So, i've been MIA on here for awhile and I apologize to some of you that have pmed me about corp fin. I started a new job that has turned out to be very demanding and just kind of fizzled out spending so much time on here. But recently i've had a new possibility.
I've been approached by someone with 10+ years experience in my current industry to come with them into a start up capacity. Most of you know i'm a young analyst a only about 3 years out of school. However, the projects i've had in my field lends myself to a very important bit of expertise and a side of the business that I know this person hasn't had. This person would be taking it on themselves to pull in the financing and start up costs as I am no help on that end. I'm currently making about 80k and am on a fast track for a promotion that would net me 100k+ by 26 at my current job. We haven't talked too much about numbers yet but it seems his thought is that I'd take a pretty significant cut in my salary but I would get an equity stake.
So i'm struggling a bit with both whether or not to leave and, if I do, what to ask for. I need to be able to pay my bills. So my question to the WSO community is what should I be asking for? 5% stake, 10%, more? I'll also need at least 50k in salary just to pay bills. Especially since I am in now way putting my money down for the opportunity and am on the fast track to be making over 100k in the next couple years I am a little hesitant.
It's also relevant whether people think I should take the plunge. I trust this person and they have been very succesful in the industry so far, so I would feel pretty comfortable things would work out well, but it's still a disconcerting step to take.
Any feedback is appreciated.
A little more detail on the start up idea, as well as the founders' background would help
I'd prefer not to give much more detail, however, I currently work in a service based industry and it's basically just going out on our own in the same services. And the partner's background is about 10+ years in the industry at the highest levels and I trust them pretty completely.
You have to ask yourself a lot of questions before making a transition like this...
Sounds like this is a brand new idea, so there is no track record? A small budget? Already a HUGE gamble.
Is the other guy going ahead with or without you? Is he depend on you joining him? If so, why?
Who will be in charge, what will be the heirarchy?
Who is funding the company? He has no official funding yet so what are we discussing?
What would your role be?
Does this guy have the right 'personality' to achieve success on his own?
Is the market need there for growth and revenue?
You are young and that is a great time to take a huge risk, you have limited responsibilities right now. But you also have a solid career developing and would risk tossing that away, what is your risk tolerance? If you have monetary needs, this is not the right move for you and you seem to be very focused on the money questions.
I focus on money because, in the end, that's the reason I get out of bed every morning and that's what drives me. So giving up a six figure career in my mid twenties is a hard pill to swallow, especially coming from a working class family. But I'll answer your questions in order.
1) Not a new idea, basically just having his/our own shop. Small potatoes t first but hopefully moving to bigger ones early on.
2) He almost definitely would go without me. But I have experience that he doesn't that will be very useful and lighten his workload.
3) We didn't discuss this but I think the accepted hierarchy would be he has final say. He would be majority owner. The talk so far is me having a small stake like 5-10% because I'm bringing no funding or contacts in the Industry. I'm essentially just someone who would make his life easier while doing this.
4) No official funding yet but we believe we will be able to get more than enough through various avenues to start well. There have been prelim talks about funding and It's promising.
5) We are basically undefined ATM. But we've discussed basically splitting the finance and operations roles down to our strengths. I know what he wants me for and so I figure that would be my role.
6) Yes and has been in everything he's done so far.
7) There isn't a need per say, but definitely an opening to make money.
I just worry I will go out and then get evicted from my apartment, you know? But there is probably 7 figures worth of upside in the best case.
Also, any thoughts on what I should be trying to negotiate in this scenario?
The truth is that he going to do this with or without you and despite what you think you can easily be replaced so I would be careful not to overplay your hand. The space is just too competitive and the applicant pool too large to think that after 3 years you could have a skillset that is that difficult to replace. With that said, the positive is that with your skillset it does sound like you could obtain another job in the same field to the extent that this does not work out. My initial proposal would be as follows:
1) 15% equity in the business (with the expectation that it will get negotiated down to 10%) with some form of anti-dilution protection (which you will likely not get, esp. if he foresees a big raise in the near-term)
2) $70k salary (with the expectation of it getting negotiated down to around $55k) but guaranteed (i.e. you become a creditor to the extent the business goes under) + discretionary bonus (neg. a min amount)
3) do not agree to any non-compete agreement and get confirmation that the partner will assist you in finding employment elsewhere should things go south
4) Guaranteed involvement in all important aspects of the business
If you are truly interested in making money, real money, you need to be willing to forego near-term income for future upside potential. In fact, you should accept as low a salary as possible and fight for as much equity as possible.
If you don't do it and 10 years later he's taking the company public you'll want to commit suicide. If you do it and it doesn't work out, you are realistically not that much worse off. You will have gained a ton of experience far beyond your current office schmuck job.
Trust me. Do it.
