I am a software engineer with about 2 years experience and currently at a big tech company. I have an offer to join a startup that has just received seed funding of 250k and they're about 6 months old, looking to raise their Series A in 3 to 9 months. They have 3 co-founders, and a few advisers (early stage investors).
I'm evaluating their offer, which is 50k base salary (no bonus) and 1.5% equity. Currently I have 120k base+bonus plus an outstanding of 40k shares to vest over the next two years with my employer, with promotions looking relatively good.
Now at first I was very keen on the startup offer but the more and more I've started to do the maths I'm beginning to think it's not as good as it seems, especially after dilution.
Can anyone weigh in and give some advice as to what I should be considering and how to evaluate this offer?
My guess would be, it is unlikely to be worth it. If we greatly simplify the calculations on this we can shed a little light on it. And these are truly simplified, don't take them as an absolute, but it would break down like this.
You are taking a paycut of over $70K/year. You did not say how much your bonuses average, but the base salary goes from $120K to $50K.
Let's guess that if this startup is a success (more on that in a bit) and it takes it 5 years to reach criticality. You will be losing ~$350K. In this time, you will probably get raises at the startup, but let's just run with it for simplicity's sake.
They are offering you 1.5%, so to make back that $350K in lost salary, the valuation of the stock would have to be worth $350K. At 1.5%, that means a rough valuation of the company at $23.3M. Do you think it will be worth that within 5 years? That is just to break even, and every year beyond the 5 year mark would mean an additional $4.6M would need to be added to the valuation.
But it gets worse. Startups have a ~90% failure rate. If I gamble with the odds stacked against me that badly, I expect a commensurate return. So I would expect 10-1, meaning the valuation of the company would need to be $233M within 5 years and my equity worth $3.5M. And that becomes difficult with the dilution that the future rounds will cause.
At 1.5% equity and a $70K salary decrease, the numbers would not work for me. Change either of those variables in your favor and it looks better and quickly, especially on the equity portion.
With that being said, I have no idea how you should approach it. Every startup junkie I have ever worked with (quite a few) have been 100% certain that their idea would reach critical mass within a short period of time. To imply otherwise might be considered an insult to them. They recruited you, which implies that they want you on the team. Use that to your advantage. Approach the salary portion first, try to get them to meet you in the middle.
Times are tough in the early stages, money is tight. Get what you can in immediate money and if that is not enough, then you can broach the subject of more equity to make up what shortfall you might still have.
Until the equity numbers get up there, direct comp is king. The equity only has a 1 in 10 shot of being worth anything.
The math doesn't add up, as others have pointed out. 1.5% for $350k is robbery.
If you've only been a software developer for 2 years and landed a job at a decent company, I'd continue down that path. If, after a few years, you realize that's not the life for you, I'd consider joining or creating a start-up.
Either you're very entrepreneurial, and start-ups are where you fit in, or you want a big salary and a respectable job. If you want both, then you'll likely have to do it yourself once you build the experience at your current job.
If you're not entrepreneurial (do you like security?), the start-up may not work out for you, and you just lost an awesome job and growth opportunity. Figure out what you want to do first before you throw away a decent job. 2 years isn't much industry experience to throw away something good for the 1 in a million chance of something better.
Rob, for what your earning now, no startup is going to be worth it on paper.
That's not the point of a startup.
Facebook and Google wouldn't have been worth it on paper in their first 6 months. Their plans started out far more modestly than total world domination, they just ended up there.
Do you have an overwhelming urge to prove yourself to yourself? to go out there and be a leader? to roll the dice? to not be managed by 15 bosses?
Your chances of immense wealth by the time your 26, 30 or even 50 are very slim as everyone else points out.
But there is a flip side. The things your likely to get from doing this start-up over your current position:
For some people money is worth more, for others finding out what they are capable of is worth more (like Steve Jobs).
Zen moment. There is no one right answer, only the answer that is right for you.
What is the startup potentially worth?
Assume it has a 10% chance of being worth this (i.e. 90% of startups will fail or never be worth significant amounts), and your shares will also get diluted a factor of 10-20. (Assuming $2-5 million Series A funding).
Crunch the numbers, and compare with your loss of earnings over the next five years.
Unless you are really sure it's the next Microsoft/Google/Facebook/... or you really prefer working in a startup...
It doesn't look like it's worth it from a purely financial stand point however you should find it easy to persuade them to give you more compensation as long as it does not effect their seed capital. Try and get some stock options or a deferred payment.
From a non-financial stand point if you want to do something different and find your current job dull this is an opportune time to try something different.
Not knowing the business model or domain, I'd say please don't dump your 120K job with only 2 years experience. With only 250K of capital with multiple people involved at the startup, it's dubious. Rather, start your own later or on the side.
If you feel that you can live on the 50K salary, then save the other 50K net after tax in reasonable investments. In 10 years, you'll have considerably more experience and half a million in capital.
Good luck on a different, later venture.
I'd like to add one more suggestion. I don't know about your educational background, but if you are 2 years out of school and have not already done so, a really good investment would be an advanced degree in field or an MBA.