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Can Investing In Startups Make You Rich – The 4 years I spent as co-founder cost me. I left my company poorer than when I started.
It may surprise you not to work in the hyper-hyped world of startups, but this experience is the norm rather than the exception.
Can Investing In Startups Make You Rich
They say, “You can’t get rich working for someone else,” but the truth is closer: “You can definitely get poor working for yourself.”
Should You Invest In A Startup?
In some situations it makes sense to found a startup. But for most people, it has the lowest expected rate of return of any job opportunity.
It rents an apartment near our office in an expensive city. Meanwhile, my co-founders were not paid at all and lived off their savings.
As a programmer, I’ve managed to freelance for some extra money, but not everyone has that luxury.
With success and time, you can expect to pay yourself more. But it’s still a fraction of what a big tech company might pay you. Depending on your skills, the opportunity cost of losing a salary can easily run into the hundreds of thousands a year.
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What to say; Every time you take money from investors, you trade a part of the company.
If your startup’s value increases between rounds of funding, it may be trivial to give up a piece since its overall value has increased.
But if you overvalue (aka overraise) the company and miss growth targets, you may have no choice but to dig deep into the founder’s equity to raise another round.
This is why I am pro-founding a business, not a startup. In other words, fund your business with earnings rather than investor money.
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Personally, I saved up quickly. Then my social life stagnated. It wasn’t the end of the world, but I was happier working at Shopify and making a decent salary.
While we all agree that money doesn’t equal happiness, lack of money can definitely make us miserable. When your bank account is empty, it’s difficult to have a relationship, eat out, or even buy clothes.
Problems at work kept my mind busy, sleep quality was poor, and it took me away most of the time. Looking back, I don’t know how my wife put up with me.
It’s strange to say, but health is underestimated. Young founders tend to believe that they are invincible and ignore this fact.
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It’s difficult to maintain a social life when you’re emailing or programming late at night. It’s easy to say no to outings when your livelihood depends on the success of your business.
While skipping hikes or board game nights with friends can be a necessary sacrifice, it’s important to remember that your network is your net worth.
If you’re leaving (or closing) your startup in a few years, your social connections can help you find your next gig.
Besides, it’s not just about the money. After all, life is short and some of the best things in life come for free.
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Recruiters might fear you’re leaving to start another business, that you’re not good at following directions, or that you simply don’t have enough skills in a particular area.
To be successful in an early-stage startup, you need to be a generalist. It is difficult to develop deep expertise in a specific subject as you always wear multiple hats.
But entrepreneurship and some managerial positions aside, deep expertise requires high pay, not broad skills.
If you’ve decided to close your startup, it may mean taking a younger job to pay the bills.
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Anecdotally, that’s bullshit. I bet well over 90% of startups fail. Most of them are difficult to get off the ground.
Also, keep in mind that not all exits are profitable. I’ve met several founders who have sold their companies through soft landings or recruitment. This means that the company will be sold at or below its value so investors don’t lose all their money.
They’re one of the few ways to quickly create innovative technologies that can have a huge positive impact on the world.
For most readers, starting a startup is a suboptimal road to success. If you get a job or join a late-stage startup, you’ll be better off, richer, and happier.
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However, if you’re going to be the next tech mogul, my experience probably won’t put you off anyway!
This article is for informational purposes only. It should not be construed as financial or legal advice. Not all information will be correct. Consult a financial professional before making any important financial decisions. It’s an unsettling feeling when everyone seems to be getting rich but you. However, after 20 years in San Francisco, the startup capital of the world, I would say that you shouldn’t join a startup if you want to get rich.
We hear about very successful startups in the news all the time. Names like DoorDash and Airbnb are trends of the month. With the gigantic share price performance after the IPO, thousands of new millionaires will flock to the San Francisco Bay Area. However, we rarely hear about failures or zombie startups that end up stagnating for years.
Most startups either fail or have mediocre results. The below-average salary that employees receive for joining a startup for equity is therefore often a bad deal. Employee shares are either diluted or early investors have a guarantee clause that renders them worthless.
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When a startup is acquired, it’s usually the founder or founders who go away with something worthwhile. Significant payouts do not typically go to employees who have helped make the founders rich. Founders know this and unfortunately often still don’t try to take care of their employees after receiving their liquidity event.
In my quest to keep people from falling into the startup limbo, here’s a new case study of how Baremetrics founder Josh Pigford walked away with millions while his employees were left with peanuts.
First, I want to make it clear that I admire anyone who takes the risk of starting a business. Without such entrepreneurs, there would not be much innovation and opportunity for millions of workers.
Founders deserve to be rewarded. However, my goal is to help most people who are not founders. Over the years I’ve spoken to hundreds of startup employees, most of whom haven’t been incredibly successful.
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Baremetrics, a business analytics software company, was founded in 2013 by Josh Pigford. Seven years later he sold it.
Going home with $3,700,000 in cash is quite an achievement. I congratulate Josh on the sale.
After taxes, Josh will make between $2.22 million and $2.59 million net at an effective tax rate of 30% to 40%. He is now one of the new millionaires in America.
Given that 90% of startups fail or don’t make money, 99% of startups that make money sell less than $10 million.
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Selling Baremetrics for $4 million is a common selling price for companies that are selling. The $100m+ or $1bn exits you read about in the news are rare and get all the attention.
. In other words, the founder got 92.5% of the final sale and his 10 employees got 7.5%.
$300,000 divided by 10 employees is only $30,000 per employee. I understand that Baremetrics had 10 employees or had 10 employees at any given time.
After seven years at Baremetrics on a below-market salary plus equity, the average employee walked away with just $4,286 per year in stock compensation ($30,000 per employee/7 years).
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College interns make over $4,286 per month at most tech companies. Of course, it’s disappointing to be getting $30,000 per employee after seven years. Even if only seven employees split the $300,000, that would still only be $42,857 per person.
When you join a startup, you often take a 20-50% pay cut because you get equity that will hopefully give you a great return. Let’s say the average salary was $120,000. That’s a 30 percent discount on the $171,000 the average employee could make elsewhere.
This means that after seven years the employee lost $357,000 in wages ($51,000 x 7) and only received $30,000 in company sales. Therefore, the net compensation lost is $327,000 per employee.
$327,000 is a 20% down payment on a $1,635,000 home. $327,000 can pay all expenses for four years at a private university. Losing more than $300,000 in compensation could delay retirement by another 10 years!
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Even if the lost compensation is only $100,000 or $200,000 seven years from now, that’s still a lot of money for the average person. Remember that one of the main goals of joining a startup is to get rich, not lose money.
Founders are not required to compensate their employees beyond the contract. The employees made them themselves
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