Starting startups is one of the current trends and people seem to be doing it for all sorts of reasons, most of which are rather silly, such as “be your own boss” and “follow your passion”. One of the more sophisticated reasons that I have come across lately is this:

Suppose you are running a company and you hire an employee A. Clearly A’s contributions should lead to an increase in your revenue after accounting for A’s compensation, or else hiring A would be a poor business decision. If you hire many employees like A whose compensation is more than the amount they are contributing towards your company’s revenues, then you are making a loss. Or in other words, any profit-making company must be paying less to its employees than what the employees are contributing towards its revenues. Therefore to earn your true worth, you need to start your own company.

Everything about this argument is spot on, except for that last line. A general principle one should keep in mind while trying to come up with easier ways of making money is that it is insanely difficult to find arbitrage in the markets. If you have discovered a simple-sounding argument that shows a clear arbitrage, that should raise a red flag and you should spend some time finding flaws in the argument before concluding you have hit the jackpot.

So let’s find the flaw in the argument above. Clearly something weird is going on here. If it’s always better for you to quit and start your own company, who are you supposed to hire in your new company? Shouldn’t your employees make the same argument and quit immediately to start their own companies, and so on? Or in other words, if we were to believe in the argument above we would need to concede that the most efficient way for the world to progress is for everyone to be a solo entrepreneur. That definitely doesn’t sound right.

I think this sort of confusion happens because we instinctively assign status values to various concepts. A “company” usually gets a high status score, and an employee gets a lower one. This is why people often say “I work for company XYZ” as opposed to “I work at company XYZ”. The former implies a sense of servitude, which is in line with ranks on the status scale. Anyway, this is speculation. But let’s get back to figuring out what’s going on.

At a very abstract level, the only way to make money is by providing value to the world. I can see two potential objections to this simplistic view of the world. Let me address those before moving forward.

First, for the statement to be true, you need a legal structure in place that makes sure all transactions happen through mutual consent. If you could easily rob people without repercussions, that would be an easy way to make money without providing value and therefore my claim wouldn’t be true. So let’s assume we have such a legal system in place.

Second, I don’t mean “value” in a moral sense. You don’t need to do things that are “good” for people in order to make money. You simply need to do something that, in the moment, appears to be valuable to them in that they are willing to give you some money in exchange of it.

With these clarifications, my claim is almost a matter of definition. To make money, you have to give something to someone, that they value enough in the moment to give you some money in return.

Now, if you are constantly doing valuable things for people that they want to give you money for, but your company steps in the middle and collects a cut of that money, that does sound annoying, and if you can convince those people to give that money to you directly, you should definitely do that.

This might actually be the case in some industries. For example, once a maid working for a maid service company has established a client base and finds herself mostly working for a select few clients, she might question the value her company is providing to her. In many cases, it might be more profitable for her to quit the company and service the clients as an independent maid. Because this is so easy, most maid service companies will make their maids sign contracts that ensure this doesn’t happen. In fact, this is the case for most client-facing roles in an organization. These kinds of roles come with a lot of clauses that prevent client stealing.

But often the organization is useful to its employees in the sense that eliminating the middleman and doing business directly with the clients would be significantly harder than keeping the middleman. Consider any product or service that has so many moving parts that it needs an entire team for it to function properly. Each individual of the team may be responsible only for a small part of the product, and only by putting together the efforts of hundreds of people in a very specific structure does one get something that’s actually valuable to the society. In such a case each team member is getting a lot of value out of being a part of the team. Yes, each member has some valuable skills, and they’re all contributing towards creating value for the society, but without being part of the team the members would have no way to make that contribution. Arguing that employees, by the mere act of being employees, always get the short end of the stick is equivalent to saying that collaboration never adds any value. And that’s definitely not true. If a bunch of people collaborate in a structured way to accomplish a certain task, and if the collaboration actually is useful, then the collaboration itself will add some value and each person’s individual contribution will add up to something less than the total value created because the act of bringing their efforts together in a structured way like that itself is responsible for adding some value.

Creating a structure that takes your skills and converts those into things valuable for the society is a non-trivial task and deserves to be compensated for. That structure is what we call an organization. It’s difficult to create that structure and it’s ok if it pays less to its employees than the value it extracts from them. It’s providing a service and is being compensated for it.

Quitting your job on the grounds of getting paid less than the value you are creating for your employer is bound to take you by surprise when you discover that you can do the same amount of work you did for your employer but no one is willing to pay you for it simply because the medium that converted your skills into things of value to the society isn’t in the picture any more. Making money as an independent worker is largely a matter of creating that medium that converts your skills into value as efficiently as possible. If you are good at it then go ahead and create it. Otherwise, you should consider paying someone else (for example, an organization) to do it for you.