Uncertainty Wednesday: Working for a Startup

I got the idea for today’s Uncertainty Wednesday from seeing quite a few tweets in my timeline to the effect that startups don’t really have meaningful upside for employees. Tracing these tweets back, led me to this post titled “working for a startups makes increasingly less sense” which has the following quote in it

That startup sold for 200 million dollars and, as the 10th engineer, I made … 15000 dollars from that exit.

First, let me do some math here: 0.015 / 200 = 0.000075 which is 0.0075%. So one of two things have to be true. Either this person got a terrible equity package, or the company had a ton of preferred overhang so that very little of the exit value went to the employees (this can and does happen).

The 10th engineer at a startup might have 0.1% (possibly more, I have seen 0,25% or more). Let’s assume a bunch of dilution along the way to 0.05% at exit. That would still be 200 * 0.0005 = 0.1 million. Now 100,000 dollars isn’t a fortune but it is certainly more meaningful than 15,000 dollars. 

Now you can easily see that these numbers of course move around a lot with the size of the grant, the amount of dilution along the way and the value of the exit. We had a very capital efficient company in our portfolio which only ever raised $5 million of primary capital and exited for $1 billion. So here the math for an early engineer would be 0.001 * 1000 = 1, or $1 million and could be as much as $2.5 million or more (if the initial grant was say 0.25%).

With that out of the way, let me still suggest though that the right way to approach early stage startup equity is to assume that it is worthless. You should not take a job at an early stage startup for any reason other than that you are excited about (1) what the company is working on and (2) the people you will be working with and (3) anything else, such as the specific technologies being used, the opportunity to take a lot of responsibility and so on.

I do a lot of recruiting for the companies that we have invested in at USV. And this point comes up a lot. Especially when people have competing offers. Engineers in particular will try to compare the offers based on some estimate of NPV. I always tell them that this fundamentally the wrong way to think about this choice. We spend the bulk of our waking hours with work, and to make this about the financial upside is ignoring the factors that matter most to long term personal satisfaction.

In the most extreme form people have some kind of scoring system where they assign values to different aspects of a startup, including the potential for financial upside, so that they can rank order their choices. This too is futile. I recently was talking to somebody who was considering an opportunity at one of our portfolio companies and at Facebook who had come up with such a system. Whenever I encounter this now, I point people at this wonderful talk by Ruth Chang, who is a philosopher at Rutgers:

I highly recommend Ruth’s perspective on making the decision whether or not to work for a startup. You are the author of your life: what do you want the next chapter to be about.