How startup founders make money (2024)

During my journey of founding Ohana, I have received many inquiries from fellow business owners, potential employees, and friends on the topic of how we even make money, why we’re working all the time, why we’re not seen lighting cigarettes with 100 dollar bills, so today I am writing this blog post to debunk mysteries about how startup founders profit from starting an innovative product and growing it into a large corporation.

During the first 5 to 10 years of the company, founders will take a salary just enough to cover a place to sleep and daily meals.

When there isn’t a profit, founders will live off personal and external investment. When the company starts making profit, founders put all profit back into growing the company.

This usually comes as a surprise to most traditional business owners, as it is more common in traditional business to set up multiple streams of passive income, thus, free up the owner’s time to do things they’re passionate about (ie: travel the world, experience new things, or spend more time with family).

On the other hand, startup founders focus less on profits, but more on exponential growth that allows the company to quickly dominate a market and disrupt an industry.

Founders make money when they sell their own shares. This happens in an event called “exit”. In exit, founders sell shares to another company or stock traders.

Trade sale exit

When a company is big enough, bigger companies will come with offers to buy all or almost all of the shares of that company.

This happens for many reasons. For example:

• Amazon bought WholeFoods and Ring to expand Amazon’s ecosystem and strategically offer more solutions to their customers.
• Alibaba bought a major chunk of Lazada to strengthen Alibaba’s establishment in South East Asia.
• Priceline bought booking.com, agoda.com, kayak.com, etc. to unify all travel booking companies into one big giant travel booking company.

At the point of offer, founders may sell all of their shares and make a sh*t ton of money, thus enjoying the reward of their hard work over many years.

IPO exit

Alternatively, founders can choose to take control of their company and list the company on the stock exchange to sell to any common person (IPO event).

As ownership is distributed to the public, the founders will maintain control of their company and will keep leading the business forward and growing the business independently of any organization.

At this point, founders may or may not take large salaries.

Determining the share value

How is value of the share determined?

1. Each time the startup is invested, the founders will sell a chunk of the company’s shares, the value of the share is determined by the investors based on team, growth, revenue, and potential market.
2. Share value is then determined again during exit where buyers bid for the highest value.

Share value may decrease

Keep in mind if the startup doesn’t do well, the value of the shares may decrease resulting in a loss of investment of all parties involved. This is one of the primary motivations for founders to keep pushing on growing their company.

Who may own startup shares before it exits

Startup shares are not only offered to private investors, but also offered to the founding team and early employees who are as dedicated to growing the business as the founders. When founders start seeing this great potential in a team member, they never hesitate to offer shares, thus making this team member a shareholder, a beneficiary of the company’s future success.

At the time of exit, here are the often-seen type of shareholders that will receive return of investment:

• Founders
• Investors
• Early team members

Startup founders lead extremely basic and minimal lifestyle, while working as hard as possible with minimum compensation to bump up the value of the company, thus bumping the value of their shares so they could sell those in the end. This is why an exponential growth is important. Exponential growth leads to the shares increasing in value at an exponential rate.

To decide to whether to be in startups or not, ask yourself:

• Is it more important for you to get small rewards in the presence, or is it more important for you to receive extremely large reward in the future?

To decide between founding startup or joining a founding team, ask yourself:

• Is it more important for me to become wildly successful, or it’s more important for me to take full control of the company?
• I happen to know a highly potential startup team, but if I found my own startup, can I put together such a team that could grow my share value faster and better than even joining the other team?

Choosing the startup life is choosing to invest all your time, energy, and money into your own future.