Thinking about joining a startup to get rich? You're not alone. After so many successful IPOs and media stories about employees and founders getting filthy rich, there is a growing desire to join startups. But joining a startup is like counting on a lottery ticket to get rich. The vast majority of startups fail or never have spectacular exits.
There's been a great shift away from traditional careers like big law, medicine, management consulting, and banking towards joining startups. With promises of riches and the greater ability to make an impact, who wouldn't want to join a startup?
Unfortunately, I believe most people who join startups end up poorer than richer. Given most startups fail, this is an indomitable truth. Only the lucky ones get all the media attention and praise.
Think about it. If venture capitalists lose money on nine investments out of ten, the same ratio can be applied to startup employees. Chances are high that if you join a startup, it will likely go nowhere or fail as well. Even the best VCs like Sequoia only win about 1 out of 7 times.
In addition, startup equity won't be liquid for at least five years, but more like 10 years. Meanwhile, all your friends who joined established companies will be earning higher wages and living a less frenetic life.
The Importance Of Equity Ownership To Get Rich
Ever since college graduation in 1999, I've had equity ownership in every single company I've worked for. When you get equity, no matter how small it is, you tend to pick up the litter in the hallway, champion your company outside of work, and work harder than the actual value of your total compensation. In short, having equity makes you care more!
Pride of ownership is important for maximizing employee production. There's just one problem: sharing.
If you're a founder, you've got to have the generosity and foresight to let your employees share in your company's equity. Giving up equity is one of the hardest things a founder can do because we are all naturally greedy. We want everything for ourselves despite the need for great people to make our company a raging success.
Sometimes, we'd rather fail and hold onto everything than give up equity in order to succeed. Irrational.
As an owner of an online business and as a consultant/advisor for startups, I straddle both sides of the fence. I've found it impossible to get truly passionate about something without any equity.
Working with no equity feels off. It makes me want to do only 101% of what is expected, not 130%. I wonder if this is how much of the workforce feels where they don't have any stake in the organization they are working for? Please let me know.
If you want to join a startup, this post offers up some candid advice. I've lived in San Francisco, the startup capital of the world, since 2001. I've seen the good and bad.
This post is a 3,500 word beast that will make you see the world a little differently by the end.
Facts About Joining A Startup
Before you join a startup, you need to understand some harsh realities. Join with eyes wide open!
I've lived in San Francisco, the startup capital of the world, since 2001. I've met thousands of startup employees who never ended up getting rich, despite joining some of the most famous startups. Of course, there are some startup employees who hit the jackpot and the media gives these winning companies massive press. But don't be fooled.
Strategically, I think it's much better to invest in fund that invests in startups while you earn the most amount of money at a higher-paying, stable job. This way, you get the best of both worlds.
I'd check out Fundrise Venture, which invests in private growth companies in the AI, Proptech, Fintech, and SAAS space. It's an open-ended fund with only a $10 investment minimum. In addition, you get to see what the fund is invested in before investing, unlike traditional venture capital companies.
Here are some facts about joining a startup.
1) Joining a startup probably won't make you rich.
Most startups fail. Startups pay lower salaries than non-startup firms because there's an equity component. But given most startups fail, your equity won't be nearly worth as much as you think.
If you accept lower pay and don't have enough equity, or any equity, you are losing. The only way you can earn “market wages” is by aggressively asking for enough equity that pays out. But in order to understand the value of your equity, you've got to ask a lot of questions.
- The total shares outstanding
- What your strike price is
- The monthly burn and the amount of cash on the balance sheet
- Any VC liquidity preferences.
- What happens to your shares in multiple sale scenarios.
Ask Management What Your Options And RSUs Are Worth
Be aware of tax implications. Employees are too afraid to ask senior management the tough questions because they don't want to seem like pests. This is unfortunate because employees have a right to know.
I've noticed that most employees have no idea what their options are really worth because they have no idea how to value companies. Valuing a company is what finance people like me do, and we still get valuations wrong all the time. If you're joining an e-commerce startup as a designer, you probably have no clue about comparable company valuations!
Instead of joining a startup, consider investing in private funds that invest in startups instead. It's less risky to invest in a portfolio and potentially more profitable as you sit back and let the general partners do the heavy lifting.
So Few Will IPO For Big Bucks
Unless you join a startup like Uber, AirBnB, or Pinterest, where you know the company has massive funding, joining a startup is tough for long-term survival.
If there is a liquidity event like an IPO, you're probably going to be stuck for years with no windfall. Even then, look at how poorly Uber has performed post IPO. Further, Airbnb took at 60% valuation hit in 2020 due to the coronavirus pandemic. Even though Airbnb is now worth $100 billion, supposedly the 30th employee there only walked away with about $30 million before tax.
