Author Topic: To startup or not to startup  (Read 4299 times)

WhatIsFrugalAfterAll

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To startup or not to startup
« on: March 14, 2015, 11:45:25 AM »
Hi!

So I have a fairly reasonable career. Able to make a decent paycheck, and save towards FI. I enjoy my career, but am not super challenged. I am just a minion, no one under me, no major responsibility. I recently stumbled upon a chance to join a new but funded startup as a fairly major player. This would mean a short term pain (aka paycut) for possible long term gain.  Has anyone ever had a decision like this? What were your factors in the decision:

Pros of current job:
  • Pays roughly 30k more per year. In 5 years, that is 150k cash money in an index fund (- taxes + growth)
  • More stable. Odds of being fired or going out of business are very low.
  • Really a 9-5 job. I can log off at 5 and not have to think about it at all
  • Ideal commute. 0 hours per week

Pros of Startup Job:
  • Equity. Would start with roughly 1/2 a million dollars in equity. Could be worth $0. Could be worth millions if I am successful and the company grows and IPOs or is bought.
  • More responsibility. I would be leading an entire part of the company, and grow my team out. Maybe only start with 1 report on day 1 (as company will stay small for first year or so), but eventually would be many people directly reporting to me.
  • I would have a lot more say and control in day to day decisions. Instead of being another Indian, I would be a Chief.
  • Future career seems a lot more interesting. It could lead to future jobs along this line, with more responsibility. So even if this startup ends up a bust, I could still make out good in the 10 year timeframe as I got other similar jobs.

I am not sure I see the stars aligning for this again. I can find more 9-5 jobs if I need to, not sure I can find another startup opportunity like this.

Thoughts? Has anyone else been through the startup game?  I have worked as a minor player in 2 startups so I know the drill, but having 10k in equity is very different from 1/2 a million.

Sparafusile

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Re: To startup or not to startup
« Reply #1 on: March 14, 2015, 12:10:10 PM »
A start up is always a calculated risk. Here are a couple questions for you:

Are you single? If so, do you have a fall-back plan in case you end up broke?
If you're not single, will your significant other be able to support both of you if you end up broke?
How well do you know the business you're thinking about joining? Have you seen the business plan? Is it actually up and running and earning income?

In the end, like I said, start ups are risks and you have to manage that risk. In poker, they set themselves a loss limit. In you cause, you might decide to dive in, but set expectations for the business in 2 years, 5 years, or whatever. If those go expectations aren't met, then you cut your losses and find a 9 to 5. On the flip side, if the start up becomes a smash hit and you end up with millions in stock value, it may be time to cash out and preserve your winnings.

WhatIsFrugalAfterAll

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Re: To startup or not to startup
« Reply #2 on: March 14, 2015, 12:15:45 PM »
Inline!

A start up is always a calculated risk. Here are a couple questions for you:

Are you single? If so, do you have a fall-back plan in case you end up broke?
If you're not single, will your significant other be able to support both of you if you end up broke?

Not single. I have enough savings to weather the job transition in case of fail (i.e. cover time from startup explode -> start a new job).

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How well do you know the business you're thinking about joining? Have you seen the business plan? Is it actually up and running and earning income?

Yes business plan, no income. There is funding for a year, so we have 1 year to earn income. Should get to the first paying customer point in 2-3 months of work. It is a valid business idea in that there is already an established marketplace of several large companies.. it's not something like trying to convince people to buy pet rocks.  The business market itself is there, we would just need to execute in such a way so as to get enough of the market away from competitors (or new people in the field) to grow.

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In the end, like I said, start ups are risks and you have to manage that risk. In poker, they set themselves a loss limit. In you cause, you might decide to dive in, but set expectations for the business in 2 years, 5 years, or whatever. If those go expectations aren't met, then you cut your losses and find a 9 to 5. On the flip side, if the start up becomes a smash hit and you end up with millions in stock value, it may be time to cash out and preserve your winnings.

Yah. Well I am not working for free, so my first stop loss is "when we run out of funding, time to go"..

For us to last much longer than 1-2 years we would need a bigger round of funding. With it would likely come a bigger paycheck, making it not a "bad" thing to stick around. So really I see the 2 outcomes as:

a) Blows up, lose equity, get new job
b) Does well for at least a few years, gets more funding rounds, keeps growing.   (Then it could peter out or IPO, but it seems less of a bad thing once we get here).

I like thinking like poker. Poker is all about expected value.

80% of startups fail. That makes 1/2 mil of equity only worth 100k. So poker would tell me to keep my current job. But this math doesn't really account for what leadership experience would grant me.
« Last Edit: March 14, 2015, 12:17:55 PM by WhatIsFrugalAfterAll »

ShortInSeattle

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Re: To startup or not to startup
« Reply #3 on: March 14, 2015, 12:28:58 PM »
An Opinion...

Do it if you want the work experience of being at a startup.

Don't do it if you're expecting a payout. Financially your current job is likely a better bet.

Value of Good savings + Stability + Wise investments > Likelihood of unfunded startup kicking the competition's ass, winning market share, and going public.

