Startup vs. Corporates: Which Path Will Make You a Millionaire?
Discover the odds of becoming a millionaire in the startup world! Is joining a startup the key to striking it rich, or is a corporate job a better bet?
Hello each-and-everyone and welcome back to another visionary episode of Tech Trendsetters! Today, I want to dive into a topic that mostly focuses on the IT industry, but don't worry because I think this information can be interesting for anyone wanting to understand how modern tech-sector works. A long read, but it’s worth it – I promise.
So, what's on the minds of many in the tech world? Is it better to work at a startup or an established big corporate company? As someone who has insights from both sides of this equation, I'm excited to share my perspective with all of you and hear your feedback. I'm pretty sure everyone has their own experience with this topic.
The Allure of Startups
Let's start by examining what draws so many to the startup world in the first place. There's an undeniable energy and excitement to being part of a small, scrappy team trying to change the world. You get to wear many hats, take on significant responsibility early, and potentially ride the rocket ship to a big exit that sets you up financially for life.
The dream is intoxicating – compress an entire career's worth of earnings and impact into a few short years at a startup that defies the odds. Luminaries like Paul Graham have long espoused that the best way to get rich is to join or found a startup. You'll build interesting things, work with brilliant people, and become part of history, or so the story goes.
And there's a reason this startup dream is so persistent. We've all heard the stories of early employees at companies like Google, Facebook, and Uber who ended up with life-changing wealth after their company went public or got acquired for billions. When a startup succeeds in a big way, the financial upside for those who got in early is immense..
But here's the thing that often gets lost amidst the hype – those big wins are the extreme outliers, not the norm. For every fairytale success story, there are countless untold stories of startups that never took off, leaving their early employees with nothing to show for years of hard work and lost earnings potential. The cold hard truth is that the vast majority of startups fail. ¯\_(ツ)_/¯
The Lottery or The Calculated Approach
Let's start by examining the prospect that draws so many talented engineers and entrepreneurs to the world of startups: the chance to strike it rich by getting in on the ground floor of the next Google, Facebook or Uber.
Who doesn't dream of being an early employee at a company that goes on to be worth billions?
On the surface, the math seems to make sense. Suppose you're offered a job at a seed-stage startup. They grant you 1,000 stock options, representing 1% ownership in the company, with an exercise price of $100 (meaning it would cost you $100,000 to actually purchase your shares).
So how likely are you to earn a cool $1 million or more from this gig?
Let's make some simplifying assumptions to run the numbers. We'll assume your ownership stake doesn't get diluted by future funding rounds (not realistic but makes the math easier). For your shares to be worth over $1 million, the company needs to achieve a $110 million or greater exit.
Valuations in the range of $110 million or more typically start at the Series C stage for the most successful startups. But reaching Series C is no guarantee of a big exit. We're interested in the probability of a startup both reaching Series C and achieving a major exit, which are two distinct events. A startup might make it to Series C but then fizzle out, get stuck in limbo, or take more than 10 years to exit, at which point your stock options will have expired worthless.
I found several estimates of the probability of a startup reaching Series C: 15%, 5.7%, and 14%. These estimates vary quite a bit, likely due to different data sources and methodologies. To simplify the analysis, let's take the average of these estimates and assume the probability of making it to Series C is around 12%.
But what about the probability of actually achieving a significant exit after reaching Series C? One estimate I found suggests that 32% of startups that make it to Series C will eventually exit. If we combine this with the 12% probability of reaching Series C, we get a 3.84% probability (12% x 32% = 3.84%) of a startup both reaching Series C and exiting.
However, not all exits are created equal. We're specifically interested in the probability of a $110 million+ exit, which is the threshold needed for your 1% equity stake to be worth at least $1 million. According to a separate estimate from 2010, the probability of a startup achieving a $100 million+ exit is only around 2%.
Now, there are a few important caveats to these estimates. The 32% Series C exit rate doesn't specify the size of the exits, so some of those could be smaller than our $110 million target. And the 2% probability of a $100 million+ exit is from 2010, so it's likely somewhat outdated given how much the startup landscape has evolved over the past decade. In the absence of such data, we can use these estimates as rough proxies, while acknowledging their limitations.
If we average the 3.84% and 2% probabilities from our two estimates, we get a 2.92% chance of a startup reaching Series C and achieving a $110 million+ exit. This suggests that the odds of your 1% equity stake turning into a $1 million+ payday are quite low, even if you join a startup that manages to reach the coveted Series C milestone. Are you feeling lucky today?
The Sobering Reality for Most Startup Employees
But wait, there's more! We haven't factored in a bunch of important details that make the situation look a lot less rosy:
Taxes will eat up a huge chunk of any gains, so the company really needs to exit for more like $150M for you to clear $1M after Uncle Sam takes his cut (+ always remember taxes can vary based on your country);
You need to work there for over 4+ years for your options to fully vest;
Your ownership will almost certainly get diluted by future funding rounds, as each round will reduce your stake;
1% ownership is a very generous grant, reserved for executives and critical early hires. Reality is that most employees get far less, often 0.1-0.25%;
To actually exercise your options and get the stock, you need to front the cash. In this example, that's $100k, plus potentially some tax bill. If you don't have hundreds of thousands sitting around, your options will simply expire worthless (and yes, there's a limited time when one can exercise their options);
After 4+ years a million dollars ain't what it used to be. Doing the hard work and a few more for the exit, you'll be lucky to have earned the equivalent of $125k/year – decent money but not exactly "set for life" riches.
