Ask HN: How Much Money is Enough... What's your Number?
I am asking because I run a profitable internet business that has doubled each of the last three years; our metrics indicate that we can maintain that growth rate for the foreseeable future. As with any business, there are major risks but the likelihood of them actually threatening us is relatively low; unfortunately, precisely quantifying the risks is impossible.
Since a significant chunk of my net worth is tied up in the business, I worry that a "rogue wave" could endanger our prospects. We have been approached multiple times by serious acquirers offering favorable terms and a 5x revenue multiple; so far, have I rejected their offers. We have no outside investors so the decision to sell would be entirely mine.
Since the M&A market is beginning to show signs of life again, I am considering a sale. The question is, how does one decide when to step off the train, and take a huge amount of risk off of the table? Thanks!
115 comments
[ 2.8 ms ] story [ 144 ms ] threadFor me, I don't need much in the way of luxuries, but would want enough money to secure my own interests regardless of whats going on around me (ie a war or something).
If I can live comfortably on the interest, I'll take it. No need to pry me out of my office chair.
I'd like a nice house and a workshop, and some extra for non-extravagant travel. None of those cost too much money, but there is one other thing on the list: starting bigger ventures without requiring outside investors. The more money I have, the more ambitious my future endeavors can be.
Let's say your firm is worth $2mm now and you forsee it doubling and maintaining 100% growth rate next year, so it will be worth roughly $4mm. Even if it doubles several more times, you still don't have enough to launch a very ambitious future endeavor but all along you're risking a random decline in a huge, valuable, and concentrated asset.
Assuming your goals include having a family and secure financial life for yourself and them, I would be inclined to start taking money off the table as soon as I could be taking it off in $250m to $500m chunks. Not to say you need to sell it all, or even a controlling interest, but having had experiences of deep 6-figure losses in my trading account (which is extremely liquid 12 hours of every day with very low slippage), I know that I'd sleep a lot better with $300-500m off the table, and then get back to work growing the remaining 75% of the company into your multi-million.
I would seriously consider though still taking on your second big endeavor with outside investors. They have a way of keeping you honest and realistic, and if you can't convince outside investors, I wonder if it's prudent to wager your whole nut anyway.
Instead, if you have a profitable exit, it will be much easier for you to raise more with giving up less from professional investors for your next, bigger project. Then you'll be able to do something big and awesome, maintain control, and still have more cash in the bank.
The proceeds of a sale would allow me to have ample money in the bank and plenty left over for other endeavors. My issue is that the longer I wait (as long as everything continues apace), the more that "plenty" becomes.
Speaking from an experience - "the way you want" criteria will change immediately after you start living the way you (currently) want. It doesn't mean that a kilo of caviar will suddenly become a desirable breakfast item, but things like a custom-designed home in a great location will pop up on a wanted list, or an expensive hobby, or an intention to provide similar lifestyle to the parents and relatives, etc.
The more you have, the bigger the dream is.
Now? A small, comfortable place to live, a kitchen, the ability to travel, and tools to tinker with and fix things is all I really want. And I make a lot more now than I did then.
Weird, I know. :)
I'd be pretty pleased with a couple million; more than that is just something to invest in interesting ideas.
5x earnings for a company you'd like to take an exit from sounds like a plan to me.
I've been living the rest of my life the way I want for nearly 8 years now. Wow. Thanks for putting it in those terms!
1. When you are bored of what you are working on and a sale would net you enough money to live for enough time to startup one or more new venture(s) that you are interested in.
2. Not bored of the venture but think that in the immediate future your business might come under attack by an incumbent and you are not agile enough to fend off said attack.
Note: those are just two that I would sell off under. I am sure there are a few more that would be a good time to sell but I am not able to conjure them right now.
I would also wager that you should be able to get a fair sale price given the growth metrics you are using.(As long as they are not too cooked.)
I met the founder of a website that sold to Demand Media, that has since blown up into a large property. Of course, Demand probably grew it faster than the founder could have on his own, but nonetheless, the founder was noticeably distressed that he sold too early.
I.e. aim for twelve ;-)
If you succeed once it will be easier to do again and you will not feel the same pressure to cash out because you will always know that if the current venture blows up you have a comfortable life banked away. Consider the idea that exiting now give you the freedom to exit whenever you want on future ventures by just walking away and trying something else...
