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The metaphor of early startup employee as investor seems really smart at first but is ludicrous in reality. It is physically impossible to choose a startup lik

The metaphor of early startup employee as investor seems really smart at first but is ludicrous in reality. It is physically impossible to choose a startup like a VC because you cannot diversify your portfolio like they can. VCs can sprinkle (relatively) small amounts of money across dozens or hundreds of startups. If one fails then the impact to the portfolio is negligible. In fact, VCs expect that most of their portfolio probably won't pan out. Good luck diversifying as an employee. Working part time at even 2 startups is obviously laughable. If you're in it for the money, working at a startup is probably not for you. It really is akin to gambling. There may seem to be more information available than gambling, but there is so much unknown and hidden information it's damn near impossible to make a 'rational' decision. That's not to say you should never work at a startup. Startups are often great learning opportunities because you usually have both broad and deep scope of responsibility. There's also often better alignment between management and employees because people tend to be working stuff that is materially relatable to the bottom line. It can also be a career accelerator if the company grows headcount rapidly and you suddenly become a 'senior person'™. YMMV.

fhbdukfrh 8y ago
I agree with you, and this was my initial response when i started reading the post. VCs also get far more information about the company and can demand way more control. How many employees of a startup get a board seat, even if you're non-founder employee #1? Even those diversified portfolios aren't going to have huge returns in most cases. I think the lesson is that if your value proposition is exchanging your skills and time for money (ie, an employee) you can't parlay that into startup style returns without essentially winning the lottery. If you can pick the next unicorn for employment purposes don't waste your talents on actually being an employee
- danenania 8y ago
  On the other side, as an early employee you can have a much bigger impact on the odds of success than an investor. If you think a company has huge potential, but it's missing X/Y/Z, and you're an expert in X/Y/Z, then you have both a unique insight and unique leverage to make a success out of something that might not have been without you. Looking for situations where you make the difference is perhaps one way to have the whole thing feel like less of a lottery.
  - tschwimmer 8y ago
    I think this is a good point. If you are the ‘secret sauce’ than you may have an edge over an investor. There is perhaps the question of how you know that the company has huge potential with any confidence but I can think of a number of situations where it may be generally indicated. You should also command a stiff premium for catalyzing the company’s success. =)
econner 8y ago
The best part is stock options. Not only are you not diversified, now you get to concentrate your portfolio by buying stock in the company that provides your income. Stock options: for concentrating your income and your investments when you're excited and biased.
- JohnFen 8y ago
  Decades of experience has taught me that stock options are essentially wallpaper. Sure, if a company wants to give me options, I'll take them -- but they are in no way a substitute for real compensation, and I won't accept them in lieu of something real. That said, if a startup is doing something that really turns my gears and I like the company, then I'm absolutely willing to work for less pay in order to be a part of that.
  - deanmoriarty 8y ago
    Something I never understood about this attitude ("... then I'm absolutely willing to work for less pay ...") is: why there are almost no examples of such behavior in other highly paid professions, such as physicians or lawyers? Very rarely you'll find physicians saying "I really want to become a brain surgeon, I'll happily take 40% less than my market rate". You'll certainly find physicians doing volunteering, but that's another thing. In software instead, that's incredibly common: several of my coworkers (late stage private company) are in mostly for the thrill of working on our technology since we operate in some interesting niche, and I know for a fact they are paid much less than me (30%+), even if they have a bigger impact than me on the company (and they are also older, with more experience!). It's so common that many times employers use it at their advantage, by preferring people that can be sold purely on the tech rather than the tech AND the market rate for the position. To me, both the financial aspects and the technical challenges must be absolutely satisfied in order to join a company. Maybe I'm too practical because I'm not a trust fund kid and grew up dirt poor, so I know that in my limited ~20y engineering career (assuming ageism) I need to make enough so that I will be able to retire comfortably, while making sure I work on stuff that stimulates me so I can give my very best.
    - 8y ago
throwaway9128 8y ago
Even if you are not in it for the money, joining a big company gives you good income right away. Speaking from experience, the quality of life change when you don't have to worry about daily expenses is enormous. Being able to buy high quality groceries, eating out when you want to, spending time/money on hobbies, etc. can improve quality of life significantly. Besides these selfish reasons, it's also possible to donate a much higher percentage of your income for good causes. Between my wife and I (both software engineers), we have played this VC startup game 5 times. Never again.
Alex3917 8y ago
