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Why You Should Reject that Start-Up Job
 

NorthSider's picture
IB
(King Kong, 1,719
 
Points)
 on 2/23/13 at 6:30pm
tumblr_lair7b9ARF1qc7mh1.png

I've always considered myself entrepreneurial at heart. Even since I've started my work in IB, I have continued to work on developing a few "back pocket" ideas that I'm excited about. Indeed, ever since I can remember, I have wanted to start my own business, not because I hope to be the next Zuckerberg, but because I believe the ability to dictate your own work is more rewarding than any other employment experience out there. It remains my ultimate career goal, and with any luck, I will make it happen some day.

That said, I have to say that the rising fad of "start-ups" in what has been - arguably - a VC bubble (read more) has started to trigger my inner skeptic. Don't get me wrong: I think it's great that we are increasingly encouraging young people to take career risks and try to create value through entrepreneurship. But I couldn't help but be suspicious that there were a fair number of people getting the short end of the "start-up" stick, if for no reason other than the fact that the few friends I had that went to work for early- to mid-stage start-ups left their corporate jobs filled with enthusiasm and are now silently trying to break their way back into what we all know collectively as the machine of corporate America.

Curious to learn more, I sat down with a friend of mine who founded a mildly successful internet venture, backed by a sizable portion of angel investment and a recent round of VC funding. While he, as you might expect, was overall very satisfied with his career decisions and current role, he did confess that his experience was far different from the one he had imagined when he first completed his round of VC funding.

Perhaps most surprisingly, when I asked him about his thoughts on taking a job at a start-up, his knee-jerk response was, "Don't do it." What ensued was surely one of the most interesting discussions I have had in a long while. Particularly, we addressed many of the "myths" of start-up jobs, and, after doing some independent reading, I though I would share some of the insights. Take them at face value, feel free to dissent, but I found it quite staggering to hear from one of the most entrepreneurial people I know. So with that, a few "myths" of start-up jobs:

  • Myth #1: "Don't worry about the pay cut, you're going to get equity in the business. More than anything else, my friends who joined start-up companies were thrilled about the concept of getting an equity stake (albeit a small one) in the business. All they had to do was work hard (at a place where their effort was far more likely to be noticed, due to the smaller workforce) and they would ultimately be paid off in the form of equity ownership in a growing business. Most people joining start-ups are under the impression that their initial equity package is just a teaser of what's to come, but the truth is quite the opposite.

    Start-ups, especially those backed by VC firms, are notoriously stingy with equity. Even those at the top of the organization often have less than 10% stakes in the business, and the chances of them willingly giving out greater shares of equity in a growing business (especially as time goes on) is vanishingly small. Many employees don't see their equity stake meaningfully increased even after years on the job.
    Perhaps more importantly, promotions, raises and bonuses are exceedingly rare at start-ups. Money is tight at small firms, and there is a prevailing belief that if the business is performing well, the appreciation in your small equity stake makes up for a lack of performance pay (though this is rarely a reflection of reality). 2.5 years after joining a start-up, my friend with considerable programming skills was still making the same salary that he was offered when he joined the firm. What's worse, he knew that at any moment, he could be fired without real cause and with no severance pay to speak of.

  • Myth #2: "If the company grows, you'll find yourself in an executive role at an early age." Although the concept of internal promotion seems to go hand-in-hand with the entire concept of a start-up, the reality is that there are shockingly few non-founders who work their way through the ranks at start-up businesses.

    In most cases, successful start-ups are forced to reach out of the organization for new talent as the business grows. This shouldn't come as a surprise to anyone, but recall that start-ups are often cash-strapped and pay salaries at below-market rates. Inevitably, titles become a form of currency at start-ups - a sort of non-cash compensation that is a key bargaining chip during negotiations with new talent ("we know we can't pay you what Goldman can, but here you'll be the VP of Corporate Finance"). In an attempt to make concrete the value of those titles, organizations have to find a way to keep people enough people in junior positions to give weight to the title of "VP". Since you're currently the bird-in-the-hand, founders are often more likely to give you the snub in order to attract new talent by dangling more-senior titles in front of their faces. That leaves you - well - SOL.

  • Myth #3: "You get more responsibility at a start-up, which will translate into better experience." While the former is quite likely to be true, the latter doesn't necessarily follow so naturally. The reality is that in all types of business, there are undesirable tasks to be done, and often times, at early-stage businesses, there is even more mind-numbing work to be spread around. Like anything else, your experience is going to vary wildly based on the group of people around you (and this is even more true at start-up companies). Go with the law of large numbers on this one: as the number of people in an organization increases, the quality of work regresses to the mean.