Let's look at some more nitty gritty compensation details by a company called Buffer App, a social media startup here in San Francisco that allows you to schedule Tweets, Facebook posts, and so forth.
I'm not sure how they are generating enough revenue to be profitable since there are so many free alternatives like HootSuite, but they are. They have a complete transparency model into how much they pay their employees.
Buffer's Open Salaries For All To See
Let's pick out Andy (#3), a senior SF Engineer who makes $124,000 a year and joined when the company was only 3-6 people. $124,000 is literally a 50% discount to what he can make elsewhere if he's truly a senior SF engineer. Let's say Andy ends up working at Buffer for five more years. He will have given up 5 X $124,000 = $620,000 in gross wages to work at Buffer.
I'm looking down the entire 24 person roster. Every single salary looks 50% light, except for the founders (CEO and COO). They are paying themselves a very healthy amount given the amount of equity they have.
2) Being one of the first employees is extremely risky.
Let's say there are two co-founders who each own 35% after raising a couple angel rounds with family, friends, and investors. They are looking to hire employees to make their product and generate revenue.
If you look online, you'll find that the most amount of equity being offered to early employees is around 2%. Meanwhile, the salaries are WAY below market e.g. $50,000 vs. $90,000, $75,000 vs. $150,000, $150,000 vs. $300,000 etc.
As a first employee, you are almost taking an equal amount of risk as the founders, yet you only get compensated 1/15th – 1/30th the amount of equity! To put it another way, every $1 you generate at the early stage helps the founders get $15 – $30 richer.
It's not like the company has been around for decades with tons of brand recognition, cash on hand, and profits. There's probably a 90%+ chance the company will turn into a zombie or go under within five years.
Joining A Later Stage Startup Is Better
Given these statistics, it's much better to join a company after their Series A or Series B round. You don't have to go through the high probability of failure, your base salary is going to be higher, and the company has probably established a scalable business model to potentially allow you to cash in on your equity.
If you were one of the first few employees and got closer to 5% equity, that level would be much more aligned with the risk you are taking. Alas, you're getting 1% equity or less. PATHETIC!
In 2024, I did some consulting for a seed-stage fintech startup. They raised $5 million at a whopping $35 million valuation! Poor employees. Most seed-stage fintech startups that haven't launched a product yet raise at a $10-15 million valuation. As a result, the founders are getting their employees for cheap and the employees are getting way overvalued equity.
What Happened To Some Of The Most Hyped Startups
If you want to join a startup, here are some historical startup valuations and what happened next. You'll see their median incomes on the left. The valuations in parentheses are from 2015.
Notice how the median income levels are not that much for how much these employees have to risk and work. Bay Area Rapid Transit janitors and elevator technicians make much more!
1. Cloudera: $142,240 median income (Valuation: $4.1 billion) – Valuation at $2.3 billion as of May 2020, acquired by Clayton, Dubilier & Rice and KKR for $5.3 billion on June 1, 2021.
2. Jawbone: $130,000 ($3.0 billion) – Went bust in 2017!
3. Medallia: $121,920 ($1.25 billion) – A success! Valuation at $2.9 billion as of 2020, and acquired by Thomo Bravo for $6.4 billion in July 2021.
4. Pinterest: $118,420 ($11.2 billion) – Raised new money in 2017 at a $12B valuation. Now public in 2020 and valued at about 16.7B as of June 2023.
5. Dropbox: $116,840 ($10.35 billion) – Went public in 2019. Currently at a $8.7 billion valuation as of June 2023.
6. Airbnb: $116,840 ($60 billion) – Was supposed to go public in 2020, but missed the window. They raised money in 2017 at a $40 billion valuation, and in 2020, they raised money from Silver Lake at a reported $18 billion valuation while having to pay 10% a year in interest. Airbnb has been a MASSIVE success.
If you were to ask me in 2015 which company would do the best, I would have chosen Airbnb and willingly invested 90%+ of my net worth in the company. Nobody could have foreseen the impact of the coronavirus on the economy. On May 5, 2020, they announced they would be laying off 25% of its workforce. But in 2023, Airbnb has rebounded.
7. Kabam: $116,840 ($1.02 billion) – Sold to Netmarble in 2017 for $800 million.
8. AppDynamics: $114,218 ($1.0 billion) – Cisco bought them in 2017 for $3.7 billion. A success!
9. Credit Karma: $111,760 ($3.5 billion) – Got sold before the coronavirus pandemic to Intuit for $7 billion. Best sale ever.
10. Okta: $110,000 ($1.2 billion) – Success at $11.7 billion in 2023.
11. MongoDB: $109,728 ($1.35 billion) – Success at $16.6 billion in 2023
12. Palantir Technologies:$105,000 ($50+ billion) – Down to $15.7 billion in 2023
13. Twilio: $105,000 ($1.03 billion) – Valued at $22 billion as of May 2020 and even more in 2021, but is now worth $9.65 billion in 2023.