But...how about telling us what general type of business?
Interest rates now are going up, but so are inflation expectations. And I'd bet that inflation will go up faster than interest rates, which sucks for debtholders.
$2 million at 5% = $100,000/yr. You can achieve that by simply working as a programmer for someone else. Without making any of the sacrifices it takes do a startup.
If I'm going to sacrifice my youth(20s-30s) doing the startup, it better be for a big enough payoff to make it worth my while.
While the $2M doesn't buy you any more "stuff" than your job, it gives you the freedom to do what you want. I'd consider that a cruicialy important "quality of life" metric, no?
I can really only think of a couple people doing interesting stuff. One spent 6 months on a boat in an Alaska working as a salmon fisher. Another is on a boat in the South Pacific as part of a grad program in geology in Chile. A third is in the Peace Corps. All of those have downsides (eg. salmon fishing is incredibly physically demanding and stinks, literally, and the girl in the Peace Corps gets sexually harassed wherever she goes). And in all cases, it's at the cost of not being able to build up any savings at all.
I jumped the 9 to 5 ship at 23 and never looked back.
Your world-view is absolutely baffling to me.
I have not had any major payoff from the companies which I have started, but neither have I suffered. They key thing I have achieved is that I can essentially work on anything I want now, not because I am independently wealthy, but because I am recognised for what I do and can pick what I want to do. You can find freedom in more than large piles of money.
If the reason is just to eliminate risk, then it might make sense to sell part of the business or simply invest part of the profit into something else.
Happiness is elusive, and in no way linked to money.
(I think I might be the most un-YCHN person on YCHN)
Yeah. Ok. Tell that to a starving person.
There are actually quite a few studies out there that show no correlation between money and hapiness once you are "safe" (have a little padding and enough $ to eat, have decent shelter, feed your family, etc).
What they do say is that after a certain point -- when most needs and some comforts are met -- adding money does not increase happiness.
Also, just in general, your life experience is not a substitute for data.
It's not a substitute for data when generalizing about other people. But data is no substitute for life experience when making decisions for oneself.
The guy said "I don't buy those studies". If he'd said, "Well, that may be true, but that's not how it worked for me". We're talking about money's relationship with happiness-- presumably we're not talking about just 1 guy.
And regardless, he didn't read very carefully. His personal data SUPPORTS THE STUDIES. To simplify it further: Flat broke = correlates with unhappiness (it's scary and you can get hungry). Once you are NOT flat broke (make enough cash, have enough cushion to not worry), money ceases to correlate with happiness.
So I work 20hrs a week consulting and spend the rest of my day reading, studying (I'm getting a masters in my spare time), cooking or playing music. There are definitely days when I am envious at my friends who work in tech, what with their fat 401ks and rockin health care and 4x income. But usually not. I'm in way better shape, have read 10x as many books in the past year, traveled more, etc. Most importantly, every time we hang out I just sense that they are unhappy and bored.
I realize most of the people reading this are going to be a lot more like aforementioned friends than like me so I hope this doesn't come off as insulting. When I think of my friends I really wonder what makes it worthwhile for them--but of course I could never ask that without sounding like a jerk. So if anyone is reading this I'd love to hear. Is it just the $$? Because I feel like you need so much less of that than you think to be really happy.
My job is kinda specialized, it has to do more with statistical programming and mathematical modeling than the coding that most people on HN do, so I guess that helps when it comes to trying to go it alone. To the extent that I'm qualified to dispense advice it would be to develop a specialized skill that your average competent hacker doesn't have, particularly if it involves a lot of math--a lot of good coders I come across know surprisingly little math. Most of the people I know who are successful consultants have such a background.
Most hackers don't want money to feel rich, but buy themselves financial freedom, so that they can read and study during the day like you, for example.
Exactly. I think that really cuts to the essence of the matter.
http://www.protolink.com/MexicanFisherman.html
In my case, it's not the money, it's the information. I work at one of the large tech companies in the valley, as a full-time employee. I spend about 20 hrs/week (out of about 50 hrs/week spent at work) actually coding, and most of the rest of the workweek reading & studying. After all, I can't write my code without understanding how it fits into the rest of the system.
The thing is, I can't learn the stuff I'm learning now anywhere else. Universities don't have it. The open-source world doesn't have it. It's all proprietary & confidential, and the only way to learn it is to work on systems that require it.
