MBA? Go to Wall Street NOT a Start Up!

Now that the title hopefully grabbed some attention...

There is a growing trend in the business school crowd where many people are taking higher risk start up positions with the hopes of making it big off of the equity portion of the compensation package.

The problem?

People don’t seem to be running the numbers.

Here lets outline why one should go ahead and turn to a front office Wall Street job instead of a Start up.

1) Job Security: Sure Wall Street is volatile and it is a cut throat business, however… What is worse? Adding no value to the company you are working for.

Yes we can go back and forth over what an MBA can add to a Start Up in terms of value, but at the end of the day the real driver to growth is engineering talent (see primary value add in the business model). If you’re in a sales position you may be more stable, but then again a sales role on Wall Street would likely have the same or similar meritocracy.

The final push that solidifies the job security issue is simple, what is more likely to go belly up? Morgan Stanley or a Start Up? The answer of course is the Start Up. You’re also first out the door because you add the least value by number crunching and sitting in on strategy meetings.

2) Debt: Here is the bigger issue, you’ve invested a lot of money in yourself. If you’re an MBA candidate who is flush with cash, feel free to skip this, but if you have debt you’ve got to think about your personal finances. If you take the job with the $90K base salary and $50K in stock options from the Start Up... all of your leverage is entirely on the Equity side of the compensation package.

Look on the other side of the table, you can clear ~$200K in gross income over a full year. This is 2.22x your cash compensation in a Start Up… Last we checked debtors don’t take start up equity as payments.

3) Stock Diversification: Run the risk profile. If you’re still not sold after bullets one and two lets look at it assuming that you will survive in both positions for a full two years. That would be roughly $420K for a solid investment banker and $180K + $100K in higher risk stock for the Start Up job.

Here’s the catch, how much equity can you buy if you simply lived a minimalist lifestyle? If you can simply live off of $90K as an investment banker (yes this is harder than you think in major cities like NYC) then you can essentially save the rest of your cash.

$420 - $180 = $240K… Lets tax this at 35% and you’re left with $156K

This is a huge change. Why? You can now take a $50K position in three different start ups. If you turned down a job at Start up XYZ you can simply obtain trading approval to purchase shares on a secondary market (such as sharespost.com) and buy that $100K+ position if you truly believe in the story. In addition, to really push this diversification move you can take an Investment Banking/Wall Street job in a field unrelated to the start up you wanted to work for. You have even more diversification at this point.

4) Less Competition: With more and more people attempting to obtain the homerun position at a Start up there has been a meaningful decline in candidate quality (note our sample is small so feel to debate this) but overall, Wall Street experience at the Associate level is a bit harder to find (also impacted by the 2009 recession – adding three years means not too many A to A promotes are around). Yes it is still extremely competitive.

But.

With more people trying to join the next hot company that means your resume is going to get a little bit more traction. Maybe your resume will stand out enough to jump from a middle market type candidate to a lower end bulge bracket type candidate. (don't mean to derail this into a bank competition but you get the point!)

5) Relationships: This is a largely overlooked piece of working on Wall Street. Be it on the buy-side or the sell-side, you’re going to meet more people as you age in the industry. You attend more meetings, conferences, events etc. where you can build out a much thicker Rolodex. The chances of being taken to important meetings as a fresh MBA at a start up is much smaller compared to your chances of being quickly thrown into drafting sessions for an IPO.

Hint: you can meet other Wall Street employees and build a soft relationship at these meetings upon hello.

To make this clear, if you obtain a slot on the buy-side the same principles apply. You will still interact with sell side clients and you will have more relationships (Rolodex) over time. The interactions are likely to begin within a few short months of starting your career.

6) More Career Control: Hate to say this but if you’re good at politics in your office, you’re going to have more control of your future. Look at a large bank with many managing directors and directors. Anyone who has actual real life experience on Wall Street knows that if you don’t have political skills in the office, it does not matter if you are a high performer. If the right people don’t like you, you’ll never get any traction in the future. A tough business indeed.

The positive flip side?

In a larger Wall Street setting you will have more opportunities to correctly position yourself under the *right* group. Again this means you’re competent at telling who matters in your group. With this set up, if things go bad you’re likely not losing your job and if the group continues to outperform you’re first in line for the head nod. At a Start Up? Not so much since the size is small and you’ll be tied much more heavily to the firm as a whole.

7) More Personal Financial Control: This was alluded to in point 2 and 3. If you have a higher cash flow (personal) you can swiftly make adjustments to your personal finances. With ~$90K per year it is tough to live an amazing life in any big city, this is why there is a saying on Wall Street

“Spend your salary on strippers and drugs if you like, but save your bonus”

If you go into your Wall Street position and *act as if* you can only live on a start up salary for a few short years, you’ll likely amass six figures. While you’re not Mark Zuckerberg you have multiple options including 1) a solid 401K program with a company match, 2) healthcare choices and 3) IRA choices off your first half year. All of these small personal finance adjustments add up if you can look at the long-term time horizon.

8) Big City Life: This is a personal one. Unless the Start Up is going to be in a major city it is tough to imagine a regular fun life in a major city. Sure, if you follow this minimalist plan for a couple years you won’t be driving around in an M3 but at least you will have a lot of interactions with people on your weekends. You can take advantage of easy transportation (no need for a car) and you can stick to the bar scene instead of spending all your money at LeBain, Marquee, Catch, PHD and the other high end venues in NYC (think of it as inspiration for the future).

9) Easier Sell: We did a longer post on how to work with headhunters in the recruiting for a hedge fund post, but that is something that should be emphasized here. If you work in a finance position at a Start Up (operations or otherwise) you’re much more likely to gain traction with head hunters...if... you have a solid Wall Street resume. Say what you will about the cookie cutter ‘top gpa, top school, top GMAT, Bulge Bracket” resume, but it will make sure you get interviews if you can simply survive for a couple of years.

There is no logical reason to burn the headhunter bridge.

10) Timing: Finally, the last reason that you should choose Wall Street?

Timing. Timing. Timing.

If you piece together this entire article you can see that you can 1) have more free cash/capital in your hands 2) have more access to jobs and 3) have a slightly larger network. This means you can now time your exit as you please. Instead of worrying about debt payments, look at how much you have increased your ability to jump into a new opportunity. Companies will always pop up over the next 5 years (unless you think the world is ending) so you can simply pack your bags, close your outlook and jump on the option when your risk profile allows it.

*******

Now the fun part.

You personally get offered a position at a Start Up you believe will grow at a rapid rate... You also got a nice offer from a bulge bracket investment bank... The battle lines are drawn.

When would you take the risk?

Overall, this analysis says the following... if the equity portion isn't worth more than ~$80-100K... you should run for the Wall Street gig.