The Startup vs. Big Company Trade-off
So given the very long odds of a truly life-changing payday, why do so many people still take the plunge into startups vs. seeking a stable job at a big established corporation? There are a few common reasons:
The work can be more exciting and impactful at a startup. You get to build something new vs. being a cog in a giant machine;
There is often more room for rapid career growth and skill development. Small teams mean broader roles.;
For the founders and executive team, the potential upside is much higher than for rank and file employees. If you're starting the company or getting several points of equity, the risk/reward can make more sense;
Some people just love the fast-paced, all-consuming nature of startup life and are willing to sacrifice work/life balance for a chance at the brass ring.
On the flip side, big companies offer a lot of compelling advantages for many:
Far more stability and job security. No worrying about the company running out of money and everyone getting laid off;
Competitive salaries and benefit packages. Typical total compensation for a software engineer at Facebook or Google is $200-300k;
Established infrastructure and support systems so you can focus on your work without having to wear dozens of hats;
Often better work/life balance – vacation time, reasonable hours, less pressure to always be "on".
Another important factor to consider beyond compensation is the type of work you'll get to do and the potential for career growth. Many assume that startups offer the most exciting, cutting-edge work and that big companies are where you go to stagnate.
But the reality is more nuanced. Yes, startups often work on novel ideas and give early employees the chance to take on outsized responsibility. But many big tech companies also have teams working on incredibly ambitious, innovative projects – it's just a matter of finding the right team.
Google, Facebook, Amazon and others are at the forefront of advancements in AI, quantum computing, AR/VR, self-driving cars, delivery drones, and other moonshots. With their vast resources, they're able to tackle technical challenges beyond the reach of most startups.
As for career growth, both startups and big companies can offer advancement, just on different trajectories. Startups often provide a chance to gain a wide breadth of experience and take on senior roles relatively early. Big companies typically have more structured career ladders and a clearer promotion path, along with formal training and mentorship.
Ultimately, there's no universally right answer in this trade-off. It depends on your own preferences, financial situation, life stage, and what you value most in your work.
Increasing Your Odds of Success
So let's say you've decided to take the plunge despite the risks – joined a startup or even founded one. What can you do to increase your chances of being in the lucky minority of startups that make it?
At the end of the day, the only thing that really matters is whether you're building something people want. Not what you think they want, or what you want to build, but what they actually want. Successful startups are obsessed with their users.
Startups are fundamentally experiments, and like any good experiment, you need to measure the results. Track your key metrics obsessively. How many users do you have? How much are they engaging with your product? How much revenue are you generating? The numbers will tell you whether you're on the right track.
Speed is one of a startup's greatest advantages over large incumbents. Embrace it. Release quickly and iterate based on feedback. The faster you can find product-market fit, the better your odds of success.
Some of the most successful startups ended up looking very different than they did at the beginning. If your original idea isn't gaining traction, don't be afraid to change course. The ability to pivot quickly based on market feedback is crucial.
TLDR;
Startups are often romanticised as the ultimate path to wealth and fulfilment. Work hard for a few years, build something people want, and then reap the rewards of a big exit that sets you up for life. It's an alluring dream, no doubt. But the reality is often quite different.
The elephant in the room often not seen – the failure rate. Depending on which study you look at, somewhere between 75-90% of startups ultimately fail. Those are pretty daunting odds. For every Facebook or Google, there are countless startups that never make it out of the garage.
Even if you beat the odds and build a successful company, the rewards are often not as lucrative as you might think. That billion dollar exit? Exceedingly rare. A more realistic "good" outcome is selling for $20-100M. Nothing to sneeze at, but split that among multiple founders and investors, account for dilution from raising multiple rounds of funding, and suddenly that big payday starts to look more modest, especially considering the years of hard work and risk it took to get there.
At this point you might be wondering – who in their right mind would choose this path? If startups are so risky and the payoff so uncertain, why bother?
Well, for some, the potential rewards – both financial and intangible – are worth the risk. The allure of being your own boss, building something from scratch, and yes, possibly getting very wealthy, is strong. There's a reason that the startup world attracts a certain type of ambitious, driven individual.
And while the odds of a smash hit are low, the potential payout can be life-changing if you do win the proverbial startup lottery. There's a reason every Venture Capital (VC) firm is willing to fund so many long-shot bets.
All it takes is one big win to return the fund.
On that note, I just wanted to thank you for being with me today – I hope this episode has given you some food for thought as you ponder your own career path. As we've seen, there are pros and cons to both routes. And ultimately, the right path for you depends on your personal goals, risk tolerance, and stage of life.
One final note: please keep in mind that the numbers and calculations in this episode are rough estimates and simplifications. The reality of compensation, equity, and valuations is far more complex and varies widely based on a multitude of factors. And of course, the startup landscape can look very different outside of the US, with its own unique challenges and opportunities.
But regardless of the specific numbers, I believe the underlying principles hold true. Remember, it's not about the destination – it's about the journey. Make sure yours is one worth taking.
As always, I'm eager to hear your thoughts. Do you agree with my assessment of the startup vs. big company trade-off? What has your own experience been? Drop me a line and until next time on the next episode of Tech Trendsetters!
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