The problem here I think is the disparity between being the last cofounder (15-30% equity before dilution typically) and being the first employee (1-2%) vs working for a more established company. If you compare the compensation for being an early employee in such a startup with working for an established company (eg Google, Facebook) then I think you'll find the employee of the latter will be better off in the long term 95% of the time and by a significant margin (disclaimer: I work for Google).
Now some people and some ideas can genuinely attract people to work for peanuts. I remember hearing about Square, then valued at $40m with their first round of funding (IIRC) and thinking "man I'd give anything to work for them" given the idea and the track record (Jack Dorsey basically).
The problem I think is that many startups think they have this kind of cachet just because they worked for Facebook in 2006. Social proof counts for something but it doesn't make you a great entrepreneur. Being a great entrepreneur makes you a great entrepreneur and that means running some kind of company that had some kind of impact (and, ideally, some significant exit).
Startups aren't for financial security. They are for the frontiermen who are hoping to strike it rich in the gold rush. Most don't but some do.
To the OP: you make very valid points and given your circumstances and preferences (and mine FWIW), I agree: working for an established company will give you a far better expected financial outcome at lower risk.
EDIT: I should clarify that there are of course non-financial reasons to work for a small startup. Less bureaucracy, it can be exciting, variety of work, degree of impact and so on.
A lot of people are willing to make those tradeoffs and sacrifice some financial return for the privilege. This isn't unique to the startup world. Games programmers, for example, typically get paid crap (until you get to be the lead developer on a big title and get a % of the revenue, etc).
All of this is simply supply and demand.
That all being said, living without health insurance in the US is incredibly risky. Generally only large employers have the clout to negotiate good plans with providers for reasonable premiums.
The other stuff (extra PTO, conferences especially, etc) are more luxuries than necessities but they do of course contribute to the overall financial outcome.
> Startups aren't for financial security. They are for the frontiermen who are hoping to strike it rich in the gold rush. Most don't but some do.
I think you mean "Founding a startup is for the frontiermen..." Being an employee is not. Being an employee is a losing proposition far more often than the 95% you cited.
It's a losing proposition, financially speaking. But it sure is a lot more fun and satisfying working at a startup than a large corporation.
Although there aren't tangible or financial benefits for working at a startup, there are definitely benefits that a large company simply can't provide, like experience and independence. For someone in their early 20's straight out of college, those benefits can outweigh the financial benefits of a big company.
It's a losing proposition, financially speaking. But it sure is a lot more fun and satisfying working at a startup than a large corporation.
Maybe. However, I think most us know people that love working for Apple, Facebook, Microsoft, Google, et al.
Frankly, I think your independence claim is overstated—financial support is crucial. Shigeru Miyamoto emphasized this perspective in a 2012 New Yorker profile: “There’s a big difference between the money you receive personally from the company and the money you can use in your job.”
There’re many reasons to found a startup, very few to work for one.
There are good startups out there. I'm almost notorious for startup-bashing because so many of them have awful cultures, but there are decent small/new companies out there. You'll probably have to look outside of VC-istan. VC-istan seems to appeal to the Clueless (see: MacLeod hierarchy) young who will jump at the chance to work "at a startup!" without discrimination.
I know someone who's actually looking at building a startup without equity. He will hold 100% of the stock, at least at first. Variable pay will be profit-sharing. He wants this company to last 20+ years without acquisition, so instead of putting the focus on a future cash-out, he wants people to be rewarded continually for good work.
I think that, as a young engineer, you also have to ask yourself why you want to work at a start-up. Is it to get rich? In that case you should be working somewhere that can teach you the ropes on your way to launching your own start-up (and even then you might be better served working somewhere you can get some domain expertise to separate you from all the fresh college grads). Is it to learn a lot and get a lot of responsibility? In that case you might consider small engineering firms that have moved out of the start-up stage and have real revenues coming in and can offer market salaries and full benefits. You won't get meaningful equity at a place like this, but you won't get that at most start-ups either. If you want to get in on the ground level of a growing organization, consider companies that aren't going the usual angel/VC route. I worked at a "out of the founder's basement" start-up that had some cost-plus contracts, and so could offer market salaries and benefits immediately. Again, no real equity in a situation like that, but on the flip side you know you'll still have a job in a year. And don't overlook working at a big faceless corporation just because it's not cool. Big organizations have the resources to actually train you, they have internal tracks for your career progression, they offer pretty good job security, etc.
