Career Investment: Employment Vs Entrepreneurship

Have you ever thought or imagined yourself as an employee as an asset? Do you think your employer is paying you the full value for the services that you are offering or are they taking you on a ride?

Have you ever thought of ditching employment for self employment? Let us attempt to explore a way to evaluate your options in an objective manner.

Whenever the term asset is mentioned what comes to mind is finances or something related to something bringing money such as savings account, property etc.

In this article we will try to look at assets broadly and in more than financial terms. Your assets are much more than financial.

Consider your human capital as an important asset that is invested in a career. Given that and from experience you realize that this asset we are calling human capital is very important especially when you are young and starting off your career as compared to your savings.

The value of your human capital can be estimated as the expected value of all the income you will generate until your retirement discounted to the present value.  This is compared to the amount that you have or your parents/sponsor has put in on your education, let’s call it initial capital.

As a benchmark the Net present value of all the income you anticipate to get when subtracted from the initial capital needs to be either zero or positive.

This can be considered as part of your total assets. So, when defining your investment strategy, you should always have in mind how your human capital is invested and avoid investments with a high correlation in order to diversify your portfolio.  Basically this means do not put all your eggs in one basket.

Ideally, one should always avoid investing all your savings in investments correlated to the industry and/or region where you’re working, in order to diversify your portfolio. This is even more important for employees who receive part of their compensation in the form of stock options; in these cases it would appear wise to sell these stocks as soon as possible. This is in case the organization goes under, you would rather have cash than worthless stock.

Once you accept that your human resources are part of your assets, and then your job becomes an investment strategy for your human capital.

This means that with the same human capital you can have different expected returns, and different risk levels.  As a result, when choosing a job it is important to try to maximise the expected return, while trying to match your risk appetite with the risk of the job.

It is possible to increase the “beta” of your human capital. You can aim for a very high beta and launch a new startup, or can aim for a very low beta working as a government employee or for a very large company, and, of course, there are a lot of opportunities in between.

When finishing a degree program or an MBA most of us have the option of looking of employment, or to try a totally different career as an entrepreneur.

This can be a very difficult decision, on one hand you have the possibility of working in stable job and developing your career with relatively security and a good salary; but on the other hand, you have the opportunity of starting a very promising company at the early stage, where everything is a lot more uncertain, but the upside might be huge.

Try to look at the two options as investment opportunities, applying a typical approach used for analysing investments with high uncertainty.

You can develop or simulate a 10 year probability tree for the two options and figure out what would be the expected value of the future incomes as well as developing the cumulative probability again for both options.

By doing so, you can clearly see how much riskier the start-up option is than a stable job.

It will also give you an idea of the probability of the start-up option paying-off

It can also assist you to understand the minimum amount of equity necessary to make the expected value of both options equivalent.

Having this information is essential when negotiating for salaries and knowing the opportunity cost of either starting your own company or seeking employment.