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From a purely monetary and risk-based viewpoint, whether to join a start-up depends on how much money you already have. Suppose you regard tldroptions.io's pro
by bumbledraven 9y ago
From a purely monetary and risk-based viewpoint, whether to join a start-up depends on how much money you already have.
Suppose you regard tldroptions.io's probability distributions and outcomes as correct, and the only thing you care about is maximizing the long-term rate of goal of your capital. Then the Kelly Criterion (https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion , a.k.a. Fortune's Formula) says that you should try to maximize the geometric mean of your capital, which amounts to maximizing the expected logarithm of your capital.
To make this concrete, suppose you are choosing between two options:
- (Startup): Working at series C+ start-up for three years, where you receive 1% equity and $100k/yr salary, and have a 20% chance of getting ~$60 million in 3 years (according to tldroptions.io)
- (AmaGooFaceSoft): Working at AmaGooFaceSoft for three years, where you receive $300k/yr total comp (according to patio11)
For simplicity, I will ignore taxes and the time value of money. All monetary amounts below are in millions of dollars. If you have no money in the bank to start with, the geometric means of your alternatives after 3 years are:
- (Startup): exp(.2 log[60+0.3 ] + .8 log[0.3]) = $0.86 million
- (AmaGooFaceSoft) = $0.9 million
In this case, AmaGooFaceSoft is slightly better.
On the other hand, suppose you already have $1 million. After 3 years you will still have the $1 million, plus your salary and whatever money you get from your equity. Here the geometric means are:
- (Startup) exp(0.2 log[6+1+0.3] + .8 log[1 + 0.3]) = $2.8 million
- (AmaGooFaceSoft): 1+0.9 = $1.9 million
In this case, it's better to join the start-up.
The base salary matters a lot. If you have no money in the bank, but you get $150k year at the startup instead of $100k, then the geometric mean of the Startup option after 3 years is better than that of AmaGooFaceSoft:
- (Startup): exp(.2 log[60+0.45 ] + .8 log[0.45]) = $1.2 million
- anorwell 9y ago1% equity in a series C startup sounds wildly optimistic. You would most likely not get that much equity as a senior software engineer. It's interesting that your first calculation still favours the other choice.
- fnbr 9y agoYeah, I agree. There's no way that an engineer is getting integer percentages of equity after seed round. Maybe if they're highly recruited, in which case Google et al. would pay more.
- ruleabidinguser 9y agoWho would get integer percentages after seed round?
- kasey_junk 9y agoC-suite hires that have other choices and capital investors.
- morgante 9y agoYou can get integer percentages right after a seed. (No way at Series C though.)
- romanovcode 9y agoYeah, I agree. No way someone in C round will get 1%.
- brianwawok 9y agoA C-suite would I think, not an engineer.
- iamacynic 9y agoa c-suite would get more than that, probably closer to 3 or 5%, and also a signing bonus, as well as performance bonuses, a huge options package, and a termination clause / parachute clause. hell, throw in a relocation package and a credit card for entertaining customers and partners also.
- seattle_spring 9y agoOn the other side though, $100k salary is widely pessimistic for a Series C employee who could command $300k total compensation at a FANG-type company. Realistically, their base salary would be closer to $150k - $180k.
- countryqt30 9y agoWhat is wrong with the traditional approach? - (Startup): 0.3 * 0.8+60.3 * 0.2 = $12.3 >> $0.9