Should You Leave Your Job for One at a Start-Up?

Adding the phrase "pre-IPO" to any want-ad turns a ho-hum job into your shot at millions -- or so it seems.

No doubt, the meteoric climb of Internet start-ups has captured many people's imaginations. In an era of irrational market valuations for some rather dubious dot-com companies, it's difficult to maintain perspective and rationally evaluate the potential profit of working at a start-up vs. sticking with a more established company.

But if you're trying to choose whether to stay the course at your current company or brave the waters of a start-up, it's crucial to consider the entire landscape of compensation and career growth.

Start with salary.

Once upon a time, you could expect to work at a start-up for a pittance -- if you got paid at all. Most senior mangers and founders lived in their parents' garages while building a company into a real business.

The billions of dollars in venture capital being poured into start-ups has changed all that, giving many start-ups enough cash to pay competitive salaries. However, if you join a start-up early on -- which increases the likelihood of getting a large amount of stock -- you may still end up going without a paycheck.

Consider the hours you'll be expected to work.

The defining characteristic of a start-up is working long hours. In the first year of a start-up's life, it's not uncommon to work 12-hour days, seven days a week.

If you're working double the hours that you now work for the same salary, you've effectively taken a 50-percent pay cut. And the time that you spend working could very well have been used for other things.

It's hard to measure the opportunity cost of giving up all your free time.

Maybe you would have spent it on the couch, but then again, maybe you would have taken a class or written that novel. Those with families have to consider the toll work will take on their personal lives. (For a financial comparison of the risks and rewards of a start-up vs. those presented by an established company, see box, below.)What benefits do you have or will you get?

You need to accurately assess the value of benefits other than salary and stock, including health insurance, flexible work hours, telecommuting, day-care subsidies, discounts on health club memberships, and subsidized education.

What kind of long-term stock programs do you already have?

Does your current employer already have some kind of stock program? Employee stock ownership programs are not uncommon and can create significant wealth for employees. They don't have the flash of an initial public offering (IPO), but they often have real value.

How many shares of stock will you get from a start-up?

Just because stock is being offered doesn't mean your dreams of becoming Jess Bezos are almost fulfilled.

The more options, the better. And the earlier you join a company, the more options you're likely to get. A thousand shares of stock, while certainly useful and attractive, is unlikely to let you retire early. To make a major impact on your financial situation, you would probably need at least 10,000 shares. And even 10,000 shares of stock that are worth $1.50 each won't put you on easy street.

What will you pay for your shares?

Options aren't free money -- although in some cases they can come close.

Companies have a lot of flexibility in how they offer their stock to employees.

Some offer employees options for pennies per share, while others are closer to the actual IPO price. Find out how much you'll have to invest to make use of your options.

How long until they vest?

It's crucial to bear in mind how long you'll have to stick around to own all your shares. This typically takes four years or even longer. A start-up is not exactly a get-rich-quick scheme.

What if the company is sold?

Many start-ups make attractive acquisitions -- in fact, some are founded in hopes that they'll be acquired by one of the giants, such as Amazon.com or Yahoo.

But what about you, your shares, and your job? Many people who are attracted by the excitement of working for a start-up don't want to work for one of the giants. If your company is bought before you fully vest, you may have to work for a company you don't especially like or have to give up some of your stock.

How diversified are your investments?

The first rule of a smart investor is to diversify. But with a start-up and its stock, you are effectively placing all your eggs in the company basket.

Presumably, being a part of that company, you'll be working to make sure that its value increases. But all it takes is one major blow, and your investment in this company could be up in smoke.

What other opportunities does the start-up offer?

Although the lure of riches is compelling for many people, there are some other reasons to work for a start-up that don't involve dollar signs.

For example, in most start-ups, people are given greater responsibility than they would have in a more established company. For many, having start-up experience is another step on the career ladder.

What are the odds of striking it rich, really?

The cold facts are not very comforting when it comes to IPOs.

Historically, IPOs are a terrible investment, as they often take years to show any significant increase in value. Despite headlines that scream about IPOs that triple or quadruple in value, in reality, most IPOs settle close to the IPO price. Many actually drop below that IPO price, meaning that if you purchased the stock at the IPO price, you lost money.

The accuracy of predicting whether the start-up you work for will be showing Amazon.com valuation in four years is daunting. Realistically, you have something like a one in 10 shot at seeing your stock options become significantly valuable.

The bottom line is that it's certainly possible to make a fortune working at a start-up. It's also very easy to end up losing money on stock, after having sacrificed your personal life for the company. Working for a start-up is a gamble and should be treated as such.

Join the newsletter!

Or
Error: Please check your email address.

More about Amazon.comYahoo

Show Comments