With a startup comes uncertainty and risk. Both an entrepreneur running the startup and an investor investing in the startup bear the risks associated with the startup. So who takes the bigger risk?
To answer this, we need to assess the risks of either.
Risks of the Entrepreneur – An entrepreneur puts in a little bit of money (generally) and a lot of time and effort. So the biggest risk of an entrepreneur is the loss of time. Since time has an opportunity cost, the value of the risk can be quantified using that metric. A premium might be added to take into account the emotional and physical distress the entrepreneur goes through during the startup journey.
Risks of the Investor – An investor invests in a startup and hence the biggest risk of the investor is the loss of money put in.
To compare the risks, we need to assess whether the entrepreneur’s time and effort is higher or lower than the investment put in by the investor.