The reading level for this article is All Levels
There are many different ways to become wealthy in our world today. You can become rich through inheritance, crime, entertainment, sports, or building a business. There are certain advantages and disadvantages to each method. Receiving an inheritance can be very helpful, but many do not have this option and even those who do often do not know how to properly manage and grow this money once they have it. As a criminal, you can make money fairly easily and very quickly, unfortunately your conscience may get to you, you’ll destroy your reputation, and likely spend much of the rest of your life in a jail cell eating pre-packaged thawed lima beans. One can surely make a lot of money through entertainment but unless you are extremely talented, are a white rapper, or win American Idol or star in Eurovision, the chances are slim you’ll make it. Professional sports is an option. Again, however, the chances are very low and the chance of serious injury, numerous surgeries, and a life of chronic pain, worn cartilage, and sore joints does not sound too appealing.
That leaves being an entrepreneur. While there are many risks to being an entrepreneur, it seems that as long as one learns from his or her mistakes, keeps his or her ear to the marketplace, and persists, he or she will eventually succeed. The dynamic, always changing, life and the chance for significant personal gain make building a business the choice many make who wish to obtain financial security and become wealthy.
There are two ways to build wealth through entrepreneurship. The first way is to build a business and pay yourself a salary. If your business grows large enough to have an ample net profit margin, you can re-invest part in your company and still have enough pay yourself a large salary. You may personally earn a few hundred thousand dollars per year, and may be happy with this amount, at all times maintaining majority ownership in your company and doing things the way you like to do them while still making time for other commitments such as a family. This method of becoming wealthy is often associated with that of the lifestyle entrepreneur, small business owner, family business owner, and the S corporation. It is surely one option.
While a few hundred thousand dollars per year may make many happy, in order to make tens or hundreds of millions, you’ll have to change your goals, thinking, and methodology. In order to make hundreds of millions of dollars, you’ll have to build a high potential company. To use this method you’ll have to be a high potential entrepreneur and a C corporation. You’ll have to develop a novel technology, obtain solid intellectual property, or have a good business idea. You’ll need to write a complete business plan and pay $15,000 for a private placement memorandum to be created so you can raise equity capital from accredited private investors, angel investors, or venture capitalists, in turn giving up a significant portion of ownership to the investors.
You’ll have to bring on a top tier team, in turn giving up a good part of the remaining ownership to your initial founders and top performers. You’ll need to bring on additional products, build systems and processes, outsource operations across the globe, launch international marketing campaigns, use derivatives to hedge risk in overseas currency markets, and attract seasoned executives and newly minted MBAs to your growing firm. You’ll need to attract a solid Board of Directors led by representatives of your investors and industry leaders. And you’ll have to reach proof of concept, raise a second and third round of financing, ensure your books meet GAAP standards, expand market share, and turn profitable.
Finally, you’ll have to attract potential acquirers or talk to investment bankers about going public. If a company wishes to buy your company, you’ll go through a process of extensive due diligence and evaluation. If you choose to go public, you’ll file form S-1 with the Securities and Exchange Commission, have a prospectus created, and go on an investor road show to pitch the merits of investing in your company. Finally, you’ll sell, part or all of your company—either to an acquirer or the public markets. Your equity, your ownership, will soon be liquid and you’ll be able to cash in on the past six years of ninety-hour weeks. You may make $5 million, you may make $500 million—dependent on the market capitalization of your company and the amount of equity you were able to retain through all the financing rounds and option pool dilutions.
This is how, at the basic level, the system works. Going public or selling a company is a dream of all high potential entrepreneurs. If you can start with a product that the market demands, raise funding, build a good team, establish market share, turn profitable, add additional products and revenue streams, and position yourself as a market leader in your niche, you’ll make it. This process is not exactly easy, however, and more often than not, even the most experienced, well educated, well connected entrepreneurs fail at following this path. Then again, there is nothing wrong with deciding to become wealthy through the cash flow of a small or lifestyle business.
