The Founder Tax: You Are Lighting $127,000 On Fire

Did you see The Founder Tax on your K-1 or your 1040 form this year?

Goodness, I hope not. It's not something the IRS collects, because I just made that tax up. But you've almost certainly been paying it for years.

You pay it a lot, at least every week, more likely every day, and here's the thing: you think you are doing something positive when you are paying that tax. Every time you hop on a call you shouldn't be on, and every Time to rewrite a deck or review a quarterly business report, you are paying The Founder Tax!

Okay, so what is the founder tax exactly?

The Founder Tax is the hours you spend doing other people's jobs, times your real hourly rate. I know you were probably hoping for a more complicated formula involving depreciation, goodwill write-downs, and the square footage of your office, but the Founder Tax is this sneaky, insidious tax that you are forced to pay when you have not functionally set up your business so that everybody is doing the right job.

According to data from the WTF Assessment, agency CEOs under $1M in revenue are paying a Founder Tax of about $127,000 a year.

Take a second and make sure you read that carefully. $127,000 evaporated and went up into money heaven because you allowed yourself to be the world's most expensive account manager.

The Math (Brace Yourself)

Let's do the numbers - because, unlike statistics and marketers, numbers never lie:

Average $1M agency founder:

Salary: $150k
Net profit share: $150k
Effective hourly rate: $144/hr

Based on other data, this is essentially the going rate for folks in various agency support positions:

Delivery work: $33/hr
Account management: $41/hr
Sales work: $48/hr

So every hour you spend in delivery, you are overpaying by $111. Every hour in account management, you are overpaying by $103. Every hour in sales, you are letting $96 an hour evaporate.

This is the part that should make you want to throw your laptop… agency founders at this stage report spending an average of 25 hours a week on this work.

For 25 hours every week, you essentially say, "I could hire a salesperson, but I'd rather do it myself and overpay.” or you say something like, "I'm a better copywriter, so I will write this landing page instead of paying someone who makes one quarter of what I do.” Even if it took them twice as long to do it, they could still deliver something better at a lower cost. Or maybe you choose to rewrite the weekly report deck, jump in to a weekly client call, and not get as much relationship solidification as a professional, experienced account manager might.

That adds up to $134,000. (Just FYI, the $127K was the average of folks who took the WTF Agency Assessment. That's The Founder Tax - the invisible P&L line item Quickbooks doesn't know how to show you, because it’s a choice to not build an organization that works without you.

WTF Could You Actually Buy With $127K?

Let's play a game. You've got $127,000 you didn't know you were spending. What could it actually buy?

It could buy:

OR

One incredible account manager. Like, a really good one. The kind who makes clients feel held and makes your team feel un-bottlenecked.
One solid sales hire at $127k OTE. Someone whose entire job — whose full-time, wake-up-in-the-morning job — is pipeline and closing.
Two full-time delivery hires plus freelancer budget. An actual team. Capacity you don't have right now.

Any of those hires would almost certainly do the work better than you. Not because you are bad at it, but because you are part-time at it. You are competing, against full-time specialists who think about this stuff all day.

That’s not super wise investment…Warren Buffet would be saying “WTF?!?!?”

Why You Are Still Paying The Founder Tax

Why are agency owners…smart ones, experienced ones, people who really have got a good head on their shoulders volunteering to light $127K on fire every year?

The Work Is Getting Done & You Aren’t Paying Any Extra For It! You are getting shit done. Doing delivery work feels like you are being productive. Rewriting the deck feels like you are accomplishing something. Running a client call feels like you are adding special sauce, control, and quality. You get to do all of that without adding anybody to the payroll. Awesome, right? No, it just means that you were paying yourself for work that other people can almost certainly do better and at a lower cost. By avoiding hiring somebody to do a job they are super well suited for, you were doing it part-time and you were overpaying. That cost is not financial; it pulls away from your focus on making the agency as good as it can be.
You don't trust anyone else to do it "right." This might be currently true, but mostly it's because you were back on your bullshit and didn't invest the work into creating something that other people can do. You trained nobody. You documented nothing. You hired on vibes and then got mad when the vibes didn't read your mind. The reason no one else can do it is because you've structured the agency so that only you can. And that is stupid and sucky.
Doing the work is where you feel competent. Leading people is scary. You might be bad at it. Nobody claps when you run a good 1:1. But when you swoop in and save a client call? You can feel your cape flutter in the breeze, the crowds gather and give you generous and enthusiastic applause, and even if you don't ever say it out loud, you feel like the hero. You are spending $127,000 a year to get a couple of squirts of dopamine. You could get more satisfaction, more happiness, more efficiency, better margins, and more time for yourself if you realized that you are addicted to being needed and you have built an agency that is the perfect dealer.
You genuinely believe you can do it "in a part-time capacity" as well as a full-timer. I know your mom told you that you were amazing. You probably are amazing. You are smart, talented, attractive, charismatic, and you dance really well. But a part-time effort from you cannot replace a full-time effort from a qualified, well-trained, well-supported, curious resource. you are just not that fucking good. If I'm the first one to tell you that, I'm sorry. It probably stings a little, but you know I'm right. I'm right about the fact that you are fantastic, and I'm right about the fact that your part-time effort can't match the full-time effort of a qualified, ambitious person.

