Joining Startups Will Probably Make You Poorer Rather Than Richer

Joining StartupsSeveral of you asked me why I’m applying for startup jobs now that I’ve retired.  As I wrote in my retirement post, “Taking A Leap Of Faith And Retiring On My Own Terms,” one of my goals is to “Discover New Careers.”  I truly believe all of us are destined to do multiple things in our lives.  We just need the courage to seek!

The other reason why I am applying for startup jobs is because I want to learn more about the startup world and provide the Financial Samurai community with more insights into the process. It’s important to write from experience.  Each job only takes five minutes to apply to online.  I’m sure I will be rejected from most of them, since my background is not in internet, tech, or startup.  However, I’m curious to know more about the process.

One of the main misconceptions here in Silicon Valley is that joining a startup will guarantee you riches beyond your wildest dreams.  We hear story after story about companies raising multiple-millions of dollars in their latest round of funding and somehow translate those millions into our own millions.  It’s just not the case for the vast majority of entrepreneurs and early joiners.  The round of funding is almost always used for operational expenses such as advertising, marketing, rent, equipment, and of course salaries.

The way startup culture works is that you are paid BELOW market in salary, in exchange for lots of hardwork, and options which will hopefully become multi-baggers once the company is acquired or goes public.  There is a long road to walk before you find your gold.  How many times did you find the leprechaun?

NOT MAXIMIZING YOUR WORTH

Every Venture Capitalist says they count on 1 out of 10 of their investments to be homeruns to make up for 5-7 of their busts.  The other 3-4 companies in their portfolio just tread water, neither making or losing them money.  They call them “Deadpools”.  Therefore, even with as much due diligence you put in evaluating a potential employer,  your chances of striking gold is also about 10%.

The problem is, your chances of getting paid below market rate is almost 100% for joining private startups.  The discount to market is often in the 30%-50% range in return for stock options which will hopefully grow many fold.

Let’s say it takes on average five years for you to realize your liquidity event riches.  Here is an example I’d like to demonstrate:

Work For Startup X

Title: Head Of Sales

Salary: $80,000

Age: 31

Options: $40,000 worth struck at $10 a share.

Benefits: 401K, Dental, Health, etc.

Work For Proctor & Gamble

Title: Head of Old Spice Body Wash Marketing

Salary: $135,000

Stock Grants: $20,000 a year.

Age: 31

Benefits: 401k, Dental, Health, etc.

In Five Years

In five years, the startup person will have earned $400,000 in salary and $200,000 in options for a total value of $600,000. In five years, the Proctor & Gamble person will have earned $675,000 in salary and $100,000 in stock grants for a total value of $775,000.  The monetary difference is therefore $175,000 assuming that the startup is still alive and is one of the 3-4 companies in a 10 company portfolio that treads water.  Probability: 30-40%.

Let’s say the startup is one of the 5-7 companies in the portfolio which goes bust after five years.  The startup person earns $400,000 in total compensation because his $200,000 in options are now worthless.  The person at P&G now has made $375,000 more in five years.  Probability: 50-70%.

Finally, let’s say the startup is a raging success and grows 5X in five years.  You managed to be one of the top 15 employees and also see your options grow by 5X as well.  Your options are now worth $1,000,000 plus your $400,000 in salary for a total value of $1,400,000!  You are now $625,000 ahead of your P&G friend on paper after five years.  Probability: 10%.

Finding Out The Likely Outcome Of The Startup Employee

$600,000 X 30% = $180,000

$400,000 X 60% = $240,000

$1,400,000 X 10% = $140,000

Expected Value = $560,000 vs. $775,000 going the P&G route.  The difference is $215,000.

So the questions you have to ask yourself as a startup seeker are:

1) Is the $215,000 expected value paycut over five years worth it?

2) How will I feel if after dedicating 14 hour days at below market rate, only to see my company fail?

3) Will my resume be tainted if I work for a failed startup or will it be enhanced?

4) Will I regret not having taking the risk if the startup becomes a huge success?

5) Do I love the culture of the firm, and can I gut it out for a long enough period of time to see the financial reward?