I used to recruit software engineers during the startup craziness of the late nineties. The number of equity packages that paid off were almost zero. Today's environment for startups isn't that different than back then.

WhatIsFrugalAfterAll

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Re: To startup or not to startup
« Reply #4 on: March 14, 2015, 12:31:19 PM »
An Opinion...

Do it if you want the work experience of being at a startup.

Don't do it if you're expecting a payout. Financially your current job is likely a better bet.

I like that line of thought.

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Value of Good savings + Stability + Wise investments > Likelihood of unfunded startup kicking the competition's ass, winning market share, and going public.

Well it is funded, so you missing one part ;)

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I used to recruit software engineers during the startup craziness of the late nineties. The number of equity packages that paid off were almost zero. Today's environment for startups isn't that different than back then.

Did you find that people who had leadership experience in prior dead startups had better luck transitioning to more senior / management type jobs? Or did they end up just going back to being a regular developer.

Vilgan

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Re: To startup or not to startup
« Reply #5 on: March 14, 2015, 02:19:38 PM »
What do you mean by 1/2 a million dollars in equity? Every experience I've had with startups - you get X shares, but the value is essentially 0 unless you hit the 1 in 10 of being successful and even then the value will be determined by the valuation and can't be known years in advance. What % of the company is this? How protected are you from stock dilution?

A big part of the equation imo is: are you a founder and how much of the company will you own now and going forward through funding rounds? It sounds like you might be a C level exec or a Director of something, and those are two very different things. It seems like almost everyone in an early stage startup is a Director of something and frequently it will die before that turns into anything. Even when the company succeeds, the directors (even those that were there at the start) don't make enough to make up for what they missed out on. Its the founders, CFO, CEO, CTO, CMO, etc that makes the bulk of the money.

I've had a similar considerations myself because I consider getting back into the startup world occasionally. However, I also like the balance that my life has now and I'm a lot happier where I am. I might get back into it eventually, but only as a founder.

Rein1987

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Re: To startup or not to startup
« Reply #6 on: March 14, 2015, 02:20:47 PM »
How is your spouse's work? Is it a stable well-paid job?

My DH is considering start a startup because I have a very stable and well-paid job. If he succeed, we will retire. If he makes no money (At beginning years, he might make no money at all), we can rely on my paycheck alone. He would not do any adventure if I lose my current job.

WhatIsFrugalAfterAll

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Re: To startup or not to startup
« Reply #7 on: March 14, 2015, 02:27:30 PM »
What do you mean by 1/2 a million dollars in equity? Every experience I've had with startups - you get X shares, but the value is essentially 0 unless you hit the 1 in 10 of being successful and even then the value will be determined by the valuation and can't be known years in advance. What % of the company is this? How protected are you from stock dilution?

You cannot be "funded" without a valuation. Even with convertible equity, you still do some kind of valuation.

So let's say current investors put in 1 million dollars and got 25% of the company. That would put a "valuation" at 4 million dollars. Sure it is 100% pie in the sky money. And very good chance it will be worth $0.  But if I owned 12.5% of the hypothetical company above, I would start off day 1 with "500k equity". That is where my 500k magic money comes from.

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A big part of the equation imo is: are you a founder and how much of the company will you own now and going forward through funding rounds? It sounds like you might be a C level exec or a Director of something, and those are two very different things. It seems like almost everyone in an early stage startup is a Director of something and frequently it will die before that turns into anything. Even when the company succeeds, the directors (even those that were there at the start) don't make enough to make up for what they missed out on. Its the founders, CFO, CEO, CTO, CMO, etc that makes the bulk of the money.

From what I understand, Founder has no legal meaning. But anyway, I would not have the title Founder, but I would have a C level title, and and have the 2nd biggest share of the company after the founder and CEO. Something like 20%.

It would get diluted in future rounds, but at an equal rate to everyone else. So say my example company up above got another $1 million invest for 10% of the company... the valuation would increase from $4 million -> $10 million. My % ownership would decrease from 12.5% to 11.25%... but in theory, 11.25% of 10 million is 1.125 million, a lot better than 12.5% of 5 million.

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I've had a similar considerations myself because I consider getting back into the startup world occasionally. However, I also like the balance that my life has now and I'm a lot happier where I am. I might get back into it eventually, but only as a founder.

Yah. I have done the startup thing before as employee #10, #30, #50. Was not really worth it over a big company. This would be a chance for being #2. While not quite as good as a cofounder, it is still a pretty huge piece of equity.

WhatIsFrugalAfterAll

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Re: To startup or not to startup
« Reply #8 on: March 14, 2015, 02:29:05 PM »
How is your spouse's work? Is it a stable well-paid job?

My DH is considering start a startup because I have a very stable and well-paid job. If he succeed, we will retire. If he makes no money (At beginning years, he might make no money at all), we can rely on my paycheck alone. He would not do any adventure if I lose my current job.

Spouse is currently not working. My startup would provide enough money for us to live comfortably on for at least the 1 year it has funding for. 