14. AppNexus: $104,550 ($1.19 billion) – acquired by AT&T for an undisclosed amount
15. Uber: $101,600 ($51 billion) – Went public in 2019 at around a $65 billion valuation, went down to as low as a $20 billion valuation in 2020 and now is worth roughly $75 billion as of May 5, 2023. Originally, bankers had floated the idea that Uber would be worth $100 billion in 2018. Uber now has about a $95 billion valuation in 2021 and has recovered.
16. Eventbrite: $101,600 ($1.06 billion in 2018, $1.9 billion in 2021, $731 million market cap in 2023!)
17. Zuora: $96,736 ($1.12 billion) – $1.5 billion in 2023
18. Gilt Groupe: $95,000 ($1.15 billion) – Sold to Hudson's Bay Company for $250 million in 2016
19. DocuSign: $85,000 ($3 billion in 2018, $38 billion in 2021, but back down to $11 billion in 2023)
20. MediaMath: $80,264 ($1.07 billion) – Got recapitalized in April 2022 with a new $150 million investment, meaning its valuation is likely much lower.
Below are the average tech salaries around the country as of 2022. It's worth listening to my podcast episode on working at Facebook.
Buffer's Transparent Option Package
Now let's look at Buffer company's transparent option package, which is part of every company's compensation.
The co-founders own the lion's share of the company (65.7%), as expected. The rest of the employees combined owned ~10% – 20% (unassigned options). The remaining 15-25% of the company is owned by investors. Engineers like Andy (1% equity) and Sunil (2%) are building the company and helping make their founders 20X richer with each minute that goes by, yet they are paid 50% below market salaries.
Founder's exit:
Let's say Buffer sells for $100 million (a valuation 85% higher than their latest fund-raise in Oct, 2014) in 2020. After the fund-raising dilution, the founders still own about 55% of the company and will have windfalls of roughly $35 million for the CEO and $20 million for the COO gross. Not bad!
That's about $19.25 million and $11 million respectively after paying a 45% effective tax rate. If they can somehow pay a lower effective tax rate of 20%, then the windfall is closer to $26 million and $16 million, respectively.
Top employee's exit:
Engineer Sunil, with 2% equity, gets to cash in on $2 million gross (2% X $100M) in 2020. After paying a 40% effective total tax rate (remember, California is 13% at the top), he's left with $1.2 million. Meanwhile, as a C-level executive, Sunil is making at least $100,000 less a year than he could have made elsewhere with his $163,000 salary. That's $900,000+ in lost wages from 2010 to 2020.
His $2 million gross windfall is more like $1.1 million gross ($2M – $900K in lost wages). After taxes, that $1.1 million is really only around $660,000, using a 40% effective tax rate. Even if you use a 30% effective tax rate, that's $770,000.
$660,000 – $770,000 for Sunil vs. $11 – $26 million for the founders is a massive difference! Engineer Sunil is not living large if he stays in the SF Bay Area because the median home price here is $1.2 million. Chances are high that the cost of everything will be even higher by 2020 when he cashes out as well.
What is the windfall for other employees junior to Sunil if Buffer sells for $100 million? Their range is $179,0000 – $1 million gross, and only around $80,000 – $400,000 net after taxes and salary adjustments! We often hear about the mega billion dollar+ sales from the media, but a $100 million sale is a huge success if you compare the median $40 – $60 million exit by Y Combinator graduate companies, one of the best seed accelerator programs in the country.
In defense of the co-founders, if they never took a risk to start their company, the employees wouldn't even have the opportunity to work at their company for any amount of equity!
Buffer Company Update 2H2017 – 2021
Leo, the Co-Founder and Sunil, the CTO left. Their salaries were pretty good, but after 6 years and 4.5 years, respectively, it seems like their hearts were no longer into Buffer. Growth has slowed, and the equity may never amount to anything because who will buy Buffer? They are cash flow positive, which is great for surviving and earning. That's more than many other companies can say!
I asked Leo, Sunil, and Joel whether they bought their equity stakes and they didn't respond. So much for “radical transparency.” Figuring out what to do with the equity stake when departing is a big deal.
After a bear market in tech and private tech companies in 2022, leaving was probably a good idea. I hope they sold as much company stock as possible each year they were there. It's always good to diversify.
3) Understand equity dilution as a startup employee.
Most startups are loss-making by circumstance or by purpose (aggressive spend for growth). As a result, they must raise funds in order to survive. Each round of funding dilutes existing shareholders. You need to ask management whether your own shares are getting diluted as well with each fundraise, or whether you are getting “top-upped” from management's pool, or an equity pool.
