Startup Equity worth more than PE Carry?
Some recent discussions brought up an interesting point (sorry whoever first said it or I would've linked) that on a risk-adjusted basis, the NPV of equity compensation for the average startup employee -- lets say YC Combinator backed to exclude all the BS startups and only include promsing places that IB/PE professionals would have selected for -- is either higher or just as high as NPV of carry payouts in the average MM/UMM PE fund, given the maturation of the industry leading to compressed returns, lots of eggs, etc.
Thoughts on this? Maybe we can assume Series B vs 1bn plus fund or something, idk. Am an IB analyst thinking about long-term earnings. Thanks.
Assume 10-12% of YC startups get acquired/exit and average valuation is $50-75mm, although median is 10-25mm. You’re looking at average valuation mark-up of 5x from Series A to exit. Average timing is 4-7 yrs.
PE you can assume similar timeline depending on strategy and depends on fund size. I don’t know the math off hand for this but hopefully someone else can chime in and finish off the assumed calculations and comparison.
Also - keep in mind these will both be calculated on a lagging basis; if you’re of the believe that absurd tech valuations will mellow out and PE will become even more crowded and harder to find deals going forward, obviously discount this.
If you want to be rich, go start an HVAC company. If you want to work for someone else, face the same challenges and risks as everyone else working for someone else albeit harder, and looking at a 70-80% failure rate if you assume most PE professionals can’t make it to the top quartile, you’re really just looking at a difference here of hypothetically a higher net worth compared to your peers earlier on in your career.
PE or any career for that matter on a strictly employee-facing basis is really not all that lucrative or special. You certainly aren’t going to be flying private or buying second and third homes. You’ll be over-levered and even when carry is given you still need to be facing capital calls when deals go south.
Thanks
I know you’re joking but it’s worth still saying because it’s kind of interesting and proves a bigger point that ties in here—
If you start an HVAC business you’re not going to be rich because that everyone who could get away with that has done it already. There is no free lunch to get rich .
I have been tossing these ideas around in my head. I am particularly interested in healthcare. Considering I am indifferent to the work and just looking to maximize earnings, which is the best path in this climate.
1. Healthcare startup
2. LMM PE for a career
3. LMM PE for a few years -> operate a healthcare services business
Respectfully this theory is the epitome of “the grass is always greener”—
You would literally need to be on the founding team of a YC type startup, AND get a massive amount of equity AND the equity would need to appreciate quite massively for this to be worth it ( I have friends who went to startups and got told how much their equity would be worth at different valuations).
From what I’ve seen in the market is that the most solid startups are able to be cheap on equity so you’re not going to get enough of it to make the equation worth it … even compared to ~MM (maybe even LMM) cash.
F
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