Risk, Return, and Employee Pay – The Other View

This post generated quite a few comments, in addition to several other posts around the blogosphere. Professor Bainbridge commented initially, then went off on the similar but tangential topic of a "just wage" and made several good posts on the subject.

Now many of you are probably thinking yeah Rob it is easy for you to sit there and say profits should go to those who put up the capital – you have never been in a position where you worked your ass off only to see someone else get rich off your efforts. Actually, I am sort of in that position now (though admittedly not to the extent of the average worker). I couldn't finance my business because I needed a 300K loan and, well my net worth is less than 100K so forget it. I found an investor, and he has a net worth high enough to easily get the loan, but low enough that it will significantly impact him if we fail and he has to pay off the loan from personal assets. The final operating agreement for our LLC was sent to me this week, and I am reviewing that now. I put up 31.25% of the initial capital, but my partner wants to split the profits 70/30 because even though I am signing a personal loan guarantee, we both know he will bear the brunt of our failure because he has a high net worth.

My partner will not be active in the day to day business operations, but will do some marketing, and has some connections he can work to get us publicity. (His wife does PR for a large company that I probably shouldn't mention without asking him, but trust me, you have heard of them.) This business is fairly simple, but to hire a professional manager would probably still cost us 50-60K. We would be looking for someone with marketing experience and we would prefer an MBA. He wants to pay me mid 30s to be the manager. This is about half of what I make now, so I am not pleased. Granted, I have a 30% share of the profits, but I bought those, they weren't give to me. He wants me to count on profits, not salary, for my income because that is a good incentive. I think I deserve a market salary and that the issues of ownership and management should be kept a little more separate.

51 Ways to Define Leadership

During these discussions, the thought keeps going through my head that I am getting screwed. He is going to do very little work, and take most of the profits. I deserve more. I brought him the idea and convinced him to invest. I did the research that showed it was viable. I am saving us 20K a year by working for such a low salary (as opposed to hiring someone) and 70% of that benefit goes to him. But you know what the other side of this is? If he isn't on board, this deal won't get done. I have searched for a year for an angel investor. I have tried online services, random mailings, Chamber of Commerce meetings and all that jazz. Everyone loves the idea, but not enough to part with their money. The business is unproven because it is a new and growing industry, and there is a legitimate question of how much we can really make at it. If all I can offer is a 10-15% return then they might as well just buy stocks. So walking away because I don't like the terms means I don't get anything. Truth be told, my 30% stake could end up being a few hundred thousand a year if I am as good a marketer as I think I am and we can grow quickly.

So what do I make of all this? Well, I am trying to negotiate about 10% more pay, but ultimately, he deserves the profits he is taking. Like any worker, I have options. I can refuse to be the manager and we can hire someone. I can walk away from the deal (for legal reasons, he couldn't do it if I walked away). But that doesn't do me any good. If there aren't profits, there isn't a business and there are no jobs. Money is hard to come by and very few people part with their money easily. High profits are the incentive they need to take the adjoining risk of losing it. That is the way things are. Capitalism is as Darwinian as life itself, and if you can't adapt to a changing environment, you lose. It sucks but it is the truth. Capitalism works because it matches human nature. To go against capitalism is to go against that nature.