So you’re thinking about joining a startup…

15649828248_39f0e56247_oThere are many reasons to join a startup. Camaraderie. Working with a close knit team on a big challenge. Joy (for many) of ups and downs. Being close to the center of the action. Getting to work on things that you wouldn’t be able to work on for years at a big company. Working with a great CEO.

But money shouldn’t be one of them.

Yes, you will get equity. But if you’re junior, it won’t be a lot. Yes, you could be at the next WhatsApp, that sells for $19 billion. But the odds of that are exceedingly slim.

I’m often asked whether someone should join a startup or a big company.

If your primary concern is maximizing financial outcome, statistically, the best choice is to join a big company.

Evaluating compensation at a big company is fairly easy. You’ll typically get at a salary, a bonus and possibly some RSUs. These are company shares that you get over time.

It’s harder at a startup. You’ll get a salary and equity. (Possibly a bonus.) Equity typically comes in the form of options. This gives you the right to purchase a certain number of shares at a certain point, once it is vested. The typical vesting schedule is over four years. At one year, 1/4 of your shares will have vested. After that, shares vest proportionately monthly.

I’ll explain a rudimentary method of calculating the value of your equity. The short version is that you should expect your equity to be worth zero.

For the simple math, you’ll need to know the percent of the company you will have if you are fully vested. The company will tell you the number of shares of the initial grant. They should also tell you the number of outstanding shares. (If a startup won’t tell you the number of outstanding shares, that’s a strong signal you shouldn’t work for them.)

Let’s say you have a grant of 10,000 shares and the company has 10,000,000 shares outstanding. That gives you 0.1% of the company.

Now you can model potential outcomes. You can plug in your own numbers to see what it would be like for you.

If the company sells for $10 million, that 0.1% would be worth be worth $10,000. At $100 million, $100,000. At $1 billion (extremely unlikely), $1 million.

“That sounds pretty good.”

Not so fast. That represents a most likely best-case scenario. It assumes that your shares don’t get diluted down. If the startup needs to raise more funding, then your stake would shrink. It could become 0.05% or less. It also assumes that you stay there the full four years. If you leave within the first year, you get nothing.

There are also a lot of other potential complications, if your company (like most) struggles. Future investors may want protection on their investment. They might be guaranteed a certain return on their investment; that happens before any employee sees anything.

And we’re not done yet. Let’s assume that when you joined the company, you were deciding between $125,000 at the startup and $200,000 at the big company. That means that in addition to working longer hours, you are investing $75,000 a year to work at your startup. (The foregone salary.)

So to get your 10,000 shares, you’ve essentially paid $300,000. That’s a lot of money to invest in one company. Would you invest that much in any other company?

“I’m the best developer on the planet. The company has the best management team ever. They’ve got the best VCs. I’ll make it big.”

There are still many factors outside of your control that could break your company. A competitor may come out with a better product. Consumers may not want your product. A regulator could shut you down. The overall macro environment could go to hell and no one will want to buy anything. I can think of many well pedigreed companies that got a lot of buzz that are struggling.

“So you’re saying I shouldn’t join a startup?”

I’m not saying that at all. I’ve done startups and big companies. The startups are a lot more fun. I got to build products, meet potential partners and go on sales call. Moving the needle on a small company is a lot easier than moving the needle on a $100 billion company. It gives you a great sense of accomplishment, even if you don’t ultimately succeed.

“But I want money and my foot in startups.”

It used to be you couldn’t. But with AngelList, you can. You can take the difference in salary and invest it in a portfolio of startups. (To do this, you have to be an accredited investor. I won’t get into details here, but if you’re making $200,000 a year, you probably are.) You can take the difference in salary (or a portion of that) and invest it across a portfolio of companies. Invest $10,000 in each of 5 companies.

The odds of 1 of those 5 companies making it big are greater than the odds of 1 of 1 company making it big. This is what VCs do, they invest their money (really, other people’s money) across a number of companies. They fully expect most of their investments to fail, but to make it big on one or two.

“What should I do?”

That’s a very personal decision. I can’t answer that for you. But I hope that this post will give you a framework to make an informed decision. If you have questions, hit me up at @rakeshlobster and I’ll try to help.


About Rakesh Agrawal

Rakesh Agrawal is Senior Director of product at Amazon (Audible). Previously, he launched local and mobile products for Microsoft and AOL. He tweets at @rakeshlobster.
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