Is Entrepreneurship Riskier Than Employment?

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photo credit to sezzrs

Today’s post was written by Joel Ohman…

Joel Ohman is a Certified Financial Planner and President of 360 Quote LLC.  He is a serial entrepreneur and is currently spearheading several successful consumer comparison websites including Credit Card Chaser and Health Insurance Providers.  Although Joel holds some opposing views towards credit cards, he is a strong supporter of DFA so please welcome him with open arms and inquisitive hearts!

It is quite likely that at one point or another in your life you have thought about striking out on your own and starting your own business. Whether your motivation was/is to bring a new idea to the market in hopes of striking it rich or whether you simply decided that you just couldn’t stomach one more day of being a cubicle dweller and filling out TPS reports for an unappreciative boss – no matter what your reason was or is it is likely that if you haven’t had the entrepreneurial urge yet then most likely you will at some point in the future.

What is also likely is that the second you mentioned your plans for becoming your own boss to your spouse/friend/parent/fill in the blank you were immediately discouraged by the big “R” word – RISK. Not just lower case “risk” as in, “Oh well, I took a risk and I wasn’t successful this time. I will try again.” but “RISK” in all capital letters as in, “OH NO! Honey, why did you take this RISK! What have you done to us! Your business went under and now we are forced to live out of a cardboard box on the street and dig for grubs to feed the children!”

The case I would like to make is that being an entrepreneur certainly involves a level of risk (as does any profession) but just like there are ways to mitigate and manage risk with a “regular” profession there are also ways to mitigate and manage risk as an entrepreneur. My goal is to provide a concrete framework for evaluating the risks of any given entrepreneurial undertaking for anyone who has ever considered becoming an entrepreneur.

Entrepreneurial Risk vs. Employment Risk

Before attempting to compare the risks of entrepreneurship with the risk of being employed one must first admit that there are in fact many risks inherent with being employed just as there are with being an entrepreneur. One underlying assumption that the recent economic downturn has certainly unseated in the minds of most is the misguided assumption that entrepreneurship is full of risk while being employed is risk free. Layoffs, pay cuts, and/or failure to find a suitable job have all been recent and widespread indications of the risks that are inherent to almost any gainfully employed position.

Certainly entrepreneurship has the potential for great reward to accompany its risk but one thing worth mentioning is that the commonly quoted statistic that over 90% of all small businesses fail within 5 years is considered an unsubstantiated myth and other studies put the number at around 50% (which may or may not accurately reflect “failure” as it may include family businesses who shut down on their own, businesses who were bought out, serial entrepreneurs who moved on to bigger and better things, etc.). Granted, entrepreneurship absolutely involves risk and I am not trying to make a case to the contrary. What I would like to present is that even employees have a level of risk that can be quite high and in addition that there are certain things that can be done in order to both manage and minimize the risk of entrepreneurship.

While the risks (and rewards) can be quite different between entrepreneurs and employees there are some important differences that I believe can be summed up in two main areas:

  1. Control – Employees are “at the mercy” of their employers and/or the owners of their company while entrepreneurs have a high degree of control (and of course more responsibility) in controlling their own destiny.
  2. Money – Entrepreneurs typically need to risk not just their time and effort but their own money in order to get their business off the ground while employees typically will not need to risk any of their own money as an investment (for the sake of this discussion we will leave stock options, sales commissions, and other performance based employee pay systems out of this comparison because while not an investment of employee money per se it does involve a different level of risk).

Granted we could spend a lot of time delving into the specifics of each of the two areas but I believe that it is fair to say that the two main differences in risk between the “Entrepreneur Profession” and the “Employee Profession” could be characterized nicely as differences in the general categories of control and money.

Managing and Minimizing Entrepreneurial Risk

As any student of Finance 101 knows within the first week of class, “Generally speaking, the greater the risk the greater the potential reward”. So the goal in becoming an entrepreneur is not to eliminate risk which is for the most part impossible but to manage and minimize the risk so that the risk is appropriate to your specific situation and that you have positioned yourself in an entrepreneurial undertaking that has an acceptable risk/reward relationship to you.

