In business, you can create two kinds of wealth at the same time, but in a job, it’s usually just one.
1. Cash flow
When your business earns a profit, you can take money out in the form of:
- Salary
- Dividends
- Owner’s draw
This is immediate income, just like a paycheck.
2. Equity
When your business earns profit and you reinvest it, the business can become more valuable:
- Revenue grows
- Profit grows
- LTV improves if you keep improving the product and making the customer’s job easier
- Word of mouth spreads, and more future customers discover you
- If you own shares, the value of your ownership increases
- Over time, the valuation of your business increases
Note: You can’t take this money out because equity value is “on-paper” wealth, not money sitting in your bank account.
You only realize this income when you:
- Sell the business
- Raise investment
- Accept an acquisition offer
- Merge with another company
Job vs business
In a job, you only get immediate cash flow. Even if the company grows, you don’t gain assets unless you own stock or have equity.
In a business, you can earn immediate cash flow while also building an asset that appreciates as the business becomes more profitable.
Why early revenue is not salary (as said by Pat Walls)
- Uncertainty: You don’t know how much money you will make tomorrow.
- Reinvestment: Early revenue often needs to be reinvested to improve the product, buy tools, and run the business smoothly.
- Revenue is vanity, profit is sanity: Profit is what matters at the end of the day. Stripe fees, tool costs, hosting, advertising and other expenses shrink your revenue.
- Churn can be unpredictable: Customers may stay long-term if they truly need the product, or they may churn quickly if it’s only useful once.
- Loan: If you take out a loan, you need to pay it back first before you take out anything for yourself. (If you didn’t take a loan, ignore this point.)
Job = Income
Business = Income + Asset
But don’t forget this perk:
Business owners and self-employed people can usually deduct everyday expenses (home office portion, software, marketing, tools, travel, etc.) before taxes.
Unlike a salary, this lowers taxable income. It’s often more flexible and tax-efficient than employment income.
For salaried employees, tax usually hits the paycheck first, and deductions are more limited.
Also, gains from selling a business or holding equity long term are typically taxed at capital gains rates, which are often lower than income tax on salary.
Things to consider:(Exceptions and nuances are more important)
- If you run a solo business like a SaaS, directory, job board, content creator or lifestyle business you may not earn more than your previous job for years. But if you stick with it, eventually it can move past the hurdle and reach consistent profits. Never leave your job until then.
- If you realize you’ve been spending too much time on the wrong product, act quickly and find a way to sell it on TrustMRR (by @marclou) or acquire.com (by @agazdecki)
- If you’ve lost interest and want to move on to other projects, you can still find an ideal buyer and sell the company with the help of the best M&A consultancy available.
- If your company becomes desirable and the offers are higher than expected, consider selling if it feels like the right decision. Selling a business when it’s making good money or when demand is high is often the best time.
- Even if your business makes just 10% of your salary, don’t worry. Try to build a portfolio of products similar to the existing business or in areas that genuinely interest you. Build that product and add a buy button.
When you lose a job—even if it pays $100K/year—everything comes to a halt. In business, if one customer leaves or one product slows down, you can still survive because you’re not dependent on one customer, or one single income stream. “
“Wealth is what you don’t see.” — Morgan Housel
“You get rich by owning equity.” — Naval Ravikant