Not sure about the not much worse off part. People aren't interested in hiring failed entrepreneurs.
Don't do it. The start-up experience is overrated massively.
It's impossible to give you any guidance here. You've given virtually no detail at all. Are we talking about a boutique investment bank or an iPhone app company? Are we talking green energy or oil speculation? Honestly, it's shooting in the dark without some additional information. For example, if the guy is a managing director at a well known investment bank and wants to start a boutique and he has clients that will follow him then there's a pretty decent chance of success; however, production based businesses (think investment banking, mortgage banking, etc.) have little overall firm value since they are based solely on the principals' production. If this is a principal-based business instead of a product based business then the equity stake is of little value to you.
If we're talking something like green energy, then the guy's technical knowledge and contacts in Washington, D.C. will be critical to success.
Overall, there's just not enough information to give you any guidance. As someone who just spent 2 years at a de facto start-up, I can tell you that people's eyes are often bigger than their stomachs. Over estimating success potential is not uncommon.
I'd say stick it out with your current firm. I've been involved with 5 start-ups now--Bolivian imports/exports, home building, retail banking, institutional level renovation/rehab real estate, and Chinese green energy--on the administrative/financing side that have all failed because the founder/principal grossly over estimated the market demand and overall likelihood of success. After 5 groups of people believing the world and selling me the dream I've realized why something like 90% of businesses fail--people become blinded by their BELIEFS.
And by the way, you WILL be worse off if the start up fails. You'll be given absolutely no credit for work experience by your industry when you try to get back into the "9-5". You are on a career path right now because of your age and experience. Once you get off that path and get into your upper 20s, those career paths start to vanish when you try to get back in. You'll just be a 28-year-old who has been working at a "start-up" [hiring manger rolls eyes] for the last 2 years. To them you're a 28-year-old expecting a $90,000 salary that they can pay a 25-year-old $70,000 and train up while having him get their coffee. You are completely off base if you think you can just waltz back into the career path.
I was HIGHLY successful in my industry before going full time entrepreneur. It was like PULLNG TEETH getting back into my old roles. I was the "golden child" for one of the nation's most elite real estate groups. 30 months later I could barely get an interview. I finally landed a good gig--at a massive pay cut to my old salary. Don't fool yourself.
Damn, someone's bitter. Don't blame you, mate, after the experiences that you've had with startups. But I'd love to hear from someone who made the choice and it paid off. It'd be interesting to see what such a person has to say.
@WallStreetOasis.com, Do we have anyone like that on WSO?
Where do you get "bitter" out of my comment, "mate"? Does the word "bitter" mean something different in Australia than in the United States? I'm warning the guy that the vast, VAST majority of start-ups fail and that it's not easy to just walk back into the industry and to pick up where you dropped off. That's called, umm, good advice not "bitterness".
My two cents in order of importance:
1) I'm in a 2-year old boutique and I would strongly advise you against it unless you have an entrepreneurial streak in you. I'm saying this because you will be putting in as much work as an entrepreneur and would have the same risk-reward situation that they face, even though technically you may be an employee. Sure, you'll get more responsibility than a 24-25 year old guy would normally get, but you're still not gonna get the upside unless the business takes off in a big way.
2) Can you swallow your pride to do menial admin tasks? I'm speaking from a small pool of experience and peer-info, but I believe at a start-up with potentially a very small number of employees, a lot of administrative stuff is going to come your way whether you like it or not. And after experiencing an atmosphere where you just have to focus on your core work (ie, your current gig), taking care of such admin tasks is going to be a huge step down. Don't discount this factor.
3) Are you prepared to stick with this for the long term? There's no point in taking the jump if you get bored in a couple of years and leave. This is gonna be a long haul game and might take as long as a decade to earn the upside that you're talking about. By then you'll be in your 30's and would've spent the best years of your life with relatively mediocre pay. From your above comments, I suppose this would be the most important factor for you but I'm listing it last cause it's also the most obvious.
Hope this helps. Do let us know what you decide.
Life is all about risk.
@junkbondswap These are totally unrealistic.
@AllDay_028 I would highly advise you against joining the start-up. I was in investment banking, and then spent a year doing a start-up. I have never worked harder in my life even though cash just went out the door and never came back. I am now back in IB, which is very lucky. During my interviews, the IBs saw virtually no value in the start-up experience, but saw it instead as a risky distraction. I had to spend most of my interviews trying to bend the start-up story to cover up what they saw as a wasted year. In reality, it was not a wasted year, however, it came at an extraordinary cost.
Damn dude I had read your original blog post about the startup you created... I'm sorry it didn't work out. So what happened?? It seemed pretty promising... I have even seen the rise of similar services in my area as well
Neither you nor I can make an accurate determination regarding what is or is not realistic based on the fact that the OP was a bit vague in the original post. However, what I offered was a credible starting point from which to begin a negotiation with a more senior partner based on imperfect information.