Here are some concrete principles that may help you both minimize and manage the risk that is inherent in any entrepreneurial endeavor:

  1. Save Money by Funding Yourself“Fund Yourself” is a term that is sometimes called “Bootstrapping” and essentially means that rather than betting the farm to invest all of your nest egg into a business idea (or rather than spending a ton of effort trying to raise money from investors) see what you can do to get your idea to the market as cheaply as possible. Sure, you will have to spend some of your money but budget wisely with the goal being to get the idea to market and test out market demand for your product or service. Yes, blowing all of your nest egg into a hare brained business idea can be labeled as bootstrapping but strive to “bootstrap” as wisely and cheaply as possible so that you can gauge market demand and then iteratively make improvements (or if the idea is a dud then you can simply come up with another idea and be thankful that your budgeting allowed you to have funds left over for another business idea).
  2. NO Drastic Changes – This may sound weird to some but drastic changes are not the key to entrepreneurial success. In fact, making a drastic change will only increase (often dramatically) the level of risk associated with anything entrepreneurial. One example of making a drastic change that unnecessarily skyrockets risk is when someone quits their job with no planning and starts their business the next day. You may be gung ho at first but unless you already have experience, contacts, resources, and more in the field of your new business then you have likely just heaped yourself a huge serving of unnecessary risk without the accompanying huge potential reward. A better way to do it (note, that I am just speaking in general risk/rewards terms now and of course some people are certainly the exception) is the way that Matt Jabs continues to work his day job as an Information Technology Manager and then in addition works to build Debt Free Adventure into an ever increasing source of income. When I first started my Florida health insurance agency (my first of 5 companies that I started) I made the decision to continue working my day job as a tax preparer studying for the CFP® (which I passed) while working to build my agency on the side. Yes, there were many weeks of working what was in essence two 40 hour a week full time jobs but the risk of having to live out of a cardboard box if I failed was greatly minimized.
  3. Use the Web – In the past no matter what you wanted to sell you had to face the obstacle of deciding how to reach potential customers. In most cases this meant that you needed to rent space for a physical storefront or pay for space at a tradeshow or any other number of potentially very costly things. Now whether you want to sell shoes or hand crocheted blankets or sea monkeys you can set up a website or blog in a matter of hours and have people buying your products or using your services from the other side of the world. I am admittedly biased about loving the Internet because while some of my most recent ideas have been building a website to compare credit cards and a website to compare health insurance providers I love the concept of being able to think up an idea and then immediately start testing out the idea by putting it live on the Internet for anyone to see when they type in your domain name. With the ease of use in setting up popular blogging/website building software such as WordPress it is often as simple as choosing a domain name and then its off to the races to test out your new idea.

There are likely many other ways to both minimize and manage the risk of being an entrepreneur but I hope that sharing some of the things that I have noticed will prompt you to find a way to make your entrepreneurial dreams a reality.

What do you think?

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1 Craig Ford

Thanks for the post. Being an entrepreneur does have a false risk stigma. As you point out there are a lot of things you can control as an entrepreneur that you cannot control as an employee. Thus, perhaps there really is less to fear.

2 Gary

Very good article. I am an employee, and also have a side business. In this rapidly changing world, especially here in Michigan, jobs are hard to find, but harder to keep. If you wanted to leave, you would have to abandon your house, or take a HUGE loss on it. There is a lot of risk being an employee. To combat this, my wife and I decided to start a side business and work it as if it is our retirement plan (along with funding retirement and continuing to pay off our house). We have become distributors of an internet greeting card company. Changing lives one smile at a time. Send someone you love a FREE greeting card on us.



Thanks. I am also a CFP and realized early in my career that I was a fool to work for anyone but myself.

I started working at a bank…moved my family from Israel to California…had no money…..and was in debt. I worked really hard and it was starting to pay off. Then, 4 months later, I came in one day to find a nice pink envelop on my desk. The bank decided it didn’t want to sell investments anymore. Poof……I was on the street.

I decided right then and there to have more control over my future. I strongly recommend folks to have their own business…even if it’s just a side gig. Thanks for this post Joel.

4 Credit Card Chaser

Thanks and glad to see another CFP stopping by!

5 Craig

I think it will always be riskier, there are more obstacles in the way. Because there is no job security I can see how the playing field is more level now, but still, going on your own can be very risky. Raising money, marketing, building credibility, and just having the idea and breaking through are all very tough.