Have a look at this terrific equity dilution infographic. You'll see that big exits might mean smaller payouts for investors, founders, and employees. Do NOT be seduced by huge exit sales. It's highly likely you won't get much of a windfall as an employee as I just explained in point #2. As a founder, you could be easily come away with nothing as well.
4) Can you actually afford to buy your options?
Now that you've digested the equity dilution infograph, let's talk about whether you can actually benefit from your equity because remember, you're getting underpaid!
Let's say you join Financial Samurai and I give you $200,000 in options vesting over four years. Your pay is $100,000 a year and you work with me for three years as a software engineer before you decide to desert me for another startup. You've got $150,000 in option available to you (3/4 X $200,000).
Guess what? You've actually got to pony up $150,000 within 90 days once you leave if you want to keep your options! Otherwise, you are SOL, much like if you spend 30 years of your life paying FICA tax and then die before you're able to collect Social Security starting at age 62. Earning $100,000 a year is a nice salary, but how many $100,000 a year income earners have $150,000 liquid sitting around? Not many!
Not only do you have to come up with $150,000 in cash, you might have this massive tax bill based on the difference of the current value of the shares vs. your $150,000 value.
Finally, even if you purchase your options, there is no guarantee the value of your options will ever be worth anything! What's the solution? To stick around for as long as possible so you can save money and not face a 90 day deadline to buy your options. The reality is, stock options often don't pay out.
If you see companies that are going IPO at a sub $1 billion market cap, and have been around for 10+ years, chances are high the main reason is to cash out early investors and founders instead of raise money.
One piece of good news is that leading startup, Pinterest is giving ex-employees seven years to buy their options instead of the standard 60-90 days. Perhaps their announcement will result in similar changes at other startups.
5) Founders have asymmetric benefits.
Zynga is one of the post IPO tech/gaming disappointments today. They IPOed in December, 2011 at $10, shot up to a high of around $14.50 within a couple months and now sits dead in the water at $2.50. In other words, practically every single employee who joined a couple years before IPO hasn't been able to gain a significant windfall from their equity. After an IPO, there's always at least a 6 month lockup period before being able to sell, by which time it was too late.
But guess what? In March, 2012, just four months after IPO, Zynga filed a secondary (selling existing shares, not raising new shares for the company like a primary) to sell 43 million shares worth $591 million at the time ($13.7/share, close to the all-time high).
The sellers included the CEO, CFO, and COO. The CEO personally cashed out on $227 million. Did the rank and file get to sell any shares? Not at all! The common employee got to watch the stock crash from $13.7 all the way down to about $3.50 several months later!
Funny story. I ended up playing pickup pickleball with Marc Pincus, the founder of Zynga in 2023. We won every game we played!
If you want to read an detailed asymmetric risk/reward case study that goes to a founder, check out my Baremetrics case study. The employees got screwed!
More Crazy Founder Examples
A more recent example is the closing of an anonymous social media app named Secret. The two co-founders raised $25 million in the first year, and were able to cash out $3 million EACH without showing any revenue.
One founder even decided to buy a Ferrari with his proceeds to show off his wealth. Obviously, the founder isn't a proponent of stealth wealth and now every single media publication points out his car.
But here's the kicker. After cashing out $6 million for themselves, the founders then announced within a year they were closing down the company! This example is one of the best get rich quick startup scenarios I've ever read. “A bank heist,” as one Google Ventures partner put it.
Are the founders really to blame for cashing out when hungry investors can't get enough? No. The founders were very smart to cash out, especially since they knew their company was going down the shitter. This is the free market at work. Nobody forced the VCs to shower them with money.
Poor employees. The employees who took below market pay and now have equity worth nothing. Of course the employees weren't able to cash out early like the founders. The employees didn't even realize the founders cashed out $6 million worth of stock until they started reading about it in the media!
6) Harder for startup employees to get liquidity now
After the bear market in 2022 and the bank runs of 2023, startup employees now face more stringent lending standards. If you want to join a startup, know that liquidity events are now more important if you want to buy a house.
In the past, regional banks like First Republic Bank and Silicon Valley Bank would more easily give you a mortgage based on your credit score, debt-to-equity ratio, and value of your stock. But now that these two banks have been acquired, it may be harder to get a mortgage as a startup employee.
As a result, more startup employees may have to sell their shares in the private market to gain liquidity.
Everybody Can Get Hurt Joining A Startup
Let me tell you another harrowing story of why it's dangerous to join a startup.
For the past 10 years I've been playing in this VC/PE/startup poker game for some relatively decent stakes (average buy-in is around $500, and ranges between $200 – $2,000).
