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Over the weekend I got an e-mail question that I’m going to answer here on the blog. I decided to answer it here because it’s the kind of thing a lot of people ask. It’s related to a common misunderstanding about intangible value and business investment:
Question: How do I determine my experience as a part of my investment in my startup business?
Answer: Your experience is vital, critical to your new business, and it should, I would hope, make you successful. But it isn’t on your books as dollars or any other currency. You’re going to use it to create your business and give value to your customers, to make what you sell something that your customers want to buy. Your experience will be an important part of how you decide, if you have partners, who owns how much of what, and who does what.
But–and this is important–it doesn’t go into your books. It isn’t startup investment. Let me explain.
This is frustrating until you see how it works, and it can be a bit off-putting if you don’t like terms such as “debit” and “credit”; but really, it’s very simple. Bear with me, please.
According to standard financial convention, your investment has to be counted as dollars.
In the background, you have double-entry bookkeeping.
Don’t worry, you don’t have to learn debts and credits, so just look at this example.
Here’s what happens with a $100,000 investment. For every dollar you enter into your books as investment, there has to be a dollar entered into a bank account. Accountants call this a T drawing, and it is very simple:
Notice how “experience” doesn’t fit into the financials. Without depositing actual money in the bank account, you don’t have anything to enter as investment. The amounts on each side of the line have to sum to be exactly the same.
Startup investment doesn’t necessarily have to be, in all cases, money deposited. You can use cash equivalents in some cases, such as the following example:
The assets on the left add up to $2,570, which is credited on the right as investment. In this case, as a founder you’re contributing your personal assets to your company and crediting the value as startup investment. You can see the assets in question–the desk, chairs, computer and so on–and as this transaction is booked, they now belong not to the founder who invested in them but to the company. No money has changed hands, but assets have, and the need for two counterbalancing entries is satisfied.
In this case, too, “experience” doesn’t fit as investment. You can’t assign a dollar value to experience, and it can’t be an asset because you can’t package it up and sell it.
Summary: Off the Financials Values
This is one good example of how you have to work within the system of established conventions for financials.
Most companies at startup have the value of the founders’ experience as part of what makes them go. Without experience, you have nothing to sell.
This is something worth getting used to. A lot of the values in business end up outside of the core financials. Experience is one of them.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