6 Michelle Traudt

Great post and very timely for our situation right now. Both my husband and I are working on our own businesses and there is definitely a lot of risk, but we are confident the rewards (financial and non-financial) will be worth it!

7 Matt Jabs

I can say this for entrepreneurship… it’s a HECK of a lot more exciting!

8 kenyantykoon

i was tired of having to put in soe much sweat blood and tears(literary) for someone else’ business only to get no reward or credit and to have my financial goals at the mercy of a whimsical boss who might decide to fire you at any time for a myriad reasons. if risk is what it will take to achieve your goals financial or otherwise, take a risk management class, say a little prayer take a deep breathe and take the plunge. more often than not a well calculated risk is very much worth it

9 Matt Jabs

Thanks Kenyan. I like how you said, “a well calculated risk is very much worth it.”

10 Robert Espe

Great post, but in all fairness, a lot depends on what you do. A good CFP is probably better off self employed, but I work in law enforcement, I’m definitely better off as an employee. And while I agree with your main point, the risk of getting fired isn’t of getting fired, it’s of not having money, which is just as present when you are self employed (and in both cases an absence of debt makes the risk null). I think the primary reward of self employment is in knowing that what you have is yours. For those who desire that, there is no substitute. It is a shame that government policy makes it so difficult for people who want to start their own businesses.

11 Credit Card Chaser

I definitely agree with you in that entrepreneurship, although very rewarding, is not for everyone. My goal was more along the lines of just being a help to those people that were considering becoming some sort of entrepreneur but were unsure of the best way to take the plunge because of the perceived risk. My goal was not convince everyone that they should become an entrepreneur or even that they should want to become an entrepreneur because as you illustrate very nicely we would be in very rough shape if all of our law enforcement men and women, who also have very rewarding and very much admired professions, were all set up as entrepreneur mercenaries!

12 Lydia aka Ms. MoneyChat

as someone who recently took the plunge and jumped from employee to entrepreneur (yes in a recession, no i wasn’t laid off), i really enjoyed this post. i’m a newbie, literally, like 2 weeks into my new gig fulltime:

13 Credit Card Chaser

Glad you enjoyed it and I wish you the best with your new undertaking!

14 MoneyNing

Earnings from a business can be much more volatile but there’s definitely less risk because it’s NEVER all or nothing like a regular job.

Business income is harder to get rolling, but once it takes off, it’s never as risky as working for someone who can, at a moment’s notice, fire you.

15 Credit Card Chaser

I agree, a lot of this is just the way that I am wired but I could never ever (Lord willing) put myself in a situation where I am forced to depend on a boss to tell me what to do, how much I can earn, where I would have to live (if I was forced to transfer for example), etc. etc.

16 Steve |MyWifeQuitHerJob

I completely agree with “No Drastic Changes”. Why risk it all when you can incubate your business with the comforts of full time income. Once your business is up and running, the risk factor becomes drastically less.

17 Walter

Risk is a big hindrance when aspiring for entrepreneurship but I believe it should go with balance and preparation. I like the guidelines you have stated here and I know it will work for anyone. I’m living in both worlds and I’m blessed with such opportunity. 🙂

18 Financial Samurai

Hey Joel – great post! I love this comparison, b/c it’s been something I’ve been dealing with since the first day I got out of college. To try and make it big on my own, or make it big in a reputable corporation.

There is a BIG BIG problem for those who work in finance (banking, venture capital, private equity, money mangement firms etc)… and that is ironically TOO HIGH of an income! We’re talking regular folks in finance with 10 years experience making $300-600,000/yr regularly. The real big swingers are making much more.

Once you start making multiple six figures, it is amazingly difficult to drop that income and start on your own. Hence, “No Drastic Changes” is exactly what it’s all about.

I know I’m small fish in the internet/PF community so I am constantly impressed with folks like Neal, Matt (hey how did you get mentioned in the article?! haha), JD, Trent, SVB, Jim and all you other guys who’ve been able to really monetize your sites.

I might make more on an absolute level from my job than some of the full time bloggers, but I LOVE being the apprentice again, getting rejected (see my current post) by some of you, and starting over.

