Entrepreneurship vs Employment

Once upon a time there lived two friends Ramesh and Mahesh. They had been friends since childhood. Now both of them have completed their studies. Ramesh aspires to be an entrepreneur one day and started working towards that, whereas Mahesh wants to join a Multinational company and earn good salary. They selected their way of life after carefully studying the advantages and disadvantages of entrepreneurship and employment. The two friends spent long hours discussing and finally parted ways in different direction with a promise that they will meet once in a year and will measure the progress they made in life.

After one year they met and narrated each others story.

Ramesh, the entrepreneur invested Rs.1,50,000 to launch the new business by taking a bank loan. Meanwhile, Mahesh, the Employee invested nothing, incurring no debt or risk. If anything, he invested was a bit of time and photocopier expense in preparing a good resume.

Over the course of the first year Mahesh had a pretty big advantage in terms of income, with a salary that clearly exceeds the Rs. 20,000 owner benefit the Ramesh takes from the business. In Year 1 there is no arguing the fact a six-figure salary, even after taxes, exceeds the Rs. 20,000 owner benefit by quite a margin. Ramesh was willing to accept this.

	Entrepreneur	Employee
Startup Investment	Rs. 1,50,000/-	Rs. 0/-
Year 1	Rs. 2,00,000/- Gross 10% Net Rs. 20,000 Owner Benefit	Rs.1,00,000/-

In second year, things improve for both. The Mahesh received a very nice raise of 5%, and now has a salary of Rs. 105,000 annually. Meanwhile, The Entrepreneur has done better in the business. His gross revenues have increased from Rs.200,000 to Rs.350,000 and his net income percentage has increased from 10% to 15%—but look at what has happened to his owner benefit. Because of the healthy boost of gross revenues and greater efficiency, owner benefit has now more than doubled from Year 1 from Rs.20,000 to Rs. 52,500. Still, The Employee has an advantage in take-home salary, but Ramesh the Entrepreneur is building a business. He has more than doubled the owner benefit and is building the foundation for future growth.

	Entrepreneur	Employee
Startup Investment	Rs. 1,50,000/-	Rs. 0/-
Year 1	Rs. 2,00,000/- Gross 10% Net Rs. 20,000 Owner Benefit	Rs. 1,00,000/-
Year 2	Rs. 3,50,000/- Gross 15% Net Rs. 52,500 Owner Benefit	Rs. 1,05,000/-

Once again in Third year, The Mahesh who is a good employee was rewarded with another salary increase. His Rs. 108,000 pre-tax gross salary exceeds the Ramesh’s owner benefit. But the gap is narrowing. In two years Ramesh has gone from Rs. 20,000 to Rs. 90,000 in Owner Benefit.

Who achieved the greater hike in earnings? Ramesh again. In terms of take-home salary, The Ramesh has at least evened the score, and possibly surpassed Mahesh .

	Entrepreneur	Employee
Startup Investment	Rs. 1,50,000/-	Rs. 0/-
Year 1	Rs. 2,00,000/- Gross 10% Net Rs. 20,000 Owner Benefit	Rs. 1,00,000/-
Year 2	Rs. 3,50,000/- Gross 15% Net Rs. 52,500 Owner Benefit	Rs. 1,05,000/-
Year 3	Rs. 4,50,000/- Gross 20% Net Rs.90,000 Owner Benefit	Rs. 1,08,000/-

Moral of the story:

After three years if we compare, the asset value

• The Employee’s job has an asset value of ZERO! Think about it.
• Does an employee own a job? No.
• Does an employee own their office or work station? Someone else owns these assets—the business owner!

• Speaking of our entrepreneur, look at what happened to the market value of the asset that was created with a Rs. 150,000 investment. Because the Entrepreneur worked hard and created a successful business, he can now sell the business if he wishes. It is now worth around Rs. 2,70,000 (rule of thumb is 3 x owner benefit).

	Entrepreneur	Employee
Startup Investment	Rs. 1,50,000/-	Rs. 0/-
Year 1	Rs. 20,000 Owner Benefit	Rs. 1,00,000/-
Year 2	Rs. 52,500 Owner Benefit	Rs. 1,05,000/-
Year 3	Rs.90,000 Owner Benefit	Rs. 1,08,000/-
Owners Business	Rs. 2,70,000/-	Rs. 0/-

• The start of the exercise, the Rs. 150,000 investment seemed like a significant setback for entrepreneur, while employee enjoyed the comfort and ease of settling into a new office to work for a steady paycheck.

• Within three years The Entrepreneur had built both cash flow and asset value that exceeded The Employee.

This is just the start of the story. …..