Here's How You Fucking Fix It.

This part isn't gonna feel fun; it's going to feel like you are stepping backwards, but this is 100% what you need.

Build the org chart you need, not the one you have.

Measure how you spend every minute for the next two weeks. this is the part that isn't fun. Every time I have done this, I have really thought that I would rather stab myself in the eyeballs with sharpened chopsticks than keep a time diary for two weeks. I promise you the frustration will be worth it. Every half hour, write down what you did in the last half hour and categorize it into a functional job at your agency like sales, delivery, account management, regular management, hiring, marketing…whatever. There aren’t that many, and your categorizations do not have to be perfect, but watch where you spend your time and, if you want to be a super star, add in the time that you spend not at work thinking about these things.

At the end of these miserable two weeks, you will have an assortment of hours spent in different areas of your business. If any of the hours you have measured map to an operational role in your agency, that's real evidence of the founder tax.

Take whatever the biggest bucket of hours is and look at your org chart. Is there somebody who's supposed to be in charge of that already? If there is, why aren't they doing it? If they are full to the gills and do not have a single extra moment of capacity, then you need to hire somebody to go through that exercise for any work that somebody else can do.

Each one of those hours that you are able to give to an existing staff member or hire someone for is adding roughly $103 an hour of profit to your bottom line. PLUS, you will have less time obligated, so you will have the opportunity to focus on growth and agency quality development. Those are investments that pay off in huge multiples.

You doing work that you could pay someone else to do for less than you do it isn't yielding any investment return. In fact, it is a cost center

Hire To Fill The Function Well, Not Cheaply

Most founders hire reactively. Something breaks, they hire a body, throw the body at the broken thing and assume it is going to get fixed. Then, since that body doesn't have a clear role, scorecard, or system the work gets all screwed up, and you decide that it'll be better if you do it.

this reactive hiring and lack of planning typically happens because the agency leader wants to hire quickly, which rarely means well, and they want to hire cheaply, which almost certainly means not well. They hire poorly, pay poorly, and then end up doing the work anyway. The time you spend hiring and training this resource is wasted, and the money you have paid this resource is wasted. You are still overpaying for the work produced.

If you've gone through the effort of identifying where you are spending your hours and where the client and your company would be better served by somebody else doing that role, you have to take on the obligation of understanding:

the tasks you were doing
the process by which you are doing them
the desired outcomes and definitions of success

so you can share them with the resource that you will eventually hire. You are very smart, very attractive, you dance well, and you have taken heed of what I'm saying in this article

Build the role first. Define what "good" looks like. Then hire.

Manage people, not tasks.

If you're tracking every single to-do, you'rethe world's most overpaid project manager. Your job is not to do the work. Your job is not even to track the work. Your job is to build people who can do and track the work.

(Yes, that means less "doing" and more "leading." I know. I know.)

Stop Pretending Work You Do Is Free.

It's not free. It's just invisible. You're paying it in:

Lower Expectations of Your Team
Sending Messages To Your Team That They Aren’t Capable
Sending Messages To Your Clients That Your Team Ins’t Capable

The Founder Tax isn't just a number. It's a limiter to yopur agency growth, your team’s growth and the quality of work you can do.

Founder’s Find - And Lead

if you have ever said these words to your team, "Never mind, I'll do it," you have just issued a receipt for the founder tax. Your goal as a founder is to create a machine that is bigger than you are. Part of the founding is finding out what works. That discovery process can be a solo or team adventure. But as the leader, you are the arbiter of what the definition of “works” is…

This Isn't For Everyone

The Founder Tax fix isn't for agencies who want a quick win. It's not for people who enjoy the martyr routine, or who secretly like being the hero on every call.

It's for agency owners who are willing to look at that $127,000 number, not flinch, and make a different decision this quarter than they made last quarter.

If that's you, start here - take the WTF Assessment. It'll tell you exactly how big your Founder Tax is, where it's hiding, and which role is costing you the most.

And you can't run the agency you want while you're busy being an employee at the agency you have.