Working on Financial Samurai has been so much fun. The best part is meeting many of you, learning, and interacting. I plan to incubate Financial Samurai for years, and monetize perhaps one day for myself when I retire from my current career.



19 Credit Card Chaser

Thanks! I saw in your “Your Rejected” post that someone didn’t like your name. I actually really like the branding behind the “Financial Samurai” name. It’s definitely a memorable name (at least for me) and I like the domain name too (although I would take the time to register some of the common misspellings of “Samurai” like,, etc. and then redirect them to your site – the $7/yr for domain name registration is cheap insurance against poor spellers 🙂 ). BTW I love the image that you used for your “You’re Rejected” post too 🙂

20 Financial Samurai

Hi Joel – Thanks man. Those are good tips. Perhaps I’ll do that if I get a chance this weekend. Yeah, that girl shot my ideas down left and right. Definitely good motivation indeed.

Good seeing you over at Financial Samurai!

Best FS

21 Gary

With the sorry state of our economy, and the predictions that these conditions may just be the new norms, my wife and I have just started a new side business. We see this attitude as spreading our risk out, not taking a big leap. I hope you will check out our websight, it’s FREE!

22 aion kinah

I definitely agree with you in that entrepreneurship, although very rewarding, is not for everyone.I actually really like the branding behind the “Financial Samurai” name.

23 Kim_Mango

I have tried starting a number of businesses but nothing has really made enough money for me to quit my day job. I have made great changes in my lifestyle such as getting out from under a large mortgage by selling the property, paying off all my credit card debt, and living within my means. I drive an 8 year old car, put money in my emergency fund, and avoid a lot of shopping.

Instead of starting yet another business, I’m transitioning my career to becoming a consultant. There is a lot of fear in my way but that truly is my biggest obstacle. Mostly, it’s the fear of losing my medical benefits since I have a pre-existing condition.

I will continue my transition step by step. I appreciate articles that speak to overcoming fears and the comments from people who have done it!

24 Credit Card Chaser

“Instead of starting yet another business, I’m transitioning my career to becoming a consultant. There is a lot of fear in my way but that truly is my biggest obstacle. Mostly, it’s the fear of losing my medical benefits since I have a pre-existing condition.”

Make sure that you talk to a knowledgeable agent about the Federal HIPAA health insurance laws because as long as you have done the responsible thing and maintained continuous health insurance coverage then the Federal HIPAA laws are designed to make sure that you have access to a guaranteed issue individual health insurance plan that covers all pre-existing conditions.

Many agents do not talk about this because they are not familiar with the HIPAA laws like they should be but there is nothing to fear when it comes to pre-existing conditions as long as you have done the responsible thing and kept continuous coverage.

In a nutshell, the health insurance portion of the HIPAA laws protect people that through no fault of their own have lost their health insurance coverage and are unable to get coverage on their own because of pre-existing conditions. There are 6 requirements that must be met for eligibility and if you meet those requirements then by Federal law you must be given a health plan that does not exclude coverage for any of your pre-existing conditions. Here is an article with more detail on the 6 requirements for HIPAA (it is written for Florida residents but HIPAA is a Federal law so it applies to every resident of the US):

25 Kim_Mango

Thank you for your reply about HIPAA, I had no idea that I would even be eligible to get coverage! I will investigate this fully when I’m ready to make the leap. I appreciate your guidance in this matter.


26 Angie

New to the site. Have always wanted to do my own “thing”, but I don’t know what area to get into. Would some of you mind mentioning your business area? If not, thank you for your time.

27 Matt Jabs

Hey Angie, thanks for stopping by. There are innumerable options to consider. My advice to you is to determine what you passions are and what you really want to do.

Focus on what you love and are good at, and go make money at it. That is by far the best advice I could give… hope it helps. 🙂

28 Credit Card Chaser

I would second that. If you are really unsure then start out by listing the things that you are good at, have special knowledge in, etc.

Once you do that then start listing some of the criteria of the “perfect thing” even if it is just general type things like “I want to be able to work from anywhere” or “I like talking on the phone a lot” (or “I dislike talking on the phone a lot”) etc etc until you can kind of work backwards to find different opportunities that will fit your criteria of the ideal career.

Also, I wrote a guest post a while ago for Ron over at The Wisdom Journal that addresses some of the specifics:

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