The host was a pretty outspoken guy. He seemed to have struck gold after his advertising exchange company he started in 2005 pivoted from a regular ad exchange to do Facebook ad retargeting in 2011. This was just when Facebook's mobile usage and advertising platform started to explode. He moved into an office 5X bigger, hired 40 employees, and things were going great.
Before his company's pivot, the founder invited me to invest $50,000 – $100,000 in his company. But I declined because frankly, I had no understanding of his business model. I hadn't even started Financial Samurai yet!
If I had invested, that stake would have been worth perhaps $500,000 – $1,000,000 by early 2014! At the high point, the founder was probably worth $10 – $20 million.
Then The Startup Failed
I was kicking myself for not investing every time I saw him on Bloomberg TV. Then one day, I woke up one day to read his company was taken under. The acquirer's founder was some guy named G who faced domestic abuse charges. The acquisition amount? Definitely less than the millions he raised.
Word has it that common shareholders got nothing. Zach and his founder might have walked away with $1 million each after 10 years of paying themselves below market rate salaries. The founders lost control of the board and were forced to sell so the VCs could exercise their liquidation preference and salvage some money back. The founders and employees got nothing.
Startup Landmines Everywhere
Still want to enter the startup arena? Maybe it's best to gain some experience first and save a good chunk of change before making the leap.
If all you've ever known is working for startups, then you're probably wondering what all the fuss is about since you're getting raises and promotions along the way. Ignore my post because it's better you not know how much better you can do if you fly to another planet.
Here's an amazing letter by Mattermark founders who sold themselves for only $500,000 in cash and stock to FullContact on 12/20/2017. They start with “great news” and then say your common equity is worthless.
“Dear Mattermark Common Shareholders,
I’m reaching out to share some great news: Mattermark is being acquired by FullContact! We are happy to have found an exit for our shareholders, and are working hard to close this deal immediately. Your help is kindly requested to keep an eye out for docs in Doscusign so we can get your signature today.
This is a private stock transaction, and unfortunately the consideration for the purchase of the company did not clear the preference of Preferred shareholders so Common stockholders will not be receiving anything in this deal (cash or stock). Though this is not the outcome we all dreamed of when we embarked on this journey nearly 6 years ago, we are super grateful to have worked with you to organize the world’s business information and would appreciate your signature so we can get the majority of common holder signatures needed to close this deal today.”
And here's a quote I found from Tara Hunt on Quora:
startups are hard.
startups are really hard.
startups are really fucking hard.
startups are heartbreaking.
startups are soul-crushing.
startups are life-shortening.
you can do EVERYTHING right and still die broke.q. so why are we doing this again?
a. fuck if I know!
I know why we join promising startups or start companies of our own Tara. We do it because we love to dream and think we can solve problems. We think we can take on the world! Until the numbers are called, there's always hope that our lottery ticket might be worth something.
Invest In Startups Instead Of Work At Startups
Over the past few years, one of the biggest mistakes lots of people have made is joining a startup or leaving a big tech company for a startup. While big tech companies like Facebook, Google, and continue to dominate their respective industries and pay huge salaries, startups are getting cash crunched.
I'd rather be a private fund limited partner (venture capital, venture debt) than work at a startup. This way, you gain exposure without having to take as much risk.
Consider diversifying by investing in startups through an open-ended venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out the Fundrise Venture product, which invests in the following five sectors:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 65% of Fundrise Venture is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum.
Recommendation Starting Your Own Startup
Instead of being a startup employee, why don't you just start your own website and be your own boss? Own your brand online and earn extra income on the side that might one day morph into full-time income. Why should LinkedIn, FB, and Twitter pop up when someone Google's your name?
With your own website you can connect with potentially millions of people online. In turn, you can sell a product or sell some else's product as an affiliate. In addition, you can make passive income and find a lot of new consulting and FT work opportunities.
Financial Samurai started as a personal journal to make sense of the financial crisis in 2009. By early 2012, it started making a livable income stream so I decided to negotiate a severance package. Years later, FS now makes more than I did as an Executive Director at a major bulge bracket firm. Further, I'm having way more fun!
Learn how to start your own website today with my step-by-step tutorial guide. You never know where the journey will take you!
More Recommendations
If you want to get a better job, learn how to negotiate a severance with my one-and-only ebook, How To Engineer Your Layoff. Negotiating a severance was my #1 catalyst to break free from my investment banking job because it provided 5+ years of living expenses. Use the code “saveten” to save $10.
For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.
Startups in tech are one thing but the crypto industry that has turned out to be mostly a scam unregulated casino market ran by an offshore criminal mafia is far worse… get paid in worthless tokens… get hacked due to flawed wallets and tech… Feds can’t help… get layed off when the industry gets shut down by regulators and economic reasons … black mark on your resume worse than Lehman Bros. Crypto – never again. Only be involved in a legitimate industry
Great read!
