Do Founders Deserve Their Profit?

Warning: This isn't intended to be a political statement. It's intended to explore the entitlement of earnings by Founders, regardless of where in the world they live or what system of government they are in.

Do successful Founders deserve the profit for their invested risk?

For a long time, this question seemed almost rhetorical, but in the past few decades, the entitlement of Founder profit in the world has come under serious scrutiny. As the cultural and economic divide among workers continues to increase, the notion of who "deserves" profit has become incredibly volatile.

Not surprisingly, I'm wildly biased on this topic because I’m so passionate about startups! I believe Founders earn and deserve every penny of the profit they make, and are proportionately compensated for their risk, especially when you consider that most Founders fail miserably. But the issue isn't around failure, it's about how we now perceive success.

You Succeeded? Give it to Me!

The general understanding among taxing authorities is that if there is profit to be had, then there are taxes to be had. So, so, so many taxes. In addition to Federal, State, and Local personal income taxes, a Founder will enjoy paying (in the U.S.) Social Security Tax, Medicare Tax, Federal Unemployment Tax, State Unemployment Tax, State Disability Insurance, Local Assessed Tax, Worker's Compensation Insurance, and in many cases Health Care and Retirement matching contributions.

It keeps going. If the company is a C-Corp, it'll pay 25% in Fed/State corporate taxes before distributing money that will be taxed again as personal income tax. Also, don't forget to mark up your product costs so you can pass on Sales Taxes as well.

Remember too, that many of these taxes for Founders are paid before there even are any profits, so the tax milking machine is always running, regardless of whether the well is otherwise dry. It's kind of hard to say that Founders aren't paying enough taxes when by definition, they are the most taxed sources by orders of magnitude.

You Failed? Tough Luck!

The only way to avoid getting taxed a dozen times is to fail. Oddly, there doesn't seem to be anyone standing in that line to connect with would-be Founders who just went bankrupt. No, if we fail, let's face it — no one cares. That's our fault and our problem.

The popular saying, "Victory finds a hundred fathers, but defeat is an orphan," could not be more applicable here. We all have big opinions about what Founders should do when the profits are flowing, but build a money-losing business, and suddenly, no one has any advice or opinions.

Best case, if you fail spectacularly (see: WeWork, Theranos) you'll get a movie made about how miserably you failed for the world to watch and mock you with. Actually, maybe that's the worst case — I honestly can't tell for sure, but I can tell you that it sucks all the same! Like I said — if we fail, no one cares.

What Constitutes "Deserve"?

This is where Founders are in a bit of a different bucket than all other income earners. Unlike, say, a surgeon who can earn a very high salary, a Founder can earn exponentially more from their business than they could ever earn as an individual. As such, there comes a point where a lot of people start to feel the spoils of our efforts belong to someone else.

Can a Founder who just made $50 million on the sale of their company through their own efforts and hard work confidently tell the world it's "their money" or is there some invisible claim to it that everyone understands, but no one explicitly states?

If risk, innovation, and success don't entitle someone to their profit, what other measure should we as a society be measuring that ownership from? At what point can we be successful without having to pay a premium to someone else for the privilege of risk? If we want to change the rules for what ownership and entitlement should be, it’s probably time we update Founders before they risk everything to get it.

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