Saturday, February 9, 2013

To Jump or Not To Jump, That is the Question -- How to Think about Whether to Join a Start-Up

To Jump or Not To Jump, That is the Question--How to Think about Whether to Join a Start-Up

James Citrin

For the past month, a 23 year old marketing manager at one of the world's largest enterprise software companies has been wrestling with whether to 
join a hot new start-up. Although she hasn't yet reached her one-year anniversary she has still been torn with the decision. On the one hand it would be an opportunity to get into something on the ground floor, have a great learning experience and enjoy the adrenaline rush of an early-stage company, where her actions would have a much more direct effect on the company's results. And she believes that it could potentially be a once-in-a-career chance to make a fortune based on stock options.

On the other hand she is in a stable job with a highly regarded company making good money with benefits. She likes the company and is
learning how to operate effectively in a large organization. It also presents her with a more predictable career track and compensation future.

Have you or has someone you know confronted the difficult decision about whether to jump to a potentially exciting start-up? In today's world of 
start-ups and non-traditional career paths many of the traditional rules about career management do not - or do not seem - to apply. So how 
should our young friend think about this decision? What advice would you dispense?

Here's how I have urged her – and how I would urge you! - to think through the decision. First, consider the question, why join a start-up? There 
are a few key reasons:

1. I will make a ton of money

Perhaps. The fact is that most start-ups fail, even the most hyped ones. For every Google, there were hundreds of close competitors that bit the dust. For every Facebook, there were countless MySpaces that were equally well funded and sure to succeed but didn't. Venture capitalists, 
even the most highly regarded who make their living picking the "right ones," rely on a small number of hits to compensate for the dozens of 
companies that go under or barely survive. Unless you are lucky enough to pick one of the few companies every three or four years that have a 
spectacular outcome you generally won't make as much money as you will if you are at a big company.

Let's look at the math. Assume you make an average of $80,000 per year for the next three years at the large company and have full benefits. That is
worth approximately $90,000 year or $270,000 in gross three year income. 

As a comparison, let's assume you join a start-up that has three potential outcomes:

Start-up A - Google/Facebook-like success. If you get a few thousand options at current valuations, the company only raises money once more 
(which would dilute the value of your options by half) and then has a massive IPO, you might make $500,000.

Start-up B - Moderate success. You get a few thousand options and the company raises money twice more (so you get 25% of the current value of 
your options), but does not generate enough revenue or momentum to IPO, but it gets acquired for a decent multiple. You might make $100,000.

Start-up C - Failure. Your options never materialize. You move on only with the cash you made plus the learning experience from the ride.
If we assume that all three scenarios are equally likely and you earn $30,000 in cash, you will make $90,000 plus $200,000 in risk-adjusted equity return, about the same as your corporate gig. If you are fortunate enough to choose well and have only either scenario A or B, then you make a
risk adjusted $300,000 plus $90,000, higher than the big company route, but not by that much.

The reason to go into all this is that there is a lot of hype about how much money you can make at start-ups. Unless you work through the numbers,
however, it's easy to get swept up in the excitement. Except for the few-and-far-between exceptions the only people that win big are the 
professional venture investors who make a carry off their funds under management. To consider going to a start-up for the financial return when
you have a good job that pays well is like playing Power Ball - lots of hype around the winners, not the millions who funded the winner.

2. There will never be another opportunity like this one
This might be true. The reality is you might never see something as good as what you are considering, but if you stay in technology or the world of the
Internet that is unlikely. What is more likely is that you may not be as risk tolerant at a future date. You might have more obligations, e.g., a spouse, children, mortgage, etc., or you might just not want to work that hard. This is a good reason to try a start up before your 30s, but in the case of our young friend she still has some time to go.

3. I want to start a company one day, so I want to learn how it works
This is a good reason to join a start-up but many people find that unless they are one of the main employees they don't actually learn as much about
this aspect as they had expected and often have fewer opportunities to learn anything, let alone about start-ups. The main thing is that you will
develop a sense of what a start-up feels like, especially the difference between a growth start-up and a circling-the-drain start-up. The latter 
feels really lousy. In other words, when you are one of the first four or five people in, as founders or just after, you will be better positioned to learn how start-ups work, even if yours doesn't do well.

4. I love the sense of building something and want to figure out if start-up life suits me better than big corporate life.
This is another good reason to go work at a start-up, but in addition to considering points 1 to 3 above, it's important to think about your role. 
While any job would probably be fun for a while, one of the things to think about is what skill set you are starting to develop: sales, business 
development, marketing, etc. As we explored in The Promise Phase about How Careers Really Work, you should make it a priority in the first few years of your career to explore a variety of different areas before settling into the Momentum Phase of your career. It's useful to think about the early 
years as doing the coursework for a college degree - you need a major but you also need a path to get there. Most people need a few "100" "level" 
classes to figure that out. Your first couple of jobs are these 100-level classes. Make sure you are not just working on random, unconnected things
for too long. Operating with limited resources often means doing a lot of functional stuff you actually don't want to do

Finally, the Timing
Obviously it is good to stay somewhere for at least a year, ideally, two. However, in the world of tech start-ups, there is a bigger allowance for risk and trying something new. One caveat is that at the risk of over-generalizing, the West Coast of the U.S. is more forgiving of this than the East Coast. You might find yourself getting more questions about why you left so quickly, especially from non-tech people.
The path to a great career is more about finding what you like doing and what you are great at and then meeting the right people along the way than
about carefully constructing your resume. But you need to consider that leaving anything so quickly would be a calculated career risk. That said,
in today's economy, it is a valuable step to join a start-up early in your career since it is an important 100 level class. There is no shortage of 
interesting start-ups, but before joining one you should really kick the tires on the company, the job, and the culture. If you are truly blown away, then go for it. But if you jump in just do it with eyes wide open. If you have any hesitations, then hold tight. If you are open to it and keep looking, after a year or two another one will come along.

Edited by: Lawyer Asad

No comments: