Now's the time to scratch that start-up itch

#business A consistent path to wealth is to join an established company. However, if you have an itch that you want to scratch, now is the time.

File:Boreal pine forest after fire.JPG - Wikimedia Commons

I did my best to notice
When the call came down the line
Up to the platform of surrender
I was brought but I was kind
And sometimes I get nervous
When I see an open door
Close your eyes
Clear your heart...
And cut the cord

The Killers, Human

Not all start-ups have an exit. In 2019, of those that did, the average was $243M dollars. On the surface, this seems like a substantial amount of money, but there are many factors that come into play for the individual working at the start-up or its founders. First, the chances of an exit are rare. In the last 10 years, there have been fewer than 300 IPOs per year. If you’re hoping that the company you work for will get acquired, those chances are less than 1 in 6 even after Series H funding. While the odds of an exit are grim, the picture would be more hopeful if companies failed or exited quickly. While the time it takes to exit depends on the industry, it is still a years-long gamble. Fintech companies tend to exit most quickly with an average of 4 years while hardware companies have taken as long as 16 years to achieve that elusive exit. Finally, if odds and time weren’t stacked against you, there’s the topic of equity. Setting aside the investors (venture capitalists and founders), the regular employees just don’t get a whole lot of equity. The offers I see for executive roles (non-founder, reporting to the CEO), typically are between 0.5% to 2% of the pool not counting the strike price (the amount of money you spend to own the shares outright before the exit). Most employees have the option to own far less than that - in the realm of 0.01% to 0.5%. In the event of an acquisition, these terms can change and usually against your favor. So, all of a sudden the expected value of what you can earn from joining a start-up or starting your own company is a gamble spread across many years with a high probability the company will go out of business.

In contrast, a person joining a large company can typically expect a higher base pay with a stock package that is about equal to their salary in restricted stock options spread over 4 years with new grants that arrive every year or two. The compounding effect of higher salary, regular stock grants, and (hopefully) increasing share price means that for most individuals their path to wealth is to join a large company.

If you’re still thinking about joining an unestablished start-up or starting your own company, then my advice is to do it now. In the last 20 years, there have been three worldwide recessions and we’re in the midst of one right now. During these times, established companies struggle. The buildings, the employees, and all of the regular costs a company incurs are modeled for when things are going smoothly and when revenue offsets the costs of daily operations. When the revenue picture turns south, or in the current environment, completely evaporates for some ill-fated companies, the recession acts like a forest fire destroying companies indiscriminately. When companies do survive these times, they either did so because they had large cash balance sheets or they restructured their operating costs: layoffs, long-term lease commitments, and benefits.

Meanwhile, small or non-existent companies are fine during these times. They are already capitalized to make little or no money. As a result, the playing field has been leveled. History shows that some of the largest and most promising start-ups are often created during these times because as the incumbents get burned down to the ground new companies emerge from the cinder as green shoots. WeWork, AirBnB, Lyft, and Uber are just a few prominent examples that were created from the last recession.

Ultimately, there are many reasons to participate in a startup but clear-thinking people make such decisions because it’s fun to build new things and not because they are trying to get rich; but if you’re going to take the leap anyway for the wrong reason, do it now and you might just get lucky.