  • Myth #4: "Our company is absurdly undervalued." This is one of the most common lines you will hear when interviewing at an early-stage start-up. We're all familiar with Mark Zuckerberg and the "Accidental Billionaires", so shouldn't we be on the look out for jobs at the "next big thing"? Surely that will pay dividends?

    For the most part, what holds true in the public markets can be easily translated to the private markets as well. That means that, for the most part, no one is smart enough to beat the market (not even the VCs, it turns out!). The chances of anyone (especially the founders, whose perspectives are understandably biased) being able to accurately determine the proper valuation of a pre-profitability business is next-to-zero. If you're thinking about joining a VC-backed start-up, you've already missed the train, and the chances that an early-stage VC fund left money on the table is tiny, at best.

  • Myth #5: "So being an employee at a start-up might not be so glamorous, it's being a founder that makes it really worth it." As we're all already aware, a tiny fraction of start-up companies ever get to the point where VC funding is a realistic option. But, for a second, let's ignore that fact and pretend that you have a sure-fire VC-backed idea marinating on the rotisserie grill of your mind. You've got it made, right?

    Not quite. Even at firms that are backed by $5mm+ of VC funding, it's not uncommon for C-level executives to barely pull in 6-figures in a year. VC money (unsurprisingly) comes with tons of strings attached, and if you're trying to hold on to your precious equity stake (and let's hope that you are, for the business' sake), they aren't going to let their money be paying you a handsome salary. Not until at least a Series C funding event are the founders really going to be pulling in the kind of money that is commonplace at the higher levels of Wall Street. And not until an acquisition or (more rarely) an IPO are you ever going to see the paydays that make founding a start-up so sexy these days.

So you're still not convinced? You're still going to jump ship to the new trendy start-up shop? Here are the tips that I was able to gather:

  1. Negotiate your desire equity package before you sign on. After you're on the bandwagon, it gets increasingly difficult to grow your share of ownership. If you're taking a career risk, make sure you're compensated for it.
  2. Get the title that you want tomorrow today. Promotion is few and far between at start-ups. And you only want to be working at a company that has a strong desire for your skills. If you're sitting across the table from someone that fits that description, obtaining a better title should be a fairly easy request to fulfill.
  3. Consider that there is still a boss when you join a start-up, and the grass isn't always greener. Although the idea of the start-up culture being liberating and progressive is pervasive, the reality is that you're still taking a job - a job that a cash-strapped company is willing to pay somebody else to do for them. Don't kid yourself, there will be plenty of asinine work involved.
  4. If you can't honestly say to yourself, "If I were making the same amount of money at this company in 3 years with very little business growth, I wouldn't regret my decision to join," then don't take the job. More than anything else, working at a start-up is about believing in the business. And if you believe in the business, you should be happy just to be paid to work somewhere you love.

Hopefully you find these tips as useful as I did. If nothing else, it served as a sanity-check for my long-held ambitions. And that's enough for me.

Further Reading:
The Downside of the Startup Failure Craze
Start-Up Lessons Learned
The 25 Best Start-Up Failure Stories
The Story of Nouncer's Failure
Four Myths about Start-Up Pay
HBR: Considering a Start-Up? Think Again

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Comments

AlphaGeneration's picture

Great insights

IB
(Orangutan, 363
 
Points)
 on 2/21/13 at 3:07am

Great insights

StJamesPark's picture

Great post NS

(Monkey, 64
 
Points)
 on 2/21/13 at 3:42am

Great post NS

ZDR's picture

Thanks for the insight and

 
Points)
 on 2/21/13 at 4:40am

Thanks for the insight and advice!

diverse_kanga's picture

there's nothing wrong with a

 
Points)
 on 2/21/13 at 6:37am

there's nothing wrong with a side-hustle, just make sure you remember the difference between a hobby and a career.

Kenny Powers's picture

Absolutely true: And

O
 
Points)
 on 2/21/13 at 8:25am

Absolutely true:

And something you left which I've noticed when I was at startups was: just because the idea is killer doesn't mean that the guys running the show aren't totally incompetent. I've noticed that leadership at these places is really questionable...

pick em, lick em, stick em

CountryUnderdog's picture

100% agree. I go to a M7,

IB
(Gorilla, 563
 
Points)
 on 2/21/13 at 8:55am

100% agree. I go to a M7, and I can't tell you how many people have the most "fad" ideas out there. Although I admire their determination, some things that they come up with are too simplistic too be successful enough to build a business out of, and frankly if I have someone else tell me about this revolutionary app they are developing I am going to kill myself.

