I often get asked about the financial benefits of joining a startup. Especially by people who work at large companies such as Microsoft, Facebook or Apple and are debating whether they should take a pay cut.
By far, the most important decision criteria should be your personal excitement in your current job vs. the startup you are considering joining. It may sound corny, but all the money in the world can’t buy the feeling of satisfaction that comes from being part of a broader mission, and trying to change something the world. We spend most of our waking hours at work, so if you are one of the fortunate people who can chose their job- you better spend your time doing something you enjoy!
However, apart from personal excitement, I want to discuss the more ‘material’ considerations people have. I am going to focus on venture backed startups since companies which aren’t properly funded yet are a very different story in terms of risk and reward. In a venture backed startup you will get a decent pay, especially if the startup is already mature. In addition, you will most likely get equity through the employee stock option plan (the earlier the startup the more equity you will typically get).
The most common mistake people make when assessing the financial benefits of joining a startup, is viewing it as a single lottery ticket – they will take a pay cut and risk their job security in order to bet on the startup’s success. They perceive the outcome as somewhat binary: If the startup succeeds they can make a fortune, but if it fails – they will need to find a new job. This couldn’t be further from the truth.
The chances of making a fortune through your options in a startup are slim. Although we often hear about these stories in the press, there are very few startups that make their non-founders, non-executive employees very wealthy. Yes, your equity stake can much more than compensate for the pay cut you took, but it will most likely not be a “life changing” event. However, this is not the way you should think about compensation and risk. You are not betting your career on a single startup (or a ‘dot’) but rather a collection of many future startups (‘dots’), or a line. Successful startups are often fertile grounds for new and great companies that emerge out of them. Perhaps the best example of this phenomenon is the “PayPal mafia”, the early employees and founders of the Paypal who have since founded additional successful startups such as Tesla, LinkedIn, Palantir, SpaceX, YouTube, Yelp, and Yammer.
So when you join a fast growing startup – you will get a chance to see firsthand how success looks like from inside. When a company grows fast, so does your level of responsibility and the kind of problems you are expected to resolve. Therefore, taking part in a successful startup will accelerate your career and prepare you to solve even bigger problems next time around. In addition, fast growing startups tend to attract strong people who want to take part in the action. Some of these people are likely to leverage their experience to launch new interesting companies which you will be in pole position to join (maybe this time as a co-founder). So although your existing equity might not be worth a fortune, you have significantly accelerated your career and improved your potential financial outcome.
A lot of the above is also true in startups which end up not succeeding. Unlike what many people think, the opposite of a startup success is not necessarily failure. Most startups won’t end up achieving their initial goal: Some will get acquired along the way, some will merge with more successful startups, some will get “acqui-hired” for their talent, and a few will go bankrupt. But in all these cases you will still be part of a team that has learned and matured and is likely to start a new venture. So even in the darkest scenarios, your “job security” is not necessarily tied to a single startup success or failure.
That’s why you shouldn’t think about joining a startup as a single risky bet but rather as joining a broader ecosystem. If you pick the right team and space, it will pay off in the long run.