I was fortunate to have made a bit of money as a result of my own negotiated equity participation and subsequent successful portco exits and have personally invested in and been involved in start-ups so I bring at least some credibility in that regard. Given the diverse nature of start-ups it is really difficult to offer anything but very general perspectives and advice. Also, people who work in IB are generally pretty risk averse so it is not surprising that your IB employer looked down upon your experience.
You must be willing to take risks to create anything of real value and subsequently make a lot of money.
You've already been given great advice in the thread. I just want to add one thing which I always tell my friends in these life changing decision moments.
Which option will make you epic? Only one life to live man, no regrets. Be a badass like the WSO Certified user you are.
If the upside is clearly there, which everything you've said so far indicates, why the hell would you not pursue it? (I know the HUGE risk is why you wouldn't, just trying to make a point.) Seriously, everybody in business who is driven primarily by $ always thinks of when their break will come along to use their skill set in a new role where they can determine their destiny. You gotta go for it.
As a thought, you could hedge your risk right now by preparing for admittance to bschool next fall. I would think 1 year ish from now will provide you with enough time to feel out whether the new venture will be a success; if it's not, you'll have a top bschool in your back pocket, have great experience, and you'll learn a shit ton about yourself. Either way your next few years will be incredible.
@DCPDepository, how many startups have you been a part of? (not being condescending here, simply wondering.)
5, and I'll add that I was observing a 6th one closely. A good friend of mine was working on "business sticks" (or something like that) for about 3 years where you electronically share a business card. He was working on the technology. Technology worked perfectly--nobody was interested in the product. I also closely observed another friend's short sale fund that was a "guaranteed" winner. It was a total failure even though they had all of the most experienced people in the business, had an amazing business plan, and had all the contacts and knowledge possible to succeed.
Point is, the overwhelming majority of start-ups are failures or fall far short of expectations. And when your business fails or fails to pay you back after several years it WILL. NOT. BE. EASY. to get back into your old industry. In our early-to-mid 20s we don't realize how much our youth and inexperience is a COMMODITY in high finance. Once you become an experienced and "legitimate" adult those roles that you need to be in to "step up" into the next level are simply few and far between. You're probably not going to get ANY credit for your start-up experience so you're viewed as a guy who has been out of work for 2 or 3 years. I read a study recently that said being unemployed for 9 months is like reducing your work experience by 2 years on your resume. How about being de facto unemployed for 2 or 3 years? Might as well kiss your past career good-bye.
Oh yeah, and think your contacts are going to help you get back in? Your contacts are your competitors by the time you're 28. Don't speak for 24 or 36 months and you'll see how those old feelings of friendship evaporate over time.
Not saying the OP shouldn't pursue his dreams, but he'd better go in KNOWING that if things do fail--and they are likely to fail--then his present career will be severely set back.
Lots of great information and dialogue in here. Thanks for everything guys. Nothing has been decided yet and I have time, so I'll continue feeling it out.
The word is "calculated risk", not "risk". You have to calculate the probability that the start-up will not only be successful but that it will pay you back a substantial risk premium in a reasonable amount of time. Of the 5-7 start-ups I've been involved with, half turned a profit. The risk isn't just risk of failure but opportunity loss.
It seems like your sole focus is money, which i'd venture to say is the root of a great amount of startup failures. The self-made successful entrepreneurs that I've met had a different mindset when starting. Whether an adventurous/entrepreneurial spirit, passion to create change in or innovate a product or industry, or simply the liberty and ability to be captain of their own destiny, with of course the economic reward in the back of their mind.
It's well known that you'll work harder than you ever have, for less money than you've ever earned, with the very real risk of failing in the end - but you have to ask yourself if the potential to succeed despite the odds is worth more than the forgone income and continued worker-bee experience (which as mentioned, most employers would value more than start-up experience).
@DCDepository , it's unfortunate you ended up at so many dead-end start-ups. Did you ever consider venturing off on your own rather than counting on someone else as principal? Have you completely buried the idea of giving it another shot ever again?
I've personally always yearned to create my own enterprise (knowing though that I'd require certain resources and some amount of expertise in the target field), or at the very least work in an entrepreneurial environment, hence joining a boutique real estate investment firm making substantially less than I would have at an established company, yet learning in an unconventional manner which i figured would be of great value if i ever did take the entrepreneurial leap. I'm in a position now where I'm bored, constantly disagree with the principal on strategy/objectives, and know I would not be happy ''working" elsewhere. I've identified several 'product-based' solutions for my industry that i plan to execute on and planned my exit methodically.
If you look at statistics, failure is likely; you simply have to not fear failure nor doubt your decision once you make it.
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