Here’s a real example that illustrates the value of owning your own company and accruing equity. In the early 2000s, GCA Founder, Randy Wimmer, supported a customer as an employee of a multi-billion-dollar company. He ultimately left this company and contract for greater opportunity.
A few years later, he launched a one-person company and returned to this same contract as a “subcontractor” to his former employer. Essentially, he got his old job back, doing the same, exact work as before. However, this time, he did not have a boss as he was working as an employee of his own company.
As his own employee, he not only effectively netted 100% more income through his “subcontract” than he did when he worked as a salaried employee for his former employer, but his company was also accruing equity. At the end of his three-year subcontract, he had a very solid corporate past performance, performing high-end work for a marquis customer. He also obtained a Top-Secret Facility Clearance for his company.
Following the conclusion of his single subcontract, he had no revenue and entertained selling a share of his company to a potential partner. Not knowing if his company had any real value, he had a valuation performed. Although the “multiplier” method is most commonly used for revenue generating companies, he had zero revenue at the time.
In this type of situation, a cost-to-duplicate valuation approach is typically used to valuate pre-revenue or no-revenue companies. Simply stated, it determines the likely cost for an investor to launch and mature a company to the level of the company being purchased.
In his case, what would it cost an investor to start a new business from scratch and attain a Top-Secret Facility Clearance and a glowing 3-year past performance recommendation from a marquis customer? Using this valuation methodology, his company had a valuation of $840k. Think about this. He was simply doing the exact job that he was previously doing as an employee under a boss of another company, yet he was making double the money and accruing $840k in value over a three-year period. Although he enjoyed the free “farewell lunch” when he left the contract for the first time as an employee, he liked leaving the contract for the second time with an asset worth $840K so much more! After realizing the real value of his company, he opted to maintain 100% ownership.