I like your recommendation on starting your own business/idea on the side instead of risking joining a startup.
I feel though that for your side business to work that it requires your full time dedication, else it ends up being turned into a hobby.
Do you know if there is a way to contractually secure X amount of years of employment with a startup?
For example, I can try a join a series A but what I ask in return is at least 2 years of guaranteed income. Thanks.
How can we consult you to discuss an offer?
Sure, feel free to shoot me an e-mail on what this mysterious offer is. Thanks
Very helpful, thank you.
Can you buy only part of your options package and not the entire thing when the time comes?
Oops the previous comment was posted too quickly
What is the probability of success once the company is at serie D, E, F? What do engineers (for instance) typically make? And what was their grant? I hear a lot about people making a ton because they joined pre-IPO. Should we target those?
Great article, thanks
There is something I don’t get though. It seems to say that startups don’t pay off. But Let’s say I join a startup and the virtual value of my shares is 100k. I feel that round after round, even with dilution, value goes up (e.g the value multiplies by 4 for a 50% dilution, so your own shares still do x2 every round). Is that right?
Are there stats on probability of success
Ah good old Credit Karma. They offered me a job in Dec 2015. Base pay was $180K with a 15% bonus. It included a nice signing bonus and 10,000 RSUs.
I ended up going a different direction mostly because required relocation to SF but I wonder what could have been. I’m not sure what those 10K RSUs would have been worth as I didn’t get to that point in the process before turning down the offer.
Hi Sam,
What’s a good apples-to-apples comparison on salary + bonus + RSUs at Big Tech vs. salary and “magical” equity at a Series B startup? Trying to ascertain a good counter offer such that the startup salary is “risk-adjusted”
Did you come up with a good answer?
A startup company wants me on board as a core software engineer, at a very early stage (Seed funding stage) – there are currently 8 people in the company (Three co-founders included).
They offer me slightly less than market salary,
and 0.1% equity – Considering the high risk, and the amount of work I have to put in the products. this seems too low, doesn’t it??
Although, the technological challenges and the amount of new tech I will learn appeals to me, but I don’t want to be a slave.
What do you think I should do?
0.1% equity? Honestly, that’s an insult.
Every dollar you help make for their company makes them 1,000X richer.
That’s ironic – i found this thread because that’s exactly what i was offered by a seed stage company. 125k base + potential 75k commissions + 0.1% (Account Executive). About 18 people employed.
Also looking at the markets right now…
Hi FS!
It sounds like the people who have it best here are the VC’s… Sure you can lose money, but lot’s of VC’s have enough where they I assume they spread their wealth and end up hitting it big with the likes of Facebook, Uber, Lyft, Tesla, etc.
Even better, are the VC’s who end up investing in a company LAST so that way their equity isn’t diluted AND they have a better understanding of whether the company will make it or not (and if the startup is a bust, they don’t have to wait years to see this…).
But in order to make more money, they must already have at least millions to invest :) It would be an interesting story to see how many VC’s made their money in the first place…
Other than the founders (who might not make a lot either), it seems that a VC is in the best place to capitalize on startups!
So true! This is why all my friends and I are leaving roles startups to be consultants to startups. The economics of being in a startup don’t make sense. At least as a consultant, you have the freedom and flexibility, and you usually get paid a lot more cash (and sometimes a mix of equity). Really interesting on the Mattermark note. I always wondered where they ended up as that sale to FullContact as it never quite made sense to me.
Great article!
I had pieced this all together after I did two starts-ups in the late 1990s early 2000s during the early part of my career.
I wish I had this article back then and didn’t have to spend 7 years figuring it out, but it’s so nice that FS sharing with the community.
Wish I’d seen this way back when in 199 when I took a VP job at a startup. It was just like this and we also crashed and burned and I lost everything. Oh well, long time ago.
After working for multiple fortune 500 companies as a senior software engineer, I’ve been thinking about a better way to ‘make it rich’ and have been interviewing with startups. As you pointed out the salary is significantly less but at least I get a % of the company! After running a series of numbers with possible exit values and what my equity would be, it didn’t sound so good! After a couple quick google searches I came across this post and it really opened up my eyes to working in the startup land. As you pointed out, starting your own platform/website/blog seems to be the most reasonable way to go. All sweat equity, own 100%, and put in as little or as much money as you want without having to worry about raising money, answering to investors/cofounders, and be 100% in control of your destiny. Thanks for sharing this post, ill be sure to sign up for your newsletter ! – Dan
[…] responded, “Are you sure? The starting pay for MBA grads is huge (~$300,000+ all-in) compared to what many startups pay. Will you really be able to resist the […]
So happy I found your blog!
I joined a startup about a month ago and equity was part of my compensation package.
Do you have any advice about understanding early exercise options, filing 83b and anything good reading material that will teach me more besides googling on the internet?