I have had to skip over previous "work for free but get a lot of equity" startups because of this.. I need to pay the bills. This gives me the "rare" chance to both get paid enough while also getting equity.

vhalros

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Re: To startup or not to startup
« Reply #9 on: March 14, 2015, 03:06:55 PM »
Equity is a bit of a lottery ticket. There are a lot of factors beyond your control that determine weather or not it is worth anything. Have these guys done another successful start up before? That doesn't guarantee this one will be successful, but it is a positive sign. As far as growing your team, do you have good people you know you can pull in?

WhatIsFrugalAfterAll

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Re: To startup or not to startup
« Reply #10 on: March 14, 2015, 03:09:45 PM »
Equity is a bit of a lottery ticket. There are a lot of factors beyond your control that determine weather or not it is worth anything. Have these guys done another successful start up before? That doesn't guarantee this one will be successful, but it is a positive sign. As far as growing your team, do you have good people you know you can pull in?

No on previous success (which lowers odds of payoff yes), yes on knowing people to pull in. (Maybe not 100% of the roles, but I try to maintain a lot of connections).

Vilgan

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Re: To startup or not to startup
« Reply #11 on: March 14, 2015, 03:24:27 PM »
Having been part of a "successful" startup, a HUGE % of that success was luck and not having a competent competitor in the space rather than the execs being special. While some people contributed to that success, I don't think having a successful startup previously or not is a significant predictor of future success.

It seems like you have a pretty clear vision on upside/downside potential so not a lot I can add except maybe some reading on how the stress can potentially affect you. But really, it seems like you have a pretty good idea on what this looks like and the risks and such so good luck in your decision :)

WhatIsFrugalAfterAll

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Re: To startup or not to startup
« Reply #12 on: March 14, 2015, 03:28:11 PM »
Having been part of a "successful" startup, a HUGE % of that success was luck and not having a competent competitor in the space rather than the execs being special. While some people contributed to that success, I don't think having a successful startup previously or not is a significant predictor of future success.

Ya agreed.  According to this (http://fundersandfounders.com/will-i-succeed-with-my-startup-the-odds-of-making-it/), maybe your odds of success go up from 18% to 30%.. but that is not nearly enough to guarantee anything.

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It seems like you have a pretty clear vision on upside/downside potential so not a lot I can add except maybe some reading on how the stress can potentially affect you. But really, it seems like you have a pretty good idea on what this looks like and the risks and such so good luck in your decision :)

Awesome thanks!

Bicycle_B

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Re: To startup or not to startup
« Reply #13 on: March 14, 2015, 03:34:40 PM »
I say go for it!

Can't claim great experience - the startups I've been in never went far.  But where the other commenters seem to be implictly a bit skeptical, I think the risk/reward ratio is good enough in the circumstances that you describe that the decision is in the personal zone. 

And you sound like you want to try it; you've "had to pass up" other opportunities because they were unpaid/unfunded, etc.  You describe your current job as boring, state you can find other 9-5 jobs, etc.

I agree with the other posters that finding a solid 9-5 with great commute and safe, reliable, already-working path to FI is not something to drop lightly.  However, based on your comments, risk is limited because you are fairly comfortable in your belief that you can return to the safe path. 

The experience factor is hard to measure, and in my opinion someone who doesn't supervise anyone in their day job even though they're experienced already in their field won't magically become substantially more valuable in non-startup situations just because they went through a brief startup adventure that failed despite funding.  So IMHO the key factor is reliability of finding other jobs next year if this company doesn't become sustainable. 

That said, even if the risks are slightly greater than the quantifiable rewards, your comments imply that they are manageable in size.  So if you want to do it, you can.  I say you should!

In my view, this is a gut question. You've already stated this is a rare opportunity of low and manageable risk.  Effectively, you will pay to play:  a year or two of delay in FI versus a chance to adventure much earlier.  The upside is then bonus.  Go for it and good luck.

One person's opinion, anyway.

lostamonkey

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Re: To startup or not to startup
« Reply #14 on: March 14, 2015, 04:03:46 PM »
Based on your responses, it seems like this is something you really want to do and you just want some forum support, in which case go for it.

You did the expected value calculation wrong. You assumed that if the company is successful, your equity will only be worth 500K which is probably not the case. You also should discount the value as it will not be accessible for a long time if you want to cash out.

I personally wouldn't work at the startup. I would just work at your current job and FIRE a lot sooner on average. Your equity is like a lottery ticket, and I don't think it's worth losing 30K worth of income per year.

ShortInSeattle

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Re: To startup or not to startup
« Reply #15 on: March 14, 2015, 10:48:01 PM »

Did you find that people who had leadership experience in prior dead startups had better luck transitioning to more senior / management type jobs? Or did they end up just going back to being a regular developer.

In many cases, yes! :)

Experience is more relevant than titles though. If you will be given opportunities to build and lead a team, and you do well, those are transferable skills. But if they are giving you a C level title to compensate for crappy pay, and there is little real C-level work involved, then the title is just a sham and likely won't make much of a difference for you in future jobs.

Is there a revenue model that is going to keep your paychecks coming after the first year? Do you see a path there, and not just vague statements about getting customers? That's where I'd spend time evaluating the opportunity.

good luck OP.