EVERYTHING IS A LEAP OF FAITH

As you can see from my real life example above, everything is a leap of faith.  We can only plan and prepare for so long.  Eventually we will need to take a right turn or left turn and let fate take us.

There are a multitude of scenarios I have not written about.  What if you join a startup in year one over some steady eddy job that could last you comfortably for 10 years, and your startup goes bust the very next year!  It happens all the time here in San Francisco.  You’ve then got to look for a job all over again, and miss out on one year of where you could have been at a better startup.

Just look at the miserable employees at Zynga for example.  Everybody in the Valley knows Zynga is a rough place to work.  Many of those employees stuck around for IPO riches, but couldn’t cash out all at once.  It takes years to be able to fully sell all your stock due to employee retainership systems.  With Zynga’s stock at $2.80, the majority of options for the majority of options are worthless not even one year after IPO!

What if your “steady eddy” job at P&G decides to remove Old Spice from its product line-up?  You think you can transfer divisions, but maybe not!  And that startup you had an opportunity to join was named Airbnb, which ends up going public the following year at triple the value of your options.

The most important thing we can do is assess our situations honestly, enjoy the journey, work hard, and hope for the best.  This is why culture is so important when joining a startup.  If the company is going to fail, at least they want to fail with good people they can get a long with.  And if by chance the company succeeds, then all the sweeter the glory.

Regards,

Sam

How To Make Money Quitting Your Job

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    Everything IS a leap of faith. There are some startups that do not offer insurance or other types of benefits either but the potential is huge for making money. You have to follow your gut and hope it leads in the right direction.

    • says

      I would agree with Jerry, that you have to trust your gut!
      Sometimes it works out, sometimes it doesn’t, but you’ll never know unless you truy.

  2. Max says

    35% + 60% + 10% = 105%. If 35% should be 30%, then it would be $180K instead, making the total $560K, for a revised difference of $215K. The correction just makes the startup an even worse proposition though.

  3. says

    I think the startup person should have negotiated a bit better – that’s a pretty small incentive package for a Head of Sales position at a startup (I mean, the $40,000 unvested / 50% of salary number). I’m not saying it automatically makes the startup more attractive, but in this case the P&G slot is way better.

    That’s besides the awesome work environment you’d have with Old Spice.

  4. says

    The journey itself could certainly be worth the risk if you enjoy it and learn. It doesn’t hurt that you’d have other streams of income to supplement if it does fail. If you were supporting a family without much savings, I certainly would go for the steady job.

  5. greg says

    “Several of you asked me why I’m applying for startup jobs now that I’ve retired” – it’s what I plan to do when I become financially independent in 5-8 years

  6. says

    I’ve always worked for fortune companies. But, for a young person, the value of experience (at start-up) far exceeds monetary value(at a fortune company).

    If you work hard, you can learn the ropes and develop entrepreneurial spirit. How knows? You may end up launching your own start-up after working for a failed venture?

    • says

      For someone right out of school, these well known startups are the most coveted jobs e.g. Quora, Airbnb, etc. Great learning experience indeed, but you won’t get wealthy most likely.

      For many others, and there are many, startups have left them with nothing. A “spinning the wheels” type of feeling. I interact w/ these folks frequently here in SF. You can see it online too.

      Just want to warn people to due their due diligence.

  7. says

    Hey Sam,

    I think you should skip the joining part and just find the right partner or two and start your own company! You’ll get the same experience with all of the upside.

    That said, here’s a good method I’ve found to hedge your bets when checking out start-ups. Look for one that has some funding from a VC or angel with other companies in their portfolio. Really impress them with your work and network as much as possible and help out other start-ups in the family at every turn. If you become the go-to guy, you will become indispensable within the portfolio. If your start-up goes bust, they will often try to find you another spot in the family. Or if you network correctly, you can move in between companies to different positions almost as easily as moving up the ladder….really opens up the career path.

    I actually did this and worked for basically 3 different companies within a 2 year time period, all in the same portfolio and with most of the same players—without ever really quitting my job.

