Sorry Startup Employee #100, Your Equity Probably Won’t Make You Rich

Bloomberg’s article about lower-than-expected financial gains from startup IPOs for midlevel employees stuck in craw this week because there’s a handful of complex issues at play here. In no particular order:

Startup Equity Is Unlikely to Make You Fabulously Wealthy After Four Years Unless One or More of the Following Apply…

  • You were a founder
  • Your company ends up being worth more than $5b, $10b
  • Your company raises very little capital and sells for $500m+
  • You join at an executive level pre-IPO for a company that already has huge potential

and so on. Even in successful companies, most initial equity grants will be worth a few hundred thousand dollars to perhaps $1-2m, when fully vested. Rising in an organization and getting more grants pre-IPO helps but generally, it’s just math. Assume you get .25% of a company and you’re diluted 50-75% before IPO. For an “average IPO” it’s just not millions and millions of dollars. It’s real money. Real good money. But don’t assume one IPO turns you into a multimillionaire.

It’s Often Not Employee’s Fault That They Don’t Understand This

We need to move to more transparency for employees. When I started at Google, all they told me was the number of shares in my grant. Not the company valuation, or ownership percentage or even grant price! Just the number of shares. Being how exceptional Google performed as a company it all worked out, but a company which prided itself on data and hiring analytical employees gave me a number which didn’t mean anything. My question back to them was, “why even tell me the number of shares?”

So I generally advocate more transparency, helping employees understand different scenarios and being generous with employee grants over time. On the employee end they should realize there’s often a tradeoff between salary and equity. Be willing to take below market salaries if you’re able and load up on equity.

Being Part of a Successful Startup Early in Your Career is Often About Getting Rich Later

With the experience, relationships and nest egg from an early startup success you’re able to take more risks – start a company, join in an executive capacity at one that has huge momentum. These are the ways to really get wealthy.

The Wealth Ball Bounces in Really Strange Ways in Tech. Sometimes Dumb People Get Rich.

You gotta relax about comparing yourself to others and the anger that can occur when someone who you think isn’t as talented or hardworking as you just happens to make millions because they were at the right company at the right time. Focus on what you can control.

Post IPO, You Have Choices: Hold or Sell

Some people suggest you should sell 100% of your holdings as quickly as you can post-IPO. It’s the diversification theory and also based on the statement that if someone gave you $1m cash today, you wouldn’t necessarily use 100% of it to buy your employer’s stock. While this is logically true, life isn’t that simple. First, people feel like they don’t want to miss the upside. They experience loss regret. Second, people are loyal to their employers. I generally believe holding a large amount of company stock is fine if you can truly understand the company’s next 1-2 years.

My approach with Google at the beginning was to sell a fixed dollar amount each year, whether that took 50, 100 or 200 shares to hit that number. And it was more about diversification than changing my lifestyle.