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Should entrepreneurs work for free?

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“We all work for free here,” she said with certain pride in her tone. “We know it’s going to be hard, but we believe in the company, so we are OK with waiting for later to get paid.”

To be paid or not to be paid is the dilemma all entrepreneurs face, especially at the beginning of their ventures when resources are scarce. The outcome of this decision, however, will undoubtedly have an impact not only on their personal lives but also the startup itself. Should entrepreneurs work for free? As with many aspects of the uncertain world of entrepreneurship, there are no clear-cut answers. Here are some arguments in favor and against, based on stories of founders themselves.

We are just getting started

Most startups or small businesses don’t start with huge reserves of cash, and because the landlord and the electric company are not as forgiving as the founder, guess what’s the first expense that gets removed from the budget? Under the rationale that “We are just getting started, I’ll pay myself when we make more money,” lots of entrepreneurs (including myself at some point in life) make a bet that the future is going to be brighter.

There is nothing wrong with the willingness to subsidize your company; after all, it’s your dream we are talking about. Where this rationale can get you in trouble is if you don’t pair this optimism with specific income targets and a plan to get you there within a set timeframe.  Without that roadmap, you might build a company that survives only because of the subsidy, which will make it dependent on your free work indefinitely.

The argument for sacrifice and the signal for commitment

We all have been told that starting your own company is very hard and that it requires you to pay your dues. We know going in that we are trading the security of a salary for the freedom and the opportunity to create something great. The willingness to work without any compensation a key commitment to show your investors, and in cases where you are not providing too much of the capital needed, your unpaid work shows other stakeholders you are all in because of the huge sacrifice it implies. The founder of a local software company was able to gain the trust of angel investors in part because of his willingness to work without any compensation during the initial stages.

The strange habit of eating everyday

“Because my wife and kid had the strange habit of eating every day, I was forced to look for funding so we could pay ourselves,” joked the CEO of a local open data company. Not paying yourself and working for the love of the cause is a privilege that you might enjoy when straight out of college or when still living with mom and dad, but as you grow older and face increasing responsibilities, the price tag of that sacrifice makes it unsustainable.

Juggling your personal income needs with the cash constraints of your newborn business is one of the toughest things entrepreneurs must do. Failing to acknowledge this tension can take you down a slippery slope. Some entrepreneurs dealing with this problem end up taking on other income-generating activities to get by, leaving less and less time available for their startup. The paradox of this solution is that although it solves the immediate need for income, it cripples your business’ capacity to grow fast by depriving it of its most valuable resource: your time.

Although some investors tend to favor the practice of the entrepreneur working for little or no compensation to avoid freeloading on the part of the founder, others have different opinions. After having invested in dozens of small businesses in Central America, the manager of a private equity firm told me that they usually encourage the entrepreneurs to allocate competitive salaries for themselves. “Especially when they are highly qualified, the opportunity cost for them becomes high,” he told me. “The startup should make all efforts to pay as much as possible for that talent, even if that person is the founder.”

The need for A players and the cost associated

The rationale of the private equity firm manager applies not only to the founder but also to those invited to join the company, whether as co-founders or employees. Many entrepreneurs make the mistake of thinking that because they are wiling to work for free and make huge sacrifices for a project they strongly believe in, others are going to be just as willing.

The truth is that passion will take you a long way, but no business can depend exclusively on it. If the incentives (including economic ones) are not carefully aligned, then sustainability is at risk. You might be able to attract top talent with a powerful pitch and a compelling story, but as time goes by, working under the pressure of little or no income takes its toll on people, luring them to more sustainable opportunities.

So which one is it?

Based on my own experience and that of many entrepreneurs and investors I’ve worked with, unless there’s a clear path out of the unpaid condition and a set deadline, entrepreneurs should not work for free. There are simply too many tensions that arise from working so hard with no pay and without having a plan to overcome it. Where to draw the line of when to start getting paid, or how much, is definitely trickier, and will depend on the specifics of each project and the personal possibilities of each founder.

But in spite of these differences, what all entrepreneurs should do is design their businesses so that they can pay for the talent of all required members. This could mean looking for external funding or sharing more equity with potential co-founders, but in any case, the incentives should be there for all involved so that it becomes sustainable. If you cannot foresee how your business could pay you and your people competitive salaries, then it might be a good indicator that the model is not solid and you should rethink it.

Even if you have to subsidize the initial ramp-up, set a time limit beforehand and be absolutely disciplined about your plans. Being tough with your “baby” and demanding that it’s able to pay for the talent required will only make it stronger, which you might agree is the goal of every entrepreneur.

Read more “Doing Business columns” here

Randall Trejos works as a business developer, helping startups and medium-sized companies grow. He’s the co-director of the Founder Institute in Costa Rica and a strategy consultant at Grupo Impulso. You can follow his blog La Catapulta or contact him through LinkedIn. Stay tuned for the next edition of “Doing Business,” published twice-monthly.

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