He hasn't started it yet. He's bootstrapping. He plans on paying market to slightly above, and being generous with annual bonuses (the profit-sharing).
Wall Street gets a bad rap for its bonuses, and there are some cultural problems with it, but it's a better mechanism for compensation than what VC-istan uses. Also, I think that Wall Street culture is less horrible than VC-istan. On Wall Street, some people get butthurt about their bonuses, but you don't have teams of 15 programmers where every single one is trying to become VP/Eng and get a real slice.
I've read a lot of your writing and agree with some of it.
Bootstrapping is attractive, but it's very hard to do. Also, as misguided as employee equity grants might be, it has become the standard for compensation in SV; that a company doesn't offer some token ownership definitely will make it harder to hire.
I think it really boils down to, if you want to take part in "VC-istan" as a founder/employee, move to SF, if not, go somewhere else, because it's just too hard to hire/hold down an office/live in SF on bootstrapping.
The risk also needs to be considered separately, though. For example, which of these is better compensation?
$100,000/year
or
Each year, there is a 0.1% chance that you will be paid $1 billion.
Simple math tells us that the second one has a 10x higher expected financial outcome. But few people would actually consider that to be better compensation. Lower risk is better, to an extent that can outweigh a higher expected financial outcome.
If you get both a better expected outcome and lower risk, that's two benefits, not just one.
I think once you take into account our relatively short biological lifespans (and the subsets of them in which we are healthy and fit to do whatever we like even shorter), the second option just doesn't make any sense for most people. There is value in having $100k now.
I'm not sure if it's safety, or a knowledge that risk assessment also has to take into account the risk that your assessment is wrong. How can anyone make a prediction of any 0.1% chance? The accuracy of the information going into combines in all sorts of horrible ways, and not likely to your advantage. There's no hypothetical in which that chance would make sense, in which it would be calculable and accurate, so instead we intuitively mark it as simply foolishly optimistic belief.
Plus, if you really did have solid odds, you could sell those odds, i.e., have someone invest in you.
I'm sorry, but there is a 0% chance that an employee will be paid $1 billion. An employee is just a hired hand and has zero control and zero information about how money is being distributed. Once that kind of money is on the table, there would certainly be some way for people controlling the company to change that outcome, so an employee will never see that kind of money. And it will be done. Just business. Nothing personal.
Well that's the whole point - the realistic numbers are more like a choice where you (A) receive $100k now; or (B) receive a 1% chance of 5 million; where the (B) option is worse in all aspects, both higher risk and lower expected value.
It's not redundant. It's true that you use risk in calculating an expected financial outcome, but that doesn't mean that a better expected financial outcome has lower risk. You can have a better expected financial outcome at higher risk, in which case it may be a worse option if you have lower risk tolerance, despite the better expected financial outcome!
Now some people and some ideas can genuinely attract people to work for peanuts. I remember hearing about Square, then valued at $40m with their first round of funding (IIRC) and thinking "man I'd give anything to work for them" given the idea and the track record (Jack Dorsey basically).
The problem I think is that many startups think they have this kind of cachet just because they worked for Facebook in 2006. Social proof counts for something but it doesn't make you a great entrepreneur. Being a great entrepreneur makes you a great entrepreneur and that means running some kind of company that had some kind of impact (and, ideally, some significant exit).
Startups aren't for financial security. They are for the frontiermen who are hoping to strike it rich in the gold rush. Most don't but some do.
To the OP: you make very valid points and given your circumstances and preferences (and mine FWIW), I agree: working for an established company will give you a far better expected financial outcome at lower risk.
EDIT: I should clarify that there are of course non-financial reasons to work for a small startup. Less bureaucracy, it can be exciting, variety of work, degree of impact and so on.
A lot of people are willing to make those tradeoffs and sacrifice some financial return for the privilege. This isn't unique to the startup world. Games programmers, for example, typically get paid crap (until you get to be the lead developer on a big title and get a % of the revenue, etc).
All of this is simply supply and demand.
That all being said, living without health insurance in the US is incredibly risky. Generally only large employers have the clout to negotiate good plans with providers for reasonable premiums.
The other stuff (extra PTO, conferences especially, etc) are more luxuries than necessities but they do of course contribute to the overall financial outcome.