Get rich by grabbing an entrepreneur’s coat-tails
Bill Gates made billions off his ideas, but those who worked for him early made millions, too. (Mehdi Taamallah/AFP/Getty Images)
For every Bill Gates there’s an Andrea Lewis.
When a firm hits the big time, the company’s founder, of course, strikes it rich. Yet early employees such as Lewis, a technical writer-turned-freelance journalist, don’t fare too badly, either.
Thanks to the Microsoft stock options she was awarded in the software giant’s early days, Lewis’s net worth has been reported to be around $2 million.
Many of the world’s wealthiest individuals — think Gates, Carlos Slim, Warren Buffett, Richard Branson and Jack Ma — are billionaires who got rich by building their own companies.
Even if you don’t have the brilliant idea for the next Virgin Airlines or Alibaba, you can still amass a fortune by riding on the coat-tails of a brilliant entrepreneur.
Indeed, Jim Cody, director of estate, trusts and philanthropy services for San Francisco-based financial advisory firm, Harris myCFO Inc, believes the only way to become a high-net worth individual is to be a part of some kind of successful business venture. Cody, a former lawyer, who now works with people who have $25 million or more in investible wealth, said many of his clients have started or worked at a major Silicon Valley company.
Even his most successful lawyer friends don’t have the level of money his entrepreneurial clients have amassed.
“You don’t see people who are practicing their primary profession with that kind of wealth. That just doesn’t exist in today’s world,” he said. “You have to branch out into some sort of business endeavor or get equity in a firm.”
Employee No. 7
That’s how Jeff Kelisky made his fortune. In 2000 he joined MultiMap. He was employee number seven in Sean Phelan’s London-based online map company when he was hired as director of business development. His salary: £70,000 ($116,774). A good salary. But the real money was in Kelisky’s options.
When he started, Kelisky held 2% of the company’s stock options. That would grow to 5% by the time he became CEO in 2002. The former IBM account manager and consultant didn’t join the company for a potential windfall, but the thought of a large payout did cross his mind.
“I wanted to build something,” Kelisky said. “But certainly the potential to have a big exit was part of the reason I stepped into it.”
Kelisky walked away with about $3 million when Microsoft bought MultiMap (Picsolve)
Stock options give an employee the opportunity to own equity in a company at a certain price at a later date. You can’t usually convert those options into equity right away and employees can usually only sell the shares when a company is sold or goes public.
For five years Kelisky took only a salary, although the stock was on the edge of his mind. In 2005, though, Microsoft bought MultiMap for $60 million and he walked away with about $3 million. He was thrilled to have made so much, but he said it did sting a bit that the founder made much more, even though Kelisky did a lot of the work.
“I did feel that a bigger slice of equity in the end would have been more commensurate with what I did to help get the company there,” he said, adding that he ultimately “realised that the big money goes to the founder.”
Cody, the investment adviser, said a number of his clients who became wealthy by being an employee of a massively successful company weren’t necessarily among the first 10 or 20 people on staff. If a company can become large enough and sells for top dollar or goes public, upwards of 100 people can nab a big payout, he said.
Clever investors
Another way to ride an entrepreneur’s coattails: invest in their business. And that investment doesn’t always have to be monetary. Start-ups are often looking for all the free, but expert, help that they can get.
Daniel Bank, a 33-year-old Toronto-based lawyer, is a long way from becoming a millionaire, but to get try to get there he took an equity position in two small startup companies, ZingU, which develops customer relationship management software, and Next Grid, a renewable energy operation.
The software company gave Bank a percentage of the company in exchange for non-legal advisory services and he bought into the energy business (for an undisclosed amount) after meeting the founder at a renewable energy conference.
“This is pie in the sky, but if we can go public one day I think it the company could be worth hundreds of millions of dollars,” said Bank, who knows he may never make any money off the companies.
Choose your coat-tails wisely
Whether you’re joining a business as an early employee or buying into a company, you’ll only see a big payday if you latch on to the right person.
Michelle Scarborough, a co-chair of Toronto-based National Angel Capital Organisation, which promotes and connects angel investors, knows a few things about betting on the right business owner. She has bought into 21 companies since 2001 and has so far made money on 11 of them; only four have gone bust. She’s often tripled her investment within about three years and said she can do even better on companies she hangs on to for longer.
Michelle Scarborough has made money on more than half the companies she has bought into. (NACO)
Scarborough believes the best businesses are ones that have a product that people will actually want. Something that can shake up an industry is a plus, she added, and you should look for an entrepreneur that has invested some of his or her own money in the company.
An entrepreneur should be trustworthy — something she admits is hard to define and often comes down to a gut feeling — and have a good team behind them. You want the group to show a track record of being open to constructive criticism, have some expertise in the market and possess a lot of passion.
They should also understand what it takes to grow the operation. That means having a defined sales strategy and knowing the industry they’re in well, said Scarborough.
Before you take out your cheque book, work out your exit strategy. You could sell your equity stake to another investor or cash out your shares when the company gets bought out or goes public. Make sure you know what the terms of your investment will allow.
The simplest way to get a stake in a company is by buying equity, said Scarborough.
After Kelisky’s company was sold, he went to work for Microsoft, but found it harder to accomplish anything meaningful in a large corporation.
In 2011 he became CEO of Picsolve International, a London-based business whose technology allows theme parks to take pictures of people on rides and then sell those snapshots to them later.
It’s a larger company than MultiMap and he made sure to negotiate a bigger stake (he declined to say how much) in the business this time around, which means a bigger payout if the company goes public or is sold for a handsome sum.
“Hopefully, it will go well,” he said. “The opportunity is large. But I’m learning a lot, so I’ll be better off regardless.”