> It is physically impossible to choose a startup like a VC because you cannot diversify your portfolio like they can. As an employee though you can contribute your sweat equity on a daily basis, rather than needing to make your contribution upfront. So if you figure out the startup is a scam after day 3 of working there full time, you're free to quit immediately with basically no sunk cost. If investors could drip out their cash on a daily basis then most probably wouldn't put in the work to be fully diversified. So yeah, it's a difference, but I think it's a little overstated if you're just comparing the raw numbers of startups each group has equity in. What I think is a bigger difference is that employees don't have to worry about IRR. If as an employee it takes you an extra two years to get to liquidity, that makes basically zero material difference in your quality of life. Whereas as a professional investor that can destroy your business. On that basis I think this piece may overstate the value in looking for signal. As an investor, placing your bet on someone who is going to be successful but not for another couple years is basically the same as a loss. But that's not really true as an employee.
- tschwimmer 8y ago
  I don’t agree with your point about employees being able to ‘get their money out.’ If you have short stints at many startups I am young to see that as a serious red flag as a hiring manager. You can do it at one place but I think even if you do it twice in succession it’s going to suggest a pattern. Disclaimer: I’m not a software engineer so it may be less impactful than I think. RE: your point about IRR, I also don’t fully agree. Yes it’s bad when when you don’t show return for many years as an investor but as someone who was personally waiting for a prior employer to go public I can assure that a difference of a year or two is not ‘zero material difference’ in my quality of life.
  - mlthoughts2018 8y ago
    Why would it be a red flag? Many companies have horrible cultures and dysfunction and you only get to see it after starting full-time. It’s very common to realize you are not compatible with the particular dysfunction of a certain job and need to leave even just after a few months just for basic reasons of taking care of yourself. This can easily happen at multiple consecutive jobs. I’ll even go further and claim that in tech and especially in start-ups, hiring is deliberately deceptive. As a candidate you are at a severe information asymmetry disadvantage when you have to decide to join, and companies very often manipulate that situation to bait and switch on overqualified candidates, lie about or hide financial details, emphasize the wrong things to create halo bias in your decision making, etc. Given just how egregiously bad companies are, just in general behavior, I don’t see why it’s surprising or controversial or “a sign” of anything to see a job history with a lot of short stints. In fact, if a hiring manager or HR staff looks at a resume with short stints as a bad thing, that actually seems more like an indicator that the company is bad. They are thinking, “this person doesn’t patiently swallow company bullshit for keeping up appearances on the resume... they’ll never stick it out in our horribly toxic culture...” and it’s very telling that companies think this way instead of fixing their bullshit and being realistic about candidates needing to hop between jobs when company culture is bad.
sbilstein 8y ago
Investors spend all day hearing startup pitches from companies who would gladly accept a check from them. Engineers spend a grueling month or two getting onsite offers from maybe 8 companies at the most and one or two offers. Agree 100%, a very misleading metaphor.
fizx 8y ago
It's actually easier to "invest" as an employee than as a VC. VC's have to wait until the next round, and have to compete with other VCs. As a potential employee, you can see a company wildly succeeding (twitter in 2009, uber in 2012-13, slack, github, etc) and yet they will have <200 employees and their stock options will be granted at a 409a valuation around ~100million. Its a pretty reasonable bet at that point. You will hit some underperformers/duds (coinbase? bird?), but you will have worthwhile stock options a good chunk of the time.
- tschwimmer 8y ago
  If this is true why not just be a VC? You could pick all these unicorns at a great value. Even if you don’t put any of your own money in the fund you will make vastly more on the fund fees than you would have as even CTO. I think you’ll find that consistently picking unicorns is essentially impossible across a long time frame.
  - fizx 8y ago
    If any VC could have bought $TWTR at a $280MM cap in 2010 they would have. Only employees got that deal. Twitter was already a unicorn, but the internal paperwork hadn't caught up yet. It's arbitrage, not clairvoyance.
xivzgrev 8y ago
Came to say this. No one can predict with certainty which startups will fail and which won’t. If someone did there would be just one VC firm that grossly outperformed everyone else. The truth is you get the smartest people out there, make the most careful bets you can, and you still lose or break even 9 out of 10 times. Anyone who is joining an early stage startup primarily to get rich has got their eye on the wrong prize. Join because you like the early stage craziness. Join because you care about the mission. Join to learn. If you want to get rich, work at Fang for 10 years. That’s a lot more certain.
imh 8y ago
That's missing the point. You can't get the same deal as an investor, true, but you can still do the due diligence they do. Or at least you should try to as much as you can.
- tschwimmer 8y ago
  The entire premise of VC investment is predicated on diversification. VCs wouldn’t do diligence if they could only invest in one startup. They wouldn’t exist.
gaius 8y ago
Startups are often great learning opportunities This isn’t really true. The experience you can only get at a startup is learning to work with VCs, the board, early strategic partners and so on. This will be dangled in front of you like a carrot but as a mere employee you will never get meaningful exposure here. Unfortunately, like “dilution”, this is something that founders hope you don’t know so they can exploit you.