"They are all former investment bankers that were laid off in the economic collapse that Nancy Pelosi caused. They have no marketable skills, but by God they work hard."

prospie's picture

good stuff

(King Kong, 1,679
 
Points)
 on 2/21/13 at 9:28am

good stuff

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brutalglide's picture

After working in VC, much of

VC
 
Points)
 on 2/21/13 at 9:43am

After working in VC, much of what the OP said is very true. Joining a start-up that already has VC backing means you will likely receive less than 1% equity in the company (unless you are joining at a C-level position). Additionally, you'll still be taking on pretty significant risk (remember, 1/10 start-ups succeed), with little/no job security (most VC start-ups will only have enough cash for around 8-12 months of runway).

Another good point the OP makes is that it's almost impossible to accurate determine the valuation of a start-up. To illustrate my point, look at Socialcam: it was doing well, strong growth, great team, great VC backing - once having a faster growth/larger user base than its competitor Viddy (once valued at $370 million) - what happened? Socialcam start losing users extremely quickly due to a change in Facebook's policies and ended up selling for "only" $60 million. Viddy's valuation will likely fall as well in its next round of financing. Even if you own equity in a "hot" start-up, they still have to make it to an exit before your equity is worth anything (and believe me, getting to an exit is not easy and requires a significant amount of time). If you join a start-up that underperforms and is sold off early by its investors, common stock holders will usually receive very little, if anything at all because investors have liquidation preferences and will be paid back first.

Frankly speaking, from my point of view, it's always better to start a company or be one of the first employees hired than it is to join a start-up that already has significant traction and VC backing (and no I don't consider companies like Twitter/Dropbox/Box/etc. start-ups). This way you'll get more equity, for a similar risk profile.

boredviewer's picture

Good points. Not all startups

 
Points)
 on 2/21/13 at 9:33am

Good points. Not all startups are equal. Some will be destined for success but many more will fail. Don't be fooled by the initial social media boom. Speaking from experience, some founders are complete jerks who have serious ego problems and yet lack a real goal/direction in mind. They expect you to give your soul to helping them build their dream whilst giving you laughable compensation for your efforts. Not to mention some hide important information from you which really damages the whole early trust thing.

I think knowing as much as you can about the startup you want to join is extremely important. Make sure you yourself can believe in the company and join it without any lingering doubts. Otherwise you might want to reconsider.

UFOinsider's picture

I like when people leave to

O
(Human, 10,346
 
Points)
 on 2/21/13 at 9:36am

I like when people leave to work at CoolNewDotCom.com, it means less competition for me, especially of my soon to be MBA class all want to walk the plank. Too many people think "Oh, I'll start a business and be free and rich and OMGZ rainbows" when in reality you're a small business owner who works to death and hopes and prays you make a living. Starting it on the side until it's sustainable is a more effective approach in most cases and most successful startup guys did just that.

Other thing is this: dot.com's are trendy right now, but don't overlook other industries! So many people are dazzled by YouTwitterFace that they forget about the other 95% of the economy. The goal is to make money, not have a turtleneck wearing ghost approve of you...

YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...

mdk6c's picture

Which is the bigger form of

(Baboon, 166
 
Points)
 on 2/21/13 at 10:27am

Which is the bigger form of career suicide: joining a startup or doing teach for america? Tough call.

UFOinsider's picture

mdk6c: Which is the bigger

O
(Human, 10,346
 
Points)
 on 2/21/13 at 10:36am
mdk6c:

Which is the bigger form of career suicide: joining a startup or doing teach for america? Tough call.

If it's before MBA / grad school, these things can be a huge plus....

YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...

MogulintheMaking's picture

Depends on your risk

(Baboon, 109
 
Points)
 on 2/21/13 at 10:43am

Depends on your risk tolerance. I will admit that everything you said is true.

The real fact is that both the upside and downside potential of taking a job at a startup when compared to IB are larger. You need to decide on your risk tolerance.

Personally, I don't settle for the mediocre.

rufiolove's picture

Really enjoyed this... have

IB
(Neanderthal, 3,299
 
Points)
 on 2/21/13 at 10:47am

Really enjoyed this... have often wondered what some of the biggest misconceptions about start ups are and this was very informative...

1/2 of the WSO Bash Brothers
"Licensed to Ill It"
We all know Bro J did it...

SECfinance's picture

mdk6c: Which is the bigger

IB
(King Kong, 1,415
 
Points)
 on 2/21/13 at 11:00am
mdk6c:

Which is the bigger form of career suicide: joining a startup or doing teach for america? Tough call.

TFA straight out of undergrad is nowhere near career suicide. B-schools salivate at that type of experience.

Otter.'s picture

Original article that a lot

CD
(Gorilla, 554
 
Points)
 on 2/21/13 at 11:02am

Hi, Eric Stratton, rush chairman, damn glad to meet you.

MissNG's picture

Excellent post.

