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The Value of Time

My co-founder and I have run our startup with religious frugality. When first looking for an office, we found a shared workspace that allowed us pay by the area, and we squeezed in folks for $160/mo per person. When traveling for business, I take the search-Hipmunk-and-choose-the-cheapest approach to finding a hotel. When hiring, we have a visceral aversion to using recruiters; engaging a recruiter seems like the ultimate expression of laziness. This sort of diehard cheapness is not original; there are plenty of startups that are even better at it than us. But recently I’ve been rethinking our approach…

Every person at every company has an implicit hourly rate of value they create for the business. Perhaps Bob, our traveling salesman, provides $150 of value for every hour that he’s working [1]. If Bob catches the flu and is forced to spend a day hunched over a toilet rather on the road selling, then the DCF of future SeatGeek earnings decreases by $1,500 [2].

Once he recovers, suppose Bob has to travel across Manhattan for a meeting. He can get there by taking the subway for a modest $2 or by taking a cab for $27; the latter would save him thirty minutes of time. The frugal bootstrapper in me wants Bob to take the subway. But if Bob does that, he is effectively stealing $50 from SeatGeek [3]. Bob’s decision causes our enterprise value to drop by that amount. If a shareholder owned 2% of SeatGeek, she would be $1 poorer after Bob’s choice. It’s optimal for shareholders if Bob leaves for the meeting half an hour later and spends that time working [4].

Once you start thinking like this, your day becomes full of these tradeoffs. Today I had to buy computer for a new employee [5]. I went to Amazon, my go-to online store, and immediately found what I was looking for listed at $700. Based on previous experience, I know that Amazon isn’t usually the cheapest option for laptops; I estimated that if I spent another fifteen minutes diligently searching the web, the expected value of the best price I’d find would be $660. At that moment I was estimating my rate of value creation at over $160/hr, so I bought the Amazon computer and moved on to the next item on my to-do list.

Ideally, if you stop anyone at a company and ask them “at what rate do you value your time right now?” they should respond with a number. Determining that number is really hard; I am still quite poor at estimating my hourly value. But if you don’t have an estimate–no matter how rough–you don’t even have a framework within which to make decisions. You’re living your life by your gut rather than thinking analytically about how you spend your time. People with a number are Billy Beane; those without are Jim Hendry.

The rate at which you value your time value your time is not static; it’s constantly changing. If I’m stuck on a plane with no internet, the rate at which I’m creating value for SeatGeek is low. On the other hand, suppose it’s 3am in the morning and I’m feverishly working on a presentation for a massive client. The presentation will take place in five hours. Here, the rate at which I’m creating value is quite high. If two hours magically disappeared from the clock, it could destroy a meaningful amount of SeatGeek’s enterprise value. So I feel justified in, say, asking my girlfriend to get me a Diet Coke so that I don’t have to break my concentration (thankfully she’s an economics student, so she understands).

The rate at which someone creates value for a company (and thus should value their time, from the perspective of the company) isn’t the same as their wage. In theory, calculating the value of someone’s time is simple: if Bob went into a trance and didn’t work for an hour, how would the company’s DCF of earnings change [6]? The drivers for wage are more complex, but are nicely captured by VORP. In baseball, VORP is a statistic that identifies the incremental value Player A creates vis-à-vis the player that would replace him in the lineup if Player A got injured. If a Player A has low VORP then his team is close to indifferent about keeping him around; he will be paid a relatively low wage.

There are people who create tremendous value but have low VORP. Consider an EMT. The hourly value created by an EMT is enormous; if an EMT went into a trance on the job, she could end a human life. But the market for EMTs is liquid and the difference between the worst EMT that gets hired and the best that can’t find a job is small, so they are not particularly well-compensated. It is natural for people to associate the value of their time with their wage, but that urge is best resisted.

Last week, lots of people in the ticket industry headed to the Bellagio in Las Vegas for Ticket Summit, the largest annual ticketing conference. I went for the third year in a row. The past two years I stayed at the Imperial Palace, which seems to consistently be the cheapest place to stay in NV, despite its location in the middle of the Las Vegas Strip. The frugal-no-matter-what part of my brain drove me there. This year, I changed Palaces; I stayed at Cesar’s. My rationale: the hotel is closer to the conference than the Imperial Palace. I will spend an extra $70/night, but that cost will be more than recouped by the time I save walking back and forth. If I were being completely rational I would have just stayed at the Bellagio itself, but the $250/night price tag was more sticker shock than I could bear. I’m getting better at being coldly analytical about how I spend my time, but now and then my inner cheapskate still shines through.


[1] Bob is fictional. SeatGeek has no traveling salesmen.

[2] I’m making several assumptions here. First, I’m assuming that Bob works ten hour days (excluding lunch breaks, etc). More importantly, I’m talking in terms of expected value. In other words, on a given day Bob might create -$5,000 of enterprise value or $10,000, but I’m assuming that he creates $1,500 on average. I will use expected values throughout this post, but will not disclaim them each time.

[3] I’m making the simplifying assumption that Bob’s time is worthless while he travels. In reality, that’s unlikely–he’s able to think about his upcoming presentation or how to deal with a situation back at the office. But that doesn’t change this decision framework, it just changes the numbers. The analysis here is very much simplified, but as you add complexities the intuition still holds.

[4] I’m speaking here in terms of what’s value-maximizing for SeatGeek, which is not necessarily utility-maximizing for Bob. Bob may adore subway rides and loathe cabs, such that he prefers to get to his meeting slowly even though it reduces the value of SeatGeek. From the perspective of someone running SeatGeek, this is relevant; a more complex analytical framework would account for employee happiness and its impact on retention, productivity, etc. But, to the extent I can influence Bob’s decision when he is close to indifferent, I should incent him to take a cab. In cases when you’re choosing how to spend your time as a founder, short-term personal utility matters even less. If Bob owned 40% of SeatGeek, then he would have to find the subway much more pleasurable (“$20 worth”) in order to justify the slow trip. This is part of the driver for granting employee options.

[5] To the person who says “If you’re so concerned about the value of time, does it make sense for you to be in charge of computer procurement?”: Our office manager was on vacation, and the guy needed a computer to work.

[6] This is the case in static equilibrium, i.e. it assumes that Bob’s trance doesn’t mean that he or his co-workers will stay late to make up for Bob’s mental absence. This can also be analyzed in a more dynamic equilibrium, but as such is harder to lay out simply in a blog post.

 
767
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767
Kudos