fhbdukfrh 8y ago

I agree with you, and this was my initial response when i started reading the post. VCs also get far more information about the company and can demand way more control. How many employees of a startup get a board seat, even if you're non-founder employee #1? Even those diversified portfolios aren't going to have huge returns in most cases. I think the lesson is that if your value proposition is exchanging your skills and time for money (ie, an employee) you can't parlay that into startup style returns without essentially winning the lottery. If you can pick the next unicorn for employment purposes don't waste your talents on actually being an employee

danenania 8y ago
On the other side, as an early employee you can have a much bigger impact on the odds of success than an investor. If you think a company has huge potential, but it's missing X/Y/Z, and you're an expert in X/Y/Z, then you have both a unique insight and unique leverage to make a success out of something that might not have been without you. Looking for situations where you make the difference is perhaps one way to have the whole thing feel like less of a lottery.
- tschwimmer 8y ago
  I think this is a good point. If you are the ‘secret sauce’ than you may have an edge over an investor. There is perhaps the question of how you know that the company has huge potential with any confidence but I can think of a number of situations where it may be generally indicated. You should also command a stiff premium for catalyzing the company’s success. =)

econner 8y ago

The best part is stock options. Not only are you not diversified, now you get to concentrate your portfolio by buying stock in the company that provides your income. Stock options: for concentrating your income and your investments when you're excited and biased.

JohnFen 8y ago
Decades of experience has taught me that stock options are essentially wallpaper. Sure, if a company wants to give me options, I'll take them -- but they are in no way a substitute for real compensation, and I won't accept them in lieu of something real. That said, if a startup is doing something that really turns my gears and I like the company, then I'm absolutely willing to work for less pay in order to be a part of that.
- deanmoriarty 8y ago
  Something I never understood about this attitude ("... then I'm absolutely willing to work for less pay ...") is: why there are almost no examples of such behavior in other highly paid professions, such as physicians or lawyers? Very rarely you'll find physicians saying "I really want to become a brain surgeon, I'll happily take 40% less than my market rate". You'll certainly find physicians doing volunteering, but that's another thing. In software instead, that's incredibly common: several of my coworkers (late stage private company) are in mostly for the thrill of working on our technology since we operate in some interesting niche, and I know for a fact they are paid much less than me (30%+), even if they have a bigger impact than me on the company (and they are also older, with more experience!). It's so common that many times employers use it at their advantage, by preferring people that can be sold purely on the tech rather than the tech AND the market rate for the position. To me, both the financial aspects and the technical challenges must be absolutely satisfied in order to join a company. Maybe I'm too practical because I'm not a trust fund kid and grew up dirt poor, so I know that in my limited ~20y engineering career (assuming ageism) I need to make enough so that I will be able to retire comfortably, while making sure I work on stuff that stimulates me so I can give my very best.
  - 8y ago

throwaway9128 8y ago

Even if you are not in it for the money, joining a big company gives you good income right away. Speaking from experience, the quality of life change when you don't have to worry about daily expenses is enormous. Being able to buy high quality groceries, eating out when you want to, spending time/money on hobbies, etc. can improve quality of life significantly. Besides these selfish reasons, it's also possible to donate a much higher percentage of your income for good causes. Between my wife and I (both software engineers), we have played this VC startup game 5 times. Never again.

