses. I hope I can elevate others and that the cycle will continue. One of the best parts of my career has been elevating the next generation of entrepreneurs, and I’m excited to continue to do so well into the future.

The post Paycheck vs. Ownership: One Entrepreneur’s Secret for Building Wealth appeared first on Worth.