It was the same way for my last salaried job - I wanted to know how the financial industry worked, so I took a job at a financial software startup. As it turned out, I didn't want to learn how the financial world worked ;-), but I'm glad I had that exposure, even just as a high-level overview.
The money is just an added perk - it's nice to get paid 4x more and have a 401k and health coverage, but really, the only reason I care is that everyone else is getting it and I don't wanna feel like I'm being ripped off. I work for other organizations because I want to work on interesting problems, and I wouldn't have the opportunity to do so without the help of others.
I was a voracious reader in high school and college, and kinda feel like I've "read out" what's available through the public library system. A lot of books I check out now just feel shallow & superficial compared to what I've been exposed to in a professional context. University libraries are still somewhat interesting, but again, they often have the problem of being access-controlled to people enrolled in the university. I'd rather have people pay me to learn than pay someone to learn.
1. I like the people I work with and the work environment.
2. More importantly for me at the moment: I'm learning things which would be difficult for me to learn elsewhere. For example, in a few weeks, I'll be going to the middle-east to install some hardware and train the customer (as a software developer, I wouldn't normally get hands-on experience with the customers, hardware, support and trouble shooting - all of which I think will be useful if I do decide to go the startup route); I was also put in charge of implementing a new interface for our system (and the accompanying test-suite), so I got free reign to design and program it however I want, communication with the hardware vendor and time to learn technologies which I never knew anything about - all of which, I think, will be useful to me.
Having said that, I don't intend on staying here forever. Before I hit my 30's, I want to have taken two or maybe even three years off to travel, meet people from around the world and do what I love to do (which incidentally is software, but slightly different than what I do in my work - I might very well go startup for this, because it would be something I enjoy, even if its never profitable).
My wife is a horse trainer, makes not much money (no way we could survive without my salary!) and loves her life. When she first decided to do this, I was irritated and thought it was a waste of all that intelligence, but then I remembered that life is short and slips away quickly and realized that she was lucky to have found the kind of work that makes her truly happy. Enjoying the life we have now is far more important than how many toys we leave it with.
For me, I'm focusing first on all the things I wanted to do but that I put aside for so many years: for now that's building boats. I'm still doing tech entrepreneurial work on the side, but it's aimed at replacing my corporate income and simplifying my life, not at getting rich.
It's after 9pm here, the staff have long since fled, but a quick look around reveals Mr. $47m, Mr. $14m and Mr. $8m are still beavering away and Mr. $150m+ is still answering email (albeit tersely).
I've never yet met someone with FU money who wasn't working (and working hard) - they just seem to be more selective.
I agree with David that no amount will ever keep programmers from programming. So instead of sweating out 14+ hours a day in hope that you can retire in 5 years, why not live your life as you go.
$500k-$1m is my anything money. its enough money to allow me to do anything i want, but not enough for me to do nothing. i'd still have to work, but i could effectively make money by almost any means, i could do part-time work or take a really low-paying but fulfilling job and maintain my lifestyle.
$2m is my nothing number. enough money that i can do nothing and live off the sum. i could maintain my current lifestyle easily with $2m and never have to worry about it.
My advice: at 5x, sell. That's over 2 years your predicted growth. The money you've got is the best money you've got.
I'm sure you've done enough beating yourself up here and I'm not trying to insult you, I'm honestly curious as to what your thought process looked like at the time. That way if I ever have the same thoughts I'll know of at least one example where they obviously weren't justified.
Do I have regrets? A little, but not overwhelmingly so. I have plenty in life to be thankful for. I put the lost money in the category of "yet another multi-million-dollar-MBA" I've earned ;).
If you had a company you could sell for $1M and were predicting it to be worth $2M in a year, as the original question predicts a doubling every year, would you be tempted to hold out another few months for $1.5M?
Well, if I had a company that was worth $1M, I think I'd push its value to $10M and then sell it. ;)
1. The rule of thumb I've always heard is that $2 million in the bank lets you live off the interest with a salary of $50k/year. Which is all that anyone really needs. $4 million for $100k/year, etc. These are the standard "I'm set for life" numbers, as long as you don't do silly things with your money. Which many many people do (trust fund kids, professional athletes).
2. Just because you can retire doesn't mean that you're going to retire. One of the ways I like to think about it is that an extra $50k/year from my investments can turn a $20k/year job into a $70k/year job. So now all of the sudden I can take all kinds of jobs that I wouldn't have considered doing in the past due to low salary. Plus you don't need the job, so you can walk away from stressful or unpleasant situations much more easily.
3. Personally, I think the remorse that I would feel if I had lost it all due a rogue wave would outweigh the remorse that I'd feel if I had sold the business "too early" and missed out on doubling my money.
As far as growing the company... we are more aggressive now than ever. Since I have already taken a good portion of money out of the company, I feel safe to plow a larger portion back into growth. In our space, to keep doubling requires constant and accelerating ramping-up.
Once you have a feel for who you want to be in the next couple years (i.e. harried entrepreneur growing 200% vs. just minted), it'll be much easier for you to decide what you want to have. (In particular, if you have a good idea for your next company, then exit this one)
My F-U-but-keep-working-for-money: 5 mm My F-U--seriously-F-U: 10 mm
The difference: a large, aging family whose health I will wind up responsible for. An extra 5 mm goes a long way toward getting live-in nurses, drivers and bribes for hospital managers (this is not the US).
As an employer, I know that you are working there because you love what you are doing and don't want to be doing anything else. I don't have to worry that you'll move along as soon as someone offers you another $1.50 an hour. And in a startup, I know that if we hit a rough patch we can probably come up with a way to trade you equity for salary. For creative positions, I'd view financial independence as a positive.
That said, I'd find it almost impossible to conceal my glee and satisfaction with anything north of $2M.
With interest from multiple buyers, you can probably get a lot more than the 5x if you make them bid against one another.
But of course, if the price is right, just sell. If I were in your shoes, that threshold would be around $50MM.
Most of the numbers here are under $10 million. Bill Gates, Steve Jobs, Michael Dell, Mark Zuckerberg, could have all sold their companies very early and had plenty of F-U money with a few extra Lamborghinis to boot. But it was the vision of creating something bigger than money that kept them going at it, even though it could all fall apart, and that's why we have the amazing things we do today.
Tony Hsieh created Link Exchange in the 90s, then he sold it to Microsoft, and then turned around and created Zappos (which he recently sold to Amazon).
The paypal guys sold to eBay, and took their money to start all sorts of new ventures (off the top of my head, I can think of Elon Musk (Tesla, SpaceX), Max Levchin (Slide), Reid Hoffman (LinkedIn)
Is your suggestion that they should not have sold PayPal? Were they just "in it for the money?"
An entrepreneur who sells and has enough money not to worry, can continue to start businesses ad infinitum which puts them in a potentially better position to create "something bigger than money." If Elon Musk had stayed at PayPal, I doubt he would have started a satellite launching company as well as Tesla Motors!
In other words, sell a part of your business to limit your exposure, keep the rest. If in the future it goes down the tubes completely you will not have lost all. If it continues to go up split your risk again. And so on.
The investing is the bit that really interests me, you'd be able to properly do seed investing and "give something back" to the community. Really be disruptive.
Similar to the founder of Ubuntu.
In the late 1700s, John 'Iron Mad' Wilkinson, British industrialist and inventor of the first iron boat offered to pay off the entire national debt.
With a mere $500M you couldn't build a motorway of any significance, you couldn't buy so much as a medium sized town, you'd struggle to build the world's tallest building unless it was just a spike, you couldn't jump start a large company such as an Intel/AMD competitor or an Amazon competitor or create license and market a new cellphone unless you had a very low cost startup/bootstrap approach.
You couldn't amass a world class art collection or establish an underwater city, fund a significant amount of anti-aging research or push a bill through congress or have your own Formula 1 team or brute force your way to the moon with some Flanderys domes, some GM plants and a seed terraforming plan.
In short, you could live a hedonistic life, become famous, seed invest, philanthrophise, give something back, make local successes, but you couldn't "really be disruptive" on the world scale.
How long have you put time and effort into the company? A year? Ten? Optimistically, what would you have earned in this time otherwise and how does the sale amount compare?
Would you personally be tied up in the sale - e.g. you have to work for the purchaser for 2 years? Does that matter to you?
If it's been doubling every year for three years, imagine yourself asking this question on HN last year, having doubled for two years, considering selling for half the price. Looking back, would you advise yourself to have sold or held?
Do you have anything else pressingly interesting or important to work on, or other plans for what to do with yourself post sale?