You Probably Shouldn’t Work at a Startup

Evan Armstrong in Napkin Math arguing the expected-value case against joining a startup for most people — read the same morning as a day of eleven calls.

Notes

• Business model risk is extreme and the financial opportunity cost is significant.
• Typically we assume that a startup is a better overall employment experience, this probably isn’t true for most people
• The basic proposition is this: “we raised a lot of venture capital and plan on becoming an enormous company. Join us, take a haircut on salary, but earn way more in the future in the form of equity.”
• In acknowledgement that I am an active participant in the industry I am going to take a tough stance on today, my goal is to allow you, my readers, a clear-eyed view of the tradeoffs of startup employment.
• While I desperately want this to be the reality, truly obscene wealth is typically only available to the first ~10 employees of a company that exits (via IPO or acquisition) at a valuation of $1B or more—a so-called unicorn company.
• The best data set I could find pegged unicorns at ~1% of venture-backed startups. Of the initial group of 1,119 seed-stage tech startups in the U.S., only twelve made it to unicorn status.
• Almost all venture-backed startups don’t have a successful financial outcome. Why this matters to you as a person evaluating employment with these types of companies, is that they will typically offer you far less cash than other offers with the idea that the equity you have the option to own will be worth millions someday.
• By making you an “owner” early on, you are told that you will become a millionaire. Recommended equity and compensation for a seed-stage company (data from Index Ventures) ranges from .05%-1%. While this may sound appealing, it isn’t as good as it sounds
• The question you have to ask, do I think it is more likely that this startup will be worth a billion dollars (2% chance)? Or is it more likely that Google, Facebook, Amazon, or Apple, will still be around (100% chance)?
• So you will have to forgive me if I laugh when people say their company is “mission-driven.” As someone who was literally a missionary, a startup selling productivity software is a business, not a calling.
• In startup dogma, you are told to “hire missionaries, not mercenaries.” These mythical employees will put it all on the line. They will sacrifice and devote themselves to whatever cause your business is proclaiming as its divine mandate. Hiring these employees is good advice!
• Startups are only pursuing a non-wealth returning cause as long as the majority of shareholders say they are. Employees (aka the missionaries) never own the majority. When you inject capital that demands billion-dollar returns, the divine text shifts from the mission statement to the term sheet.
• There I met a 28-year-old who told me he managed dog food for the company. Startup guy that I am, my initial reaction was an eye roll. Dogfood? How trite. It was only later that I learned that he was managing over $2 billion dollars worth of revenue before he hit the age of 30. That is something no startup can ever provide. Yes, startups give you breadth, but big companies give you scale. Don’t knock it till you try it.