Thank you!
Early exercise and 83b election changes the tax situation significantly – the gain will be long-term, not short. This doesn’t affect CA taxes but it makes a difference on federal.
Early exercise makes sense when the price is very low, say $0.001/share. It’s not taxable if done before significant price appreciation, such as on grant.
I’m late on updating this so not sure if you’ll see it – but 83(b) is a scam just as stock options are. 83(b) is only available to very early employees. At this point you geniunely have no idea how the company will do (most startups fail esp at this stage) so you’re going to be paying to buy the stock that may very well be worth nothing (I learned this the hard way and lost $20,000 plus interest opportunities on that cash on early exercising stock – never again.) Maybe if your founders are serial startupers who have had multiple successful exits you can consider an 83(b) otherwise avoid avoid avoid!
[…] returns, cash burn, the inability to raise money at higher valuations, and LearnVest’s employees getting blind-sided. They were bought by a cash-rich giant who already invested in previous rounds and is relatively […]
Great article Sam
Let’s assume all you said is true of 95% of start-ups out there. How about here in Africa? Would it be better to replace the equity that will likely be liquidated with say education? As in, if the start up offers paying for one’s education and personal development, would it not be better to take that instead knowing in future you’d leave with some value?
Youth in need of advice.
I’ve been in the tech field for almost 30 years now….joined before the start-up/VC money was even flowing, but have been through and seen a lot of my co-workers join the fray. This is a great post for sure…one of the best I have seen on the financial side of the start-up world.
One other absolute musts for taking one of these jobs (or quite frankly, any E-VP/President/C-level job in the corporate world) is make sure your spouse/significant other is aligned with impact these jobs have on your lifestyle. I think the divorce rate for my buddies who made a decent payout is about 80%….. They did not have pre-nups…so on their first “windfall” they lost 50% in their separation agreement. Now, divorce happens to all income levels….but the rates are MUCH higher when you need to work 60-80 hours a week and you have a family (often a young family) with a spouse not aligned to that lifestyle and stress….
I had a great career coach say once to me…before I took the really big job….make sure you wife is part of the decision…and KNOWS that SHE NEEDS to play her role as well…. go into the deal with BOTH eyes open…..
Really good advice on getting your spouse on board. The hours needed for success are long, so I still wonder why people complain about their progress when they are only working 40 hours a week or less.
How do you feel you’ve done financially after 30 years? Is there anything you would have done differently?
I made the call not to go for the E-VP job…much to my bosses chagrin (I had already turned down a number of start-up gigs.) I was progressing in my job, had good pay, good stock options, good living location, an overall pretty good gig…. but, I was already working 60-70 hrs/wk, had 3 kids (one special needs….which is added family stress) and a 4th on the way, and a wife who gave me constant grief for not ever being home….or being present when I was home. She let me know that this was not what she bargained for when we said I do…..I was on conference calls in Europe at 6:00 AM, Asia at 10:00 PM, and the US all in between. For me…I could not make it sustainable. I applaud those who can…I never cracked the code when it came to balancing family and the large P&L responsibility
Even after 10 years….I really do not have significant regrets (once in a while, I get the what if thought…but it goes away soon) I knew I would have larger regrets losing my family (divorce or simply being a completely absent father) because I chose business success first. I have got to see my kids grow up (play sports, help with homework, etc) over the past 8 years. Got one in college now…..couple more progressing well. I missed most of that my first 15-16 years.
There are consequences…..we need to watch expenses much more closely. Can’t afford the beach house that my wife still wants…..When I was on the fast track, I was looser with the credit card…. Financially, I really can’t complain…. and I found a couple positions where I still have a “comparative advantage” in my company and the industry, which affords a decent wage (but not F You wage). If I had read a post like yours on stock options when I was 30, I could have retired by now! I lost a ton of paper wealth in the 2000 tech collapse! Oh well…..
Keep up the great work, Sam.
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Great post. I’ve been through the rodeo a few times and have learned a lot, and even though I know a great deal about stock options I still don’t know enough to make smart choices when it comes to my compensation and negotiation at startups! This post is a good overview on many of the realities of startup options. A few topics you didn’t mention:
1) Investor liquidation preferences — if the company sells for a little bit over what was raised, the investors get paid back at a different ratio then the employees. So employees may still get nothing, even if the investors get their money back and then some first. I don’t understand how this works exactly, as it seems to depend upon each unique round’s contract – but it’s another case-in-point where employees get screwed in the end.
2) Taxes. You did mention the whole if you have enough $ lying around when it’s time to cash out bit (unlikely as rank-in-file employee) but beyond this, you ALSO have to pay taxes. You have to pay taxes on the difference in what you were granted the stock at vs what it’s worth today, even though you can’t actually sell the stock. So you end up paying MORE on a very risky bet — which is supposed to be part of your compensation but really you’re just gambling. If your company is doing well and has a stable customer base, you may do ok. But clearly odds are against you.
