Startups are always selling. Their goal is to grow 2x, 3x, 10x, etc. every year, and to do so they need a talented team. The founders and senior leadership have already drunk the Kool-Aid and believe their idea is the next big thing. If they want you, they will sell their idea to you. Before jumping in and drinking the Kool-Aid yourself, be really clear about your goals and the reality of joining a startup.
The primary advantage of joining a startup is the pace at which you will learn. The amount of opportunity and responsibility you have for critical tasks is unmatched in other companies. Everyone will be happy for you to take on more work and congratulate you for taking risks to accomplish big wins. In Outliers: The Story of Success, Malcolm Gladwell vocalized the rule of thumb that it takes 10,000 hours to become an expert and that those who start putting in their hours early in their career get ahead in their industry. I wholeheartedly believe in this and argue that those who join startups will reap the long-term benefits.
Largely you will get ahead because of how tough the startup environment is. While career opportunities are plentiful, so are the expectations that come along with them. Yes, you will be able to take on projects that are above your skill level, but the company will also expect for you to be successful at them. And, ultimately what is a success, but how you perform against expectations that your board or boss have set. When those expectations change board meeting to board meeting, or when they come with an expectation of a 2X+ growth rate regardless of the situation, you have to do more than simply deliver. You have to deliver in a way that is meaningful to the business with the odds stacked against you with the ever changing expectations it entails. So while opportunities are plentiful to develop hard skills, so are the accompanying challenges.
Most highly intelligent young entrepreneurs who I see thrive in this environment also suffer in this environment for the first few years. They go home anxious. They get upset. They cry. Don’t get me wrong they love it and inflict much of the expectations, pains, and rigor on themselves, but it is still a rough first few years. If you ask them about their experience, they will sell you on the startup, the experience, and everything else. For one they are probably selling it to themselves and ratifying their own lost evenings, but they also need everyone to see them as successful.
Ok, great. So you will learn a bunch and it will be tough. But another reason people consider startups is the hope of making it big in a lucrative industry. What about getting rich?
It’s improbable you will get rich by joining a startup. VCs invest in a portfolio of startups because they are trying to have 1 out of 50 startups hit a return that far outweighs the other 49 investments. The 1 out of 50 that hits it big is also improbable. Though there are a lot of big stories including the Snapchats, Facebooks, and beyond, know that even if you land at one of these unicorns or a mid-tier success that you may not become rich.
As an example, in your offer letter, you will be offered shares. If you are offered 5,000 shares at a Series A company that later sells for $50M you might hope that will make a lot of money, but that might not be true. It’s likely that your 5,000 could net out to less than $15,000 after four years of vesting. How does this happen? Let me explain.
It is super tough to know how much those shares are worth when they are offered to you because the information is kept very close to the chest. Here is some context: At a Series A startup there are definitely more than 10,000,000 shares outstanding. This means your 5,000 shares will be worth ~0.005% of the company. If the company raises $10M on a $20M pre-valuation ($30M post) that means your shares are worth $15,000 today.
However, VCs invest to make money and they will protect their downside. There may be a term as a part of their investment agreement that says that they will get paid 3X before anyone else does. So if your startup does sell to another company for $50M you would think that that means your shares are worth $25,000 (0.005% of $50M), but you are wrong. Investors first will take their 3X cut ($10M multiplied by 3 or $30M). Then, you will own 0.005% of the remainder of $20M or $15,000 (0.005% of $20M). Additionally, if you sell right as they vest, the shares will be subject to income tax, so shave off another 30% and you end up with ~$10,000 after four years.
Don’t get me wrong, every startup I join or create, I will do so with the expectation to make a lot of money. At the same time, we need to go in eyes wide open, understanding that in all probability our shares will be worth what we would have gotten as a bonus at a Fortune 500 company in a lot less time.
So: join a startup out of passion with the knowledge that the startup will mess with your social life, your mind, and your emotions. Know that you will come out having learned more than you could imagine, stronger than ever before, and hopefully with something that millions of people use.
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