O
 
Points)
 on 2/21/13 at 11:02am

"Dont compromise yourself; you're all you've got" - Janis Joplin

NorthSider's picture

MogulintheMaking: Depends on

IB
(King Kong, 1,719
 
Points)
 on 2/21/13 at 11:04am
snakeplissken's picture

couldn't agree more. while

CF
(Orangutan, 335
 
Points)
 on 2/21/13 at 11:22am

Remember, once you're inside you're on your own.
Oh, you mean I can't count on you?
No.
Good!

prospie's picture

NorthSider: Actually,

(King Kong, 1,679
 
Points)
 on 2/21/13 at 11:44am

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NorthSider's picture

prospie: Having said that, 10

IB
(King Kong, 1,719
 
Points)
 on 2/21/13 at 11:46am
NorthSider's picture

brutalglide: After working in

IB
(King Kong, 1,719
 
Points)
 on 2/21/13 at 12:46pm
WallStreetOasis.com's picture

this is why I like

EN
(Human, 12,067
 
Points)
 on 2/21/13 at 12:52pm

WSO Conference 2013

Private Certified User Chat

NorthSider's picture

WallStreetOasis.com: this is

IB
(King Kong, 1,719
 
Points)
 on 2/21/13 at 1:07pm
TheKing's picture

WallStreetOasis.com: this is

O
 
Points)
 on 2/21/13 at 1:35pm

Check out my WSO Blog

TheKing's picture

To add - this isn't to say

O
 
Points)
 on 2/21/13 at 1:38pm

Check out my WSO Blog

meabric's picture

SECfinance: mdk6c: Which is

 
Points)
 on 2/21/13 at 1:44pm
NorthSider's picture

TheKing: To add - this isn't

IB
(King Kong, 1,719
 
Points)
 on 2/21/13 at 2:27pm
atomic's picture

If everyone thought this way,

(Baboon, 160
 
Points)
 on 2/21/13 at 3:57pm
SirTradesaLot's picture

Great post.

 
Points)
 on 2/21/13 at 3:53pm

Turbo leverage for capital explosion -- BD Capital

My WSO Blog

meabric's picture

atomic: I know brilliant,

 
Points)
 on 2/21/13 at 4:10pm
freeloader's picture

NorthSider: TheKing: To add

PE
 
Points)
 on 2/21/13 at 4:21pm
panda123's picture

nice reading for the

(Monkey, 41
 
Points)
 on 2/21/13 at 4:22pm
TheKing's picture

freeloader: NorthSider: T

O
 
Points)
 on 2/21/13 at 5:27pm

Check out my WSO Blog

karypto's picture

From personal experience. I

EN
 
Points)
 on 2/21/13 at 10:28pm
oowij's picture

Really great post

 
Points)
 on 2/22/13 at 11:24am
nori90's picture

I think your article is a

(Baboon, 109
 
Points)
 on 2/22/13 at 4:58pm
jericsson09's picture

Agreed. I'm from a startup

(Chimp, 1
 
Points)
 on 2/22/13 at 5:09pm
duffmt6's picture

jericsson09: Agreed. I'm from

IB
(Neanderthal, 2,316
 
Points)
 on 2/22/13 at 5:26pm

"Social cohesion and puritanical morality place roughly on my list of concerns between whether I'll pick up jock itch at the gym this week (not likely, since I don't go the gym) and whether it'll rain in Christchurch, New Zealand next Tuesday."
-Eddie

Chimpy's picture

I'm currently a cofounder at

IB
(Monkey, 49
 
Points)
 on 2/22/13 at 5:59pm
NorthSider's picture

Chimpy: I'm currently a

IB
(King Kong, 1,719
 
Points)
 on 2/22/13 at 8:01pm
Dying's For Fools's picture

Thanks for writing this post.

O
(Gorilla, 529
 
Points)
 on 2/22/13 at 9:46pm

"Well make more fuckin' money. This is America. You don't make money, then you're a fuckin' douchebag." - Mr. French

rabbit's picture

Great read. Thanks for

 
Points)
 on 2/23/13 at 1:57am
eleutheros's picture

Great article!

IB
 
Points)
 on 2/23/13 at 6:56pm
Banker88's picture

The biggest thing that

IB
(King Kong, 1,650
 
Points)
 on 2/23/13 at 7:18pm
budfox55's picture

Interned at a start-up last

 
Points)
 on 2/23/13 at 8:35pm
sillymonkey123's picture

Banker88: The biggest thing

(Monkey, 56
 
Points)
 on 2/23/13 at 10:18pm
EURCHF parity's picture

I SB'ed this because it's

O
 
Points)
 on 2/24/13 at 8:12pm
techguy24's picture

I worked at a bootstrapped

 
Points)
 on 2/25/13 at 3:30am
NorthSider's picture

techguy24: I worked at a

IB
(King Kong, 1,719
 
Points)
 on 2/25/13 at 10:32am

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