Alex3917 8y ago

> It is physically impossible to choose a startup like a VC because you cannot diversify your portfolio like they can. As an employee though you can contribute your sweat equity on a daily basis, rather than needing to make your contribution upfront. So if you figure out the startup is a scam after day 3 of working there full time, you're free to quit immediately with basically no sunk cost. If investors could drip out their cash on a daily basis then most probably wouldn't put in the work to be fully diversified. So yeah, it's a difference, but I think it's a little overstated if you're just comparing the raw numbers of startups each group has equity in. What I think is a bigger difference is that employees don't have to worry about IRR. If as an employee it takes you an extra two years to get to liquidity, that makes basically zero material difference in your quality of life. Whereas as a professional investor that can destroy your business. On that basis I think this piece may overstate the value in looking for signal. As an investor, placing your bet on someone who is going to be successful but not for another couple years is basically the same as a loss. But that's not really true as an employee.

tschwimmer 8y ago
I don’t agree with your point about employees being able to ‘get their money out.’ If you have short stints at many startups I am young to see that as a serious red flag as a hiring manager. You can do it at one place but I think even if you do it twice in succession it’s going to suggest a pattern. Disclaimer: I’m not a software engineer so it may be less impactful than I think. RE: your point about IRR, I also don’t fully agree. Yes it’s bad when when you don’t show return for many years as an investor but as someone who was personally waiting for a prior employer to go public I can assure that a difference of a year or two is not ‘zero material difference’ in my quality of life.
- mlthoughts2018 8y ago
  Why would it be a red flag? Many companies have horrible cultures and dysfunction and you only get to see it after starting full-time. It’s very common to realize you are not compatible with the particular dysfunction of a certain job and need to leave even just after a few months just for basic reasons of taking care of yourself. This can easily happen at multiple consecutive jobs. I’ll even go further and claim that in tech and especially in start-ups, hiring is deliberately deceptive. As a candidate you are at a severe information asymmetry disadvantage when you have to decide to join, and companies very often manipulate that situation to bait and switch on overqualified candidates, lie about or hide financial details, emphasize the wrong things to create halo bias in your decision making, etc. Given just how egregiously bad companies are, just in general behavior, I don’t see why it’s surprising or controversial or “a sign” of anything to see a job history with a lot of short stints. In fact, if a hiring manager or HR staff looks at a resume with short stints as a bad thing, that actually seems more like an indicator that the company is bad. They are thinking, “this person doesn’t patiently swallow company bullshit for keeping up appearances on the resume... they’ll never stick it out in our horribly toxic culture...” and it’s very telling that companies think this way instead of fixing their bullshit and being realistic about candidates needing to hop between jobs when company culture is bad.

sbilstein 8y ago

Investors spend all day hearing startup pitches from companies who would gladly accept a check from them. Engineers spend a grueling month or two getting onsite offers from maybe 8 companies at the most and one or two offers. Agree 100%, a very misleading metaphor.

fizx 8y ago

It's actually easier to "invest" as an employee than as a VC. VC's have to wait until the next round, and have to compete with other VCs. As a potential employee, you can see a company wildly succeeding (twitter in 2009, uber in 2012-13, slack, github, etc) and yet they will have <200 employees and their stock options will be granted at a 409a valuation around ~100million. Its a pretty reasonable bet at that point. You will hit some underperformers/duds (coinbase? bird?), but you will have worthwhile stock options a good chunk of the time.

tschwimmer 8y ago
If this is true why not just be a VC? You could pick all these unicorns at a great value. Even if you don’t put any of your own money in the fund you will make vastly more on the fund fees than you would have as even CTO. I think you’ll find that consistently picking unicorns is essentially impossible across a long time frame.
- fizx 8y ago
  If any VC could have bought $TWTR at a $280MM cap in 2010 they would have. Only employees got that deal. Twitter was already a unicorn, but the internal paperwork hadn't caught up yet. It's arbitrage, not clairvoyance.

xivzgrev 8y ago

Came to say this. No one can predict with certainty which startups will fail and which won’t. If someone did there would be just one VC firm that grossly outperformed everyone else. The truth is you get the smartest people out there, make the most careful bets you can, and you still lose or break even 9 out of 10 times. Anyone who is joining an early stage startup primarily to get rich has got their eye on the wrong prize. Join because you like the early stage craziness. Join because you care about the mission. Join to learn. If you want to get rich, work at Fang for 10 years. That’s a lot more certain.

imh 8y ago

That's missing the point. You can't get the same deal as an investor, true, but you can still do the due diligence they do. Or at least you should try to as much as you can.

tschwimmer 8y ago
The entire premise of VC investment is predicated on diversification. VCs wouldn’t do diligence if they could only invest in one startup. They wouldn’t exist.

gaius 8y ago

Startups are often great learning opportunities This isn’t really true. The experience you can only get at a startup is learning to work with VCs, the board, early strategic partners and so on. This will be dangled in front of you like a carrot but as a mere employee you will never get meaningful exposure here. Unfortunately, like “dilution”, this is something that founders hope you don’t know so they can exploit you.