Feeling left behind while everyone else seems to be striking it rich can be tough, especially in a place like San Francisco, the world’s startup hotspot. But here’s a tip: if you really want to get wealthy, don’t work for a startup—invest in them instead. Try putting your money into an open venture capital fund like Fundrise Innovation Fund, which lets you invest in hot areas like artificial intelligence and fintech with as little as $10. This gives you a stake in the private company growth without the huge time commitment.
The stories that make headlines are usually about startups like DoorDash and Airbnb, which create waves of new millionaires with their massive IPOs. However, we rarely hear about the ones that fail or barely scrape by, leaving their employees with little to show for their hard work. Often, the employees receive shares that are heavily diluted or are rendered worthless by clauses that favor early investors. And if a startup does get bought out, it’s usually the founders, not the employees, who see the significant payouts.
Take, for example, Baremetrics, founded by Josh Pigford in 2013 and sold seven years later for $4 million. While Josh walked away with $3.7 million, the ten employees split what was left, averaging $30,000 each. That amount translates to a meager $4,286 per employee per year, less than what a college intern makes in a month at many tech companies. These employees took salary cuts for equity with the hope of a big payout, which clearly didn’t pan out as they might have hoped.
Joining a startup means you’re often accepting lower pay in exchange for equity that is supposed to provide much greater returns down the line. Unfortunately, the reality is that these employees could have earned $357,000 more over those seven years by working elsewhere. This lost income could have been a down payment on a house or paid for a private university education.
The Baremetrics scenario highlights a common issue in startups. When the company was sold, seed investors General Catalyst and Bessemer forgave their $800,000 investment, which unexpectedly boosted the founder’s takeaway. Employees, who had also contributed to the company’s success, did not see a comparable benefit. This situation could have been an excellent opportunity for the founder to share the unexpected windfall with his team, rewarding them for their efforts and loyalty.
However, if you are considering a startup job, don’t let these stories deter you completely. Startups can still offer valuable experiences and potentially lucrative opportunities, but you must be very clear about what you’re getting into:
– Understand exactly what percentage of the company your equity represents.
– Consider the realistic potential sale price of the company to gauge what your stake could be worth.
– Negotiate aggressively for your salary and equity because the risk of startup failure is high.
– Consider joining as a co-founder or in a later-stage startup where financial stability and payouts are more likely.
Alternatively, starting your own business could be a better route. You retain complete control and reap all the benefits. Or, if you prefer, investing in startups through a venture capital fund can expose you to potential high returns without the risk of losing your job or wasting years for little return.
Remember, joining a startup is not the only path to wealth. It’s crucial to weigh the potential rewards against the risks and missed opportunities. Investing in real estate, for example, could provide more stable and consistent returns. If you decide to join a startup, do it for the experience and the potential—just don’t bank on it making you rich.
