Employees, think like an investor
This week, I am visiting my family in Texas. I decided to take break from the insanity of buzzwords and ideas with no gravity that is prolific in the Valley.
I discussed my life in the Valley with my family and what it is like to work in a startup. My parents, as most Americans, worked their way up the corporate latter to a title that starts with a “C”. I described the “startup mentality” and they replied:
“The point of working a lot in a startup is there is not enough people to go around. There is too much work to do. You don’t just work hard for no reason.”
When I hear a friend who joined a large startup company and is working crazy hours for below market pay because of a “startup mentality” or “startup culture”, I scratch my head. The phrase “we are a startup” seems to be used as an excuse for underpaying and over-working employees, so does it make sense to be an employee at a startup? According to most prominent investors in tech, the answer is no.
Most company exits are now M&A, which lowers the probability of employees making bank. This is due to the higher costs of going public and the violatity of today’s public markets (see Kayak’s IPO delay). The number of initial public offerings in America has declined from an average of 311 a year in 1980-2000 to 99 a year in 2001-11. This lowers potential returns for employees because M&A is a valuation at a single point in time while publicly tradable shares is valued over a period of time.- via Mark Suster
Shareholder preferences, clawbacks, and expiration notices limit your upside. The truth is employees get paid last in a liquidation event. Investors place a number of mechanisms to insure they get first dibs. Employees are always last to the dinner table. - via Brad Feld
Dilution is depressing. Raising money from investors, angels to VCs, is very expensive. As you raise more and more money to finance a growing business, employee stock options decline in value more and more. - via Fred Wilson.
You own less than 0.5%. Startup executives and VCs prefer to hide the number of shares you “own” as a percentage of total number of shares because it is depressing. Almost every offer I have received highlights irrelevant equity information (strike price, number of shares allotted, size of employee option pool). The only thing that matters is your percentage ownership, everything else is noise. - via Chris Dixon and Mark Suster.
However, there is more to startups than strictly a financial return. Coined by Mark Suster, startup employees should either be earning or learning.
Earning is when your percentage ownership in a company financially matters. Earning does not require co-founder title. First-hires and “late-cofounders” should receive more equity than the typical 0.5% to 1.5% due to the above factors and falling costs associated with starting a company. Unless your startup abides by this logic (most do not), you won’t be earning.
The other route is Learning. Learning is straight-forward: working to improve professionally and taking on a lot of responsibility. In startups, experience and knowledge typically matter less than attitude and drive because a startup is a 24/7 crash course is surviving. Working in a startup accelerates everything in your career. You are typically in the edge of your field and the constant need to survive pushes you to new heights.
The decision to work at a startup follows your answer to this question: are you earning or learning? If it is neither, forget it. Don’t bother with startups that underpay you.