  8. Mike Hunt says

    I worked at a start up in the Bay Area as a Director at age 27. My salary was good- $140K+ but no bonuses. I had a boatload of options (83K) priced at pre-IPO pricing at $0.15 per share. I got greedy and exercised them paying $12K of my hard earned money. The reason for this- to pay long term capital gains instead of short term…

    Well the company went bust 10 months after I joined. They had a ton VC money but it was all the total sum that was to be disbursed in staged funding that got pulled soon after the fraud issues with Worldcom (as the start up was in the telecom space). That, and 9/11 made things take a major turn for the worse and I was then consulting for a few months until I found my next gig, which led me out to Asia!

    The sad thing was when I joined the start up I was making about $95k a year at a previous company and this company matched my offer that the start up gave me. Of course I turned them down as diplomatically as I could but after the start up failed I got the sense that they didn’t want me back!

    Anyway I moved on and did just fine after 10 years down a totally different road.

    You can only tell your story in hindsight- looking into the future is like trying to peer through the thick fog… no certainties, lots of possibilities and the best guess at probable outcomes. But if you knew the future perfectly I’d wager that life would not be worth living!

    -Mike

    • says

      Great perspective Mike! $140K at a startup is solid! Was it a later stage startup? I don’t see those salaries now for 27 year olds, as that comes close to finance/law jobs.

      At least you can say you tried the startup dream and have no regrets!

  9. Ray Fong says

    Zynga has been granting RSUs vs options for the last couple of years, so those RSUs are still worth something. Even with the drop in price I’ll be making money both off the sale of stock at $3 and by writing off my capital losses.

    • says

      Ray, thanks for your perspective. I take it you work at Zynga. I really hope you do make some money. My point of this article is to highlight risk and reward.

      The question is, how much is the Zynga return vs. doing something else.

      • Ray Fong says

        I don’t think there is much upside working elsewhere. I’m still vesting, and combining income from my RSUs with my salary I’ll still make more than working elsewhere. There’s no guarantee stock options would be worth anything going to another start up.

        • says

          What about places like Quora, Airbnb (the example in this article), and other startups?

          Just read a couple VPs left Zynga today. Pincus said he’s granting y’all new options at this level? If so, could be good!

  10. says

    I have worked for/with several startups, including some at the principal level (before salary, incorporation, funding or “stock options”).

    In a lot of ways it is just like looking for a job. Go to where you’ll learn the most first, go for $$$ second. If making $$$ is the priority, then mathematically speaking startups don’t pay off. But if looking for the experience, the learning, and the having more power to influence things, startups USUALLY (not always) have the advantage.

    It’s really about cultural fit.. which cannot be forced (and that is frustrating at times).

    • says

      The experience…. the average age of startups I’m looking at is around 26-28… for people in that demographic, I think the startup culture will be a BLAST. For those older or much older, it feels weird. You feel kinda like a baby sitter.

      • says

        My prime years in the startup field were between ages 26-31. A few had REAL potential, but in end nothing materialized (wealth-wise).

        I will say, however, that compared with those days, every job I have held since has been a walk in the park. Almost boring.

        • says

          You are probably right on everything else being boring after the startup life. So back to the thesis of this post… would you have been better off financially if you worked at a non startup job?

        • says

          Yes. I had a management fast-track career at a large company, which I gave up because I wanted to play music (and I could DO both, but I couldn’t EXCEL at both). I gave up a pretty good salary, and what could have become quite rapid career advancement.

          Joining startups just happened by accident. I didn’t make it big time as a musician, but I did tour the USA and had dozens of stories/experiences I wouldn’t have gotten elsewhere….

  11. says

    I never experienced working in a startup, but my husband did. It never crossed my mind, or maybe because I was never given the opportunity. Should I say I was glad? My husband worked for a startup company for five years. Though the company increased its asset more than thrice, they were never given any salary increase and other fringe benefits that were promised to them when they were still starting up. Sad but true!

  12. says

    It’s very hard to put together a long-term case study for something like this. It would have to follow 20 individuals, 10 at startups, 10 in corporations. And just track their net worth over 10 years or something. Call it the 10-10-10 project! (patent pending….j/k ;) ).

