Employee vs Entrepreneur – Which is Riskier?

Conventional wisdom holds that entrepreneurs take more risk than employees. It may have been the case in past, but is it still true today?

We’re thinking about the things they don’t teach you in school. For example, most people assume that it’s less risky to be an employee, rather than an entrepreneur. Are they wrong?

Entrepreneurs are masters at minimizing risk. But do they take less risk than an employee?

You may say, “Of course not.” But let’s not be hasty…

Labels: employee vs entrepreneur

“Employee” is a label which describes a contractual relationship.

“Entrepreneur” is a label which describes a contractual relationship.

So what difference does a label make?

If we remove the label, we can see the essence of the relationship.

Every employee has a business

When we get to its essence, a job is a business – a service business.

You are a supplier. You sell your time and talents, your energy and expertise to your employer.

Your compensation – salary or wages plus benefits – is the price you charge.

So how many customers do you have?

One. Your employer.

The entrepreneur’s business

Now let’s say you have a peer who has the exact same time and talent, energy and expertise as you.

But instead of working for someone else, they own their own firm. In other words, they’re an entrepreneur.

They have 10 customers. Each customer pays your colleague one-tenth of the total compensation you get as an employee, including all benefits.

In other words, you both have the same disposable income.

Risk: Employee vs Entrepreneur

So let’s say your friend loses 1 customer.

How much of their income will they lose?

10%.

If you lose your job, how much of your income will be lost?

100%.

So which is riskier – being an employee or an entrepreneur?

The entrepreneur’s income capitalizes on diversification. The employee’s income doesn’t.

We’re all familiar with the old saying, “Don’t put all your eggs in one basket.” Yet we’re taught to believe that being an employee and putting all your eggs in your employer’s basket is safer than being an entrepreneur.

How important is this to understand when the next major layoff is just one down quarter away?

You see, entrepreneurs are often able to read a situation differently. They dig down to the essence. We’ve shown an example of that here.

Employer vs entrepreneur: what does it mean for you?

We said earlier that “employee” and “entrepreneur” are just labels which define a contractual relationship. What we didn’t point out was that the contract favors employees over entrepreneurs.

Employees have more rights than entrepreneurs. But in most cases, these rights matter less than commonly thought. In addition, as an entrepreneur, you can put terms in your contract which protect you.

Going back to our earlier example, if you got laid off – if you lost your only customer, you would likely be able to get collect unemployment.

However, if that’s the only thing holding you back – create your own safety net. Build up an emergency reserve before you launch your business.

But here’s the real beauty:

Why not be both an employee and an entrepreneur?
Keep your job and start a business on the side?

Start by asking yourself this question:
What can I try with no fear of loss?

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