Worst time to join a startup is right after it gets initial VC financing (2009)(cdixon.org)
cdixon.org
Worst time to join a startup is right after it gets initial VC financing (2009)
http://cdixon.org/2009/08/24/the-worst-time-to-join-a-startup-is-right-after-it-gets-initial-vc-financing/
9 comments
He's arguing that there's a discontinuity. It's better to join just before a major funding event vs. just after. It becomes steadily better as time passes after the funding event (assuming the company makes progress at the right pace), until the next funding event.
Joining right before the series B is probably better than right after the A, from an equity maximization perspective, weighted for risk. Of course, being an early hire right after the A makes it more likely you'd be in a senior role, or at least get a lot of great work done before the B, but your equity grant is not likely to increase.
Joining right before the series B is probably better than right after the A, from an equity maximization perspective, weighted for risk. Of course, being an early hire right after the A makes it more likely you'd be in a senior role, or at least get a lot of great work done before the B, but your equity grant is not likely to increase.
Joining a company right before it closes a series A is much better than joining the same company right after, but what about joining a similar company that is trying to raise a series A but never manages to? As risks suddenly drop, so does reward - unsurprising. They may be incommensurate, but they're at least moving in the right direction.
I would have expected the worst time to join to be right before a funding round because of your value getting horribly diluted. I know there was lots of talk of this some months back (and scumbag companies like Zynga trying to one up the evil) and assumed this practice would get even worse. Has that not happened?
In absolute terms, but the comparison is not what you personally gain and lost before the VC, it's a comparison of what you have now and what the next person hired will get.
His point is that the drop in equity grants post Series A is not proportional to the drop in risk.
Certainly I get that some people can't handle the risk of joining a company before Series A, or can't handle a subsistence salary. But that's not the point he's trying to make.
Certainly I get that some people can't handle the risk of joining a company before Series A, or can't handle a subsistence salary. But that's not the point he's trying to make.
The error he's making is that personal risk is different from the company's risk. Just after receiving funding the company isn't any less likely to fail (well, maybe slightly less), but a job with this company now offers a steady income for longer than was guaranteed prior to greater funding.
So, in fact, just after funding might be a great time to join a company.
So, in fact, just after funding might be a great time to join a company.
If you're looking for a steady income for a while, why not join a big company or research lab where that's guaranteed?
That's an important question to ask yourself. And the converse is equally important: "if you're willing to work with a low and very unreliable income stream for a while, why be someone else's employee?"
The "early employee" in the middle can be a tricky spot. There's a phrase I read on HN a while back "the founders get rich, the early employees get screwed, and the late employees get paid."
I think this phrase does a better job identifying a risk than an inevitability, but it is worth thinking about.
The "early employee" in the middle can be a tricky spot. There's a phrase I read on HN a while back "the founders get rich, the early employees get screwed, and the late employees get paid."
I think this phrase does a better job identifying a risk than an inevitability, but it is worth thinking about.
Right, which I think is the point of the article. The "after series A" point is sorta in no-man's-land, where if you're optimizing for potential returns it sucks, and if you're optimizing for stability it sucks.
There is one potential difference, though, which is in the value of a full paycheck in the short to medium term.
Some people may feel they just can't afford to forego a standard, market rate salary, and they wouldn't want to join a company that has a high chance of disappearing next month or failing to make payroll. But beyond that, they're not terrified of the idea of losing their job and looking for a new one. I think we may overstate at times how easy it is to get a job here on HN, but clearly there is a large population of strong programmers who can be picky about what they'll take and still get a decent job offer within a month or two of looking.
I remember Marc Andressen writing about this on his blog a while back - that in a very tech dense place like silicon valley, startups aren't quite as risky as they might sound. A total meltdown in hiring is an outside risk (like the couple of years immediately after the first dot com bust), but otherwise, people often build up such a strong network and skillset through startups that they may have more "job" stability, if it's defined as the ability to get a job (I hear this referred to as "career stability").
None of this necessarily means that post series A is quite the right spot to be in. That might still have too poor a stability vs opportunity ratio. But some sort of "early employee" be the right spot for people who would like to optimize for potential returns under a strict constraint of earning a market-level (or close to it) salary.
Some people may feel they just can't afford to forego a standard, market rate salary, and they wouldn't want to join a company that has a high chance of disappearing next month or failing to make payroll. But beyond that, they're not terrified of the idea of losing their job and looking for a new one. I think we may overstate at times how easy it is to get a job here on HN, but clearly there is a large population of strong programmers who can be picky about what they'll take and still get a decent job offer within a month or two of looking.
I remember Marc Andressen writing about this on his blog a while back - that in a very tech dense place like silicon valley, startups aren't quite as risky as they might sound. A total meltdown in hiring is an outside risk (like the couple of years immediately after the first dot com bust), but otherwise, people often build up such a strong network and skillset through startups that they may have more "job" stability, if it's defined as the ability to get a job (I hear this referred to as "career stability").
