Does everyone know that being an employee at a startup is a worse bet?

2882617308_805650bf75_mI believe that working for a startup as an employee is a worse financial bet than working for a big company.

This is a response to an article I posted a week ago about The Cult of Silicon Valley. The comment thread blew up on Hacker News. The most popular comment was from terravion. His first line:

By now everyone knows that expected payoff of working at a start-up is the same or lower than a big company, but with much higher variability. Everyone knows this.

The problem is, I’m not sure everyone knows. Actually I’m sure they don’t because the meme in the media is the exact opposite, and authority figures reinforce that meme.

Terravion is right that the variance is much higher in Startups, but I think most people fail at calculating the Expected Value. It’s impossible.

Nobody knows how many businesses are started in any given year. You could look at the number of business licenses registered, but in the internet era, many people don’t register anything. There are a lot of half implemented ideas floating around out there, and very few of them turn into anything, let alone something profitable.

Calculating the odds that any given idea will work is difficult, and I’m positive the odds of success are lower than we think because of the survivorship bias in the media.

On the other hand, I think most software developers consciously know the odds of success are low. Most of us took statistics, and most of us understand survivorship bias. Even so, seeing the same successful stories all the time, and never witnessing the failures has a profound effect. Over time you’ll start to believe that your chances for success are larger than they actually are.

So far we’ve only talked about success at the company level. Success at the employee level is even tougher to calculate. Salaries are never public knowledge, and neither are equity grants. The best we can do is to go back in time after an IPO and see how many employees did well, but even then, you’ll have a huge bias towards the people who made large amounts of money.

Traditionally, employees that get rich are early employees of the “unicorns.” In the last decade, those were Google, Facebook, Twitter, etc. 

The nature of the unicorn is to be rare, as only a few of them come around every 10 years, so the odds are low that your startup is a magical creature. It then follows that your equity is not likely to make you rich.

In general, most employees don’t receive enough equity to be worth anything.

Now, when I say “anything” what do I mean? Personally, “anything” would be 1 million+ dollars for me. Many people have a different definition of “anything.” If a couple hundred thousand dollars is life changing for you, or even 50 thousand dollars, then please ignore me. But keep in mind you typically have to take reduced pay in order to get that payout at the end of 5+ years, and even then you’re not guaranteed to get anything. In fact, odds are you’ll get nothing.

So yes the variance is higher, but the expected value is still lower than just being an employee at a big company. Once again, these are back of the envelope calculations because the data is basically non-existent.

Now, like any rule, there are plenty of exceptions. There are plenty of situations where I would still happily be an employee at a startup:

  • I get an offer from a very well capitalized pre-IPO company that is growing like gangbusters and has already invaded many markets. Typically these companies are going to pay close to market rates for engineers. Look at GlassDoor for Uber, for example.
  • I’m just starting my career and I need experience – I actually did this as an intern back in college. I worked one summer at a startup. I wasn’t expecting to make any money anyway, and the experience was invaluable because I got to wear so many hats.

I’m sure there are many more, and you probably have many more for yourself. But like any rule, the exceptions prove the rule.

The conventional wisdom of “you’re always better off working for a startup” is wrong when you look at the finances.

If you take the experience of working for a startup into account, then the two are closer, but we’re talking about money here.

Photo Credit: Roger Blake