3) Qualified stock options vs non-qualified – there are options for very early employees where as a “bonus” you are allowed to buy them early (i.e. if you have $100k in stock options you can buy these up front, possibly taking a loan from the company to pay for them and paying it back over your employment.) This is theoretically a benefit for early employees because then you get to pay long-term capital gains on your increases, and don’t have to worry about the 90 day rule for any stock you vested w/ additional taxes, because you’ve been buying the stock along the way. But what really happens most of the time is you’re locked into an investment that is going no where – slow. Usually companies prevent you from selling the stock, even at a loss. There are private markets but those are confusing and require expert financial planners to help navigate if you don’t know what you’re doing. Ie, you may hold $50k of stock from a company you no longer work at, which you purchased in order to get better tax rates once it was worth more than that – only the $50k is worth something less than that today (but you can’t know exactly what because you left the company so have no way to know) and you are just waiting for the company to go under so you can take a massive net loss. You don’t have any say in WHEN you will take the net loss — so you just have to wait… and wait… and wait.
4) Down rounds. They happen. They happen often. People come in and think their $1 stock is super cheap after a B or C round. But then the company doesn’t hockey stick grow and the stock is suddenly worth .50 cents a share. You have a bunch of people who have options under water and it hurts the company because they have to either re-up the employees or risk a lot of people leaving. You get people who are very upset as they felt they were lied to (which they weren’t, it’s just the nature of stock options) and the company has to deal with handling all the turnover and angst. It’s a downward spiral that few companies can recover from. And it happens very often. Companies that keep going up in value are the exception not the norm.
5) Stock splits. So you think you have 50 cent shares and wow even if the stock is worth $1 a share you’ll be filthy rich. Think again. Most companies do reverse stock splits before they IPO. So one share could actually be worth 1/4 a share, or 1/16th a share, in the IPO. There are no rules around this. Yes, it’s actually all “worth” the same (stock splits don’t change value) but the mindset of “well if we IPO for at least a dollar” doesn’t end up aligning to reality.
6) More stock. Say you are promised more options later on. If the company happens to be doing well then you may get more stock, but this will be more expensive and have a 4 year vesting period again for the grant. Maybe this is a good thing because the company is doing well and you want to stay… but it’s just more handcuffs to keep you loyal and not looking elsewhere.
Those are six of the main additional points that I think this post is missing. Ultimately I view stock options as the pyrite handcuffs of startups. Yes a few people do strike it rich but it’s a crapshoot/lottery ticket and worse even when a business seems to be doing well there are still so many reasons why your options can end up worth much less than you think they’re worth, or even bankrupt you due to tax issues and lock ups, as we say in the 2001 bubble burst. It’s actually quite scary and the startup employees don’t have the money to invest in a great financial planner to really hammer out the risks, even though companies always advise that you do before you buy the shares.
I’ve given up at the dream of getting somewhat rich by stock options and now negotiate straight up for salary. Seeing one too many CEOs walk away with millions while everyone else was left to hang out on a sinking ship, I’ve learned my lesson. Amen to Tara Hunt’s comment. :)
Good write-up Sam,
I know you are just warning and not taking a position against startups. I say that to say this.
Believing in yourself is the foundation for making a difference in this world. And yet that can be such a lonely and challenging path (re: entrepreneurs & depression). Your support , and that of more and more investors who have gone down this path themselves, is like a rallying war cry for innovation, courage, and daring to defy “business as usual.”
From a historical perspectivethe pioneering spirit of this country vastly predates Silicon Valley. Those who settled the American West were taking a risk. It’s what makes great people great, taking risks.
– Warren
Wow lots of fantastic insights in this post. I think anyone looking for a job in the Bay Area especially should read this post. Startups have this alluring sexy appeal, but there’s a lot more to it and it’s so true that even if you get in early you may not end up making a lot and the risk is very high.
I do find the open salary info at Buffer quite interesting. I’m not sure I would like that at all. If I was the CEO I would at least keep people’s names private. It’d still be possible for internal folks to figure out who is who, but I don’t think the public should be able to know which person’s identity is associated with each salary.
Startups are fascinating to me being on the outside. Not sure how I would feel actually working at one from the inside.
A nice overview. I often have realized this with many of the jobs that I have applied to in the past few months.
Hey Sam, were you talking about Triggit? An old ad agency buddy of mine used to work there. I’ve been at Millennial Media for three years, and previously spent time at other start ups, so this article hits close to home. Good post!
Of course he is.
I just want to know when the tshirts go on sale. Self submissions of pics would be a great organic marketing idea.