None of this necessarily means that post series A is quite the right spot to be in. That might still have too poor a stability vs opportunity ratio. But some sort of "early employee" be the right spot for people who would like to optimize for potential returns under a strict constraint of earning a market-level (or close to it) salary.
There's a risk/reward continuum. Big company gives me a very secure job and zero equity. Post-series-A you have a fair bit of salary security and a small but nontrivial slice of equity. Pre-series-A you have a larger piece of equity but they could fail to make payroll at any point. For some people post-series-A is the best point on the curve.
I think there's a fairly important consideration that he misses, especially if you lack experience. Right after the Series A is when you're most likely to gain useful experience and work on interesting stuff. Before the funding, you're often just in survival mode, and just building the simplest things possible. Later on, job roles become more rigid, and most of the design/architecture has solidified.
Correspondingly, this might be the most fun/interesting time to be at a startup.
Correspondingly, this might be the most fun/interesting time to be at a startup.
Another thing that's missed, that doesn't seem mentioned in the comments thusfar, is that we're not looking at the odds that this company succeeds; we're looking at the odds the investment I made pays off. The odds that a company that already deserved investment succeeds should only be increased a bit by getting funding now (as opposed to later or as opposed to getting by without it). However, the fact that they raised the money means that someone else thought they were at least so likely to succeed (and bet on it) and that should increase my estimate that this company will succeed more than the cash infusion will increase their actual chances.
>I’ve met a lot of entrepreneurs, but even the smartest are usually barely on par, intellectually/analytically/etc, with average/mediocre hedge fund analysts (just from my own personal experience). There is a reason for this; make startups more compelling for smart people to join; value human capital at its intrinsic worth, and pay accordingly; after all, that’s what the VC money is for half the time, right?
-from his comments
-from his comments
There is some truth in what he is saying.
When it comes to pedigree (which is not the same thing as capability) very few startups are offering enough to get the people who have a lot of options.
Don't get me wrong: there are smart people taking low-level positions in startups, but they generally do so because they can't get into the hedge funds or quant roles. You are not going to see a Harvard CS grad taking 0.2% equity in a post-A startup with a $50,000/year salary. You might find an equally intelligent and capable state-school drop-out in such a position, but only because he has fewer options.
One of the reasons "data science" has come to the fore is that it's a job description that has become, in some companies, code word for "software engineering, but mostly the fun stuff". It's something startups are pumping because it gets them a sort of person they'd otherwise never be able to get for a non-executive engineering role.
When it comes to pedigree (which is not the same thing as capability) very few startups are offering enough to get the people who have a lot of options.
Don't get me wrong: there are smart people taking low-level positions in startups, but they generally do so because they can't get into the hedge funds or quant roles. You are not going to see a Harvard CS grad taking 0.2% equity in a post-A startup with a $50,000/year salary. You might find an equally intelligent and capable state-school drop-out in such a position, but only because he has fewer options.
One of the reasons "data science" has come to the fore is that it's a job description that has become, in some companies, code word for "software engineering, but mostly the fun stuff". It's something startups are pumping because it gets them a sort of person they'd otherwise never be able to get for a non-executive engineering role.
note this post is from 2009 [edit -- now reflected in the title]--
I think the top comment makes a pretty solid argument
You're an entrepreneur, which means that your risk profile is high. Mine too! That's why we're leading companies, not joining them.
I look at our current economy and see instability everywhere, which has made me even MORE risk tolerant. Being in an entrepreneurial company that's trying to do something new and/or differently seems safer than almost anything else, but few people seem to share that perspective.
Most people just aren't cut out for the inherent instability of an early-stage start-up, and the lousy economy has many people clinging that much more tightly to what they know.
I think the top comment makes a pretty solid argument
You're an entrepreneur, which means that your risk profile is high. Mine too! That's why we're leading companies, not joining them.
I look at our current economy and see instability everywhere, which has made me even MORE risk tolerant. Being in an entrepreneurial company that's trying to do something new and/or differently seems safer than almost anything else, but few people seem to share that perspective.
Most people just aren't cut out for the inherent instability of an early-stage start-up, and the lousy economy has many people clinging that much more tightly to what they know.
I'd say it's a best time because then the poor blokes finally have some money to pay you properly. Also it's not their own money so they may feel generous.
Unless you are working for startups only for the hope of hitting a jackpot. Then the OP is probably right.
Unless you are working for startups only for the hope of hitting a jackpot. Then the OP is probably right.
He forgot: "...all other things being equal", which would make his point practically useless.
There are people whose risk profiles make it unacceptable for them to join a company before it reaches a certain degree of stability. For those people, the second the company has closed a VC round might be the best time to join. I've hired people in that exact situation; they only made the leap to a startup when I was able to guarantee that we'd have enough money to pay them for a while.