What’s the appropriate reduction in lifestyle to take the entrepreneurial plunge?

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In talking to hundreds of entrepreneurs over the years, I’ve had the opportunity to hear from people with a number of different backgrounds. One segment that is particularly interesting is executives from mid-to-large companies looking to make the entrepreneurial plunge. They have an idea, maybe a prototype, and they’re out raising money and often have low six figures ready to go from friends and family.

Now, as an executive at a mid-to-large company, they have $150,000 – $300,000/year compensation packages, so naturally, I like to ask the question: how are you going to reduce your lifestyle to handle a startup salary? A startup salary is often 1/4 to 1/2 what they were previously making, assuming they raise a sizable angel round. Too often, it hasn’t crossed their mind just how little salary they’ll get and how they will have to change their lifestyle.

Here are a few thoughts on lifestyle reduction to take the entrepreneurial plunge:

At the simplest level, the compensation should be no more than the bare minimum to support the existing lifestyle (e.g. save no money each month and cut down on frivolous purchases)
One approach is to do a flat, round salary like $50k or $100k and keep it simple, regardless of lifestyle
Another approach is to maintain a salary similar to that from the large company, but to require that the entrepreneur invest 100% of his or her life savings into the company immediately, so that there’s significant skin in the game and alignment of interests

This is one of the most difficult topics for successful people that want to change things up and become an entrepreneur. Society glorifies the middle class lifestyle and many people get trapped by their mortgage, car payments, school loans, and more such that they don’t have the ability to make a career change without a significant lifestyle reduction.

What else? What are your thoughts on the appropriate reduction in lifestyle to take the entrepreneurial plunge?

Comments

8 responses to “What’s the appropriate reduction in lifestyle to take the entrepreneurial plunge?”

May 4, 2013

C Sweet

Not much meat on the bones here… How about delivering on the headline?

Reply
May 4, 2013

Justin Ballou

Real question is……is there a fixed salary number, (say 75-80k) that is universal? Taking into account a market that is huge, and heating up, like education…..most that would be experts in the field would be making between 50% and 65% of the number above. Is it possible to take the entrepreneurial plunge AND increase your yearly salary; living above your means? Also, could that have a positive effect/ motivational push for success that promotes rather than demotes?

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May 5, 2013

craigskipsey

Its tough to give up the lifestyle of the exec salary, I keep hoping that I can kinda ease my way into a startup i.e. run it while I have my day job until such time it delivers enough profits to substitute my salary. Am I dreaming or can people do this?

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1. May 7, 2013
  
  lance (@lance)
  
  You are dreaming.
  
  Reply
May 5, 2013

candice

This is an interesting topic and definitely one that we could be fleshed out further. However, it makes the assumption that only former c-level people are entrepreneurs.

First thing to note is that a good business plan includes a financial strategy with estimated salary breakdowns as well. I agree that a big lifestyle change is necessary for those coming from a large income, but for many others it will simply be tightening the belt since their income may have already been low. While I understand why you may think saving money is less important than the company, I must respectfully disagree. One may need to reduce what is put into savings each month, but it is not a good financial practice to stop saving.

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1. February 6, 2020
  
  Tolulope Awe
  
  Thanks. Sometimes you need people confirming what you already believe to encourage you. Cheers!
  
  Reply
May 5, 2013

Darby Wong (@darbyw)

Another consideration – it can be really time-consuming and distracting to make drastic lifestyle changes, while you often don’t know how long you’d have to cut back for. It could easily be net inefficient if you started making enough money to support your previous lifestyle before the point at which you would have run out of money (had you not cut back). I suspect the best approach is to take a staggered approach and make a series of cuts as you gain more information, with the least disruptive ones coming first.

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May 6, 2013

Kevin Sandlin (@KEVIN8R)

Something that’s missing here in the “lifestyle adjustment” discussion is spouse & family. If you’re married, your spouse MUST be on board with what’s coming. I talk about this in my blogpost, “So you wanna bootstrap your startup?” here: http://www.kevinsandlin.com/2013/02/so-you-wanna-bootstrap-your-startup.html

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