Can You Strike it Rich in a Startup?

Posted Wednesday, November 30th, 2011 at 9:21 pm

Startups are known for being places where people work really hard, often at unsustainable paces. “Work hard, play hard,” is the oft-invoked slogan, and there are usually foosball tables, game consoles, and other signifiers of fun lying around the office. (How often they get used is another story; the reality can easily be more like “work hard, then crash” or “work, eat, sleep”.) But there’s a logic behind it:

The idea is that you work really hard for a few years, but then there’s a big payout when your company goes public. In those few years, you can make enough money to live in comfort for quite a while. Or so the story goes. Does it actually happen that way?

Let’s try a quick experiment: Think of all the people you know, or have known, who have worked at startups. If you’re like me, working as a web developer in the Bay Area, this means “think of all your past and present co-workers”, and maybe a fair number of your friends who have worked for startups… just not the same ones as you.

Okay, total that up. Got a general ballpark number, at least? Great.

Now, how many of those people have actually gotten the kind of “big payout” that lets them live in comfort? Even for just a few years?

When I run these numbers for my own circumstances and acquaintances, I come up with roughly two hundred friends and ex-co-workers who’ve “done the startup thing”. None of them have “struck it rich” to the point of being able to take even 5 years off from work. One friend made enough money to buy a house, but wasn’t able to keep up the payments, and wound up back on the rental market again after a few years; he never took more than maybe one year off from working.

“What about jwz?”, I hear you ask. Well, I go dancing at his night club every so often, and I saw him give a talk at BALUG once back in the late ’90s. Other than that, I’ve never so much as shaken his hand; he doesn’t actually qualify as even an acquaintance, much less a friend.

That says to me that “striking it rich” as an employee in a startup is a less than 1-in-200 chance. And that’s over the past 15 years, which includes the first Dot-Com Boom. IPOs haven’t exactly been quite so common in the past few years. Even when they do occur, as with Groupon, they’re not the spectacular events that we saw with Netscape and Yahoo! back in the day.

And even if your company does have an IPO, it may not get you much. Consider the experiences of this commenter on TechCrunch, who pointed out that “[E]quity received after dilution is hardly the big exit most people read about. After two exits, the pay out was about equal to 1 bonus check received from big company.” A reply agreed that he’d “been wiped out (ie, diluted basically to bupkiss) three times in 10 years.”

I’m not saying “Don’t work for a startup.” I’m just saying that you shouldn’t count on “The Big Payout” as part of the upside, because it’s probably mythical. Sure, the chances are better than those of winning the lottery — but you give up a lot more to work at a startup than you do to play the lottery.

Addendum: Just as I was getting this article into final shape for publication, I ran across this post by none other than the aforementioned jwz, posted two days ago, making a very complementary point. The whole thing is worth reading in its entirety, but if you take only one thing from it, this is the “money paragraph”:

I did make a bunch of money by winning the Netscape Startup Lottery, it’s true. So did most of the early engineers. But the people who made 100x as much as the engineers did? I can tell you for a fact that none of them slept under their desk. If you look at a list of financially successful people from the software industry, I’ll bet you get a very different view of what kind of sleep habits and office hours are successful than the one presented here.

But really, read the whole thing. It’ll take you less than five minutes. Many of the comments are worth reading, too, particularly the one by Jet and the second reply to it, by Brandon.

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