    But I think, like others have stated, a startup is about the thrill of creating somehting new and exciting, and striking it rich when you become the next facebook. The corporate route is about work/life balance, comfort and security. There are two very different personality types at these businesses, and I don’t know if many of them would crossover well…

  13. Melissa Claire says

    First time poster, long time reader – but I work in a telecom start-up and am 27, and wanted to comment that the experience far outweighs the salary implications. With less people around there are more opportunities to be noticed and gain further responsibility. I worked for two Fortune 500 companies prior to the start-up and never gained the insight I have now. I feel like the one thing that still holds me back is my young age and lack of experience. I am just so eager to do more! Type A personality right here :)

    • says

      I agree with you on experience. At 27, I think you are in the sweat spot for startup land.

      Come back a few years from now and I’d love to hear more about how your experience went. Good luck!

  14. Live Simply says

    I laughed when I read this. I work on Old Spice and my manager is the P&G Brand Manager of Old Spice you refer to. He makes more than your estimate, but that’s besides the point. You hit on an important topic of misconception about start-ups, as I am much more familiar friends failing than hitting it big. I think it’s important to have that big name organization (such as P&G) on the resume before you try out the start-up route. That way, if you fail, you still have the big name company on the resume when you look for the next position. Also, the training at the top companies make their employees very attractive to head hunters, which can’t always be said for the entrepreneurial type. When all is said and done, it is really a matter of personality and I encourage everyone to explore both large and small organizations to see where you fit.
    The focus is to find something you enjoy, and then find how to make money at it. Not the other way around.

  15. Peter J says

    I think it depends on the startup, the location, what you do, what the leadership is like, what employee # you are, and if you like what they actually do as a company. If you join a startup just for the potential to ‘hit the lottery’, you are probably in for a rude awakening. Startups are no different than most businesses from any domain. Most fail. The only difference in startup land is some take on huge investors who expect even huger returns.

    So a company might be forced to sell to the highest bidder within a few years because of the VCs. When ABC Startup is bought by P&G, founders and executives might luck out, VCs might luck out, but normally the employees usually get the shaft. It’s nice to dream of IPOs, big stock options, but this isn’t the dot com era where everybody was going public. When companies like zynga and Facebook have struggled on the market, that doesn’t bode well for other companies to actually go public or VCs to wait around till the IPO. What happens is companies get forced to sell as soon as some P&G is interested.

    As far as the comparison, do a simple checklist, but at the end of the day, it is your gut feeling. Some people will never start a business. They will never sky dive. They will never go feed the sharks. It’s not in them. Nothing wrong with that. People should really know who they are because a person who is afraid of taking risks, probably shouldn’t be joining a 5-15 person startup company who just started a year ago and hasn’t even released a product yet. And a person who loves wearing many hats, loves working on small teams and doesn’t like tons of structure, probably would hate to work for a 20K person Fortune 500 company with 100 managers over them doing the same thing day in and day out for years.

    I think you need a mindset that isn’t counting on bonuses or stock options. It’s great if it happens, but if it doesn’t, you don’t feel shafted or wasted. If you can afford to take a little less money but love the environment, the founders, co-workers, and the product/service, that it is worth it. A lot of people fall in love with what a startup is trying to do. They drink the kool aid. They become defensive. You don’t get that often with Fortune 500 companies. Some people might enjoy their job, but it’s not the norm to hear somebody say they love P&G and brag about P&G.

    The truth is, If you’re just looking for the ‘lottery ticket’, you’d be better off joining wall street. Or a hedge fund. You’re more likely to make it rich working in those environments and with those bonuses compared to joining a startup. Joining a startup should be more about enjoying the culture. Enjoying the challenge, that adversity, the unknown. It should also be about liking what they do. It’s one thing to work for a P&G and hate the company, but know it’s a paycheck, its benefits, it’s vacation time, it’s moving up the corporate ladder, and it’s being home with family friends. It’s another to work for a 10 person company and hate the founder and the company. You don’t wish either of those scenarios, but it is far harder to live that life in a startup than it is in the big bad corporate world.

    • says

      Thanks Peter. What is your working experience so I can get a better idea?

      You got that right regarding working in finance. The pay is much greater than the average. The tough part is getting your foot in the door, especially if you don’t have connections or a great resume.

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