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:
- 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.
- 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.
- 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.
- 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
cs/2012/04/considering_a_start-up_think_a.html">HBR: Considering a Start-Up? Think Again
Mod Note (Andy): #TBT Throwback Thursday - this was originally posted on 1/203/14. To see all of our top content from the past, click here.
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.
this is why I like bootstrapped start-ups and why I haven't taken $. Get a good team in place and delay taking VC money for as long as possible (if you need it at all) so that you can hold onto as much of the equity as possible.
The guys over at Warby Parker did this, and I can assure you they have WAY more than 10% because they had every VC tripping over themselves to fund the deal.
Early traction and revenue = higher valuation and more equity in your pocket. There are still a TON of interesting startups outside of .coms that shoudl not be forgotten....com's just get a lot of the attention because of the crazy success stories. Given how scalable the web is, it's the type of businesses that can be run with a small team and scale to massive size.
That doesnt mean someone shouldnt make a better chain of laundrymats that serves beer on tap...
Best way to navigate the tech startup world is to begin your career optimizing your credentials, build your knowledge and network in the high growth sectors within the startup world, and come in at a more senior level with a better comp package. A more direct way to gain credentials is to go work at a hot post Series B tech company -- it already has a ton of traction and momentum, but still cast as the young upstart in the media, so you get the glory without as much risk. Doesn't really make much sense, but neither does credentialism.
Most startups suck. There is a tiny handful of startups every year that are actually worth your time. Figure those out and use your shiny pedigree to make your way in. If it doesn't work out and you really hate the uncertainty, head to business school and reset. If you catch the bug and can't see yourself doing much else, congrats -- you've finally found an actual career and not just another stepping stone.
There is a ton of luck involved in executing on a great startup. There's substantially less luck involved in boostrapping something on the side where you own all or most of the company. Just depends on what you want in life and what concessions you're willing to make to have that.