How cheap should we be?

Posted By on May 29, 2009

As Baydin has started, I’ve heard a number of different voices on how cheap a startup should be.  Those voices have almost universally concentrated toward the extremes – they advise either being incredibly, incredibly cheap (buy nothing, get furniture from the sidewalk when people throw it out, trade time for money always) or spending money like a sailor in port (buy everything, buy luxury, hire expensive service providers, trade money for time at every opportunity).  Some folks have told me that it’s OK to pick an extreme, but not to be anywhere in the middle.

I think that sounds like a lousy idea.

We have some money, but we don’t have a lot.  So spending money like a sailor in port is necessarily out.  We can’t afford Aeron chairs, whether we think they’re a great idea or not.  But at the same time, an hour spent hunting furniture on Craigslist is an hour spent NOT building our product, pushing the date when we start getting revenue an hour further into the future.

I also have a personal distaste for spending my time on things that don’t yield much value.  If I wanted to do something I hate for minimum wage, I would be a janitor, not founding a startup.

In my personal life, I found an answer that made “buy it or make it” decisions easy – I just set an hourly rate for my own free time. If I don’t enjoy doing something for its own sake, I should only do that thing if doing it myself saves me more than my hourly rate.

Setting that hourly rate was easy.  I looked at my paycheck and read the rate off of there.  If I would rather work an hour than do a task that yielded less than that rate, it wasn’t worth the time.

That made things that look extraordinarily wasteful actually make a lot of sense.  I bought a $500 portable dishwasher that I wheel up to my sink when I want to wash dishes.  Expensive?  Sure.  But in the year and a month since I bought it, I’ve washed about 75 loads of dishes.  Every single one of those loads would have taken me at least an hour.  At $20 an hour, I’d be up to $1500 in “wages” for doing something I despise.

I would love to use the same technique for Baydin’s expenses, but I no longer have a paycheck from which to read my hourly rate.  My paycheck is now $0, but my time still has value.  How do I figure out what my hourly rate should be?

The web tells me that I need to figure out my burn rate, figure out how long I have until I’m out of cash, figure out how much revenue I can expect to gain versus time, then figure out how much faster an extra hour of coding gets us toward the goal.  Put that into a spreadsheet, regress it to the mean, take 2 standard deviations, and voila!

But it seems like getting to a reasonable answer is a lot easier.  I quit my job, where I had that steady paycheck, to start this company.  If I didn’t believe every hour I spent working on the company was more valuable than every hour I spent at my old company, I wouldn’t have done that.  So my answer is easy.  My hourly rate is exactly what it used to be when I was working at my old job. If spending less than that saves me an hour, I should spend the money.  Trading an hour of time to get a computer for $369 instead of $389 just isn’t worth it, even though the overoptimizing engineer part of my brain is screaming at me about every “wasted” penny.

Of course, to be able to have that flexibility, I needed to build savings before quitting my job.  If I hadn’t spent a few extra months at the job, earning the savings, go cheap would be our only option.  Luckily, we’re at a place where we can afford to make the money-time tradeoff for obvious big wins.  We’ll let you know how it works out for us.


  1. So, how do you value the “free” time? Free time that you’d spend doing nothing, just chilling. Would time spent looking for furniture come out of your “work” time of “free” time as far as the rate is concerned.
    Great post!

  2. i meant or, not of, as in “…come out of your “work” time OR “free” time as far as the rate is concerned.

  3. Probably I’d still value free time at the same rate as work time… We’ll see how that changes as the percentage of food I can afford shifts toward 100% Ramen noodles!

  4. Hi, interest post. I’ll write you later about few questions!

  5. Dude, it’s like you’re reading my mind or something. I’ve had this same philosophy for over a decade. I think about it *exactly* the same way.

    One additional note (after years of experience): You should pick a *high* hourly rate (even when your paycheck is zero). What you will find is that when you set a high value on your time, you start behaving in a way that makes your time worth more. It’s a self-fulfilling prophecy.

  6. Great point – I didn’t even think about its validity as a motivational tactic.

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