I’ve been using a discounted cash flow model to evaluate work opportunities for years and it’s great to see an article take that approach too.
What I’ve found in my own analysis and with friends looking to join a new place is we tend to undervalue the established, current company and overvalue the startup. It’s difficult to calculate the odds of success at a startup and everyone has a different current arrangement with their existing company but in many cases I’ve calculated that the startup would have to be valued at many billions 7 or 8 years down the road to break even in total compensation. Especially so if your current role is at a post-IPO success story (that will add a lot of value over the next 8 years) where the RSU’s are fully charged, have great benefits (yay for matching 401k’s!) and a very good salary.
It not getting there means fairly bad returns so you really need to be going for the “right reasons”. Seeing startup gold is not it.
Of course the other side of it is the startup is a huge success in 8 years and your cumulative ISO’s are worth a fortune. And that dream is so alluring to people. And so unlikely.
Indeed yay for matching 401(k)s, but that benefit is only a high-four figure sum per year for most people. In the scheme of SWE comp, that’s about a needle’s width on the gauge.
It’s a piece of the puzzle though. Consider you’ll be at the startup for 8 years before moving on, letting all your ISO’s vest after the IPO. In that time, the current company would have matched ~200k in funds when accounting for yearly appreciation of 8% in it. And of course the marginal tax savings you’ll have from a higher a salary over that time.
So you add that to the formula plus assumed salary differences in that time and whatever income you’ll receive from RSU’s and the increase in the current company’s market cap over the time. You may even consider what your current salary allows you to invest after taxes and how that will compound and if the startups lower salary will still allow that or if you’d have to pause that.
So add that all up and that is what you’re discounting. In essence the ISO’s from the startup need to at least equal that after 8 years (or however many you are assuming until exit. 8 is average) to break even. It’s possibly in the many millions for some people.
It’s a hard calculation with a lot of variables and assumptions. But it’s helpful to see how much of a risk you may really be taking.
My experience is that, tech companies who start to succeed and scale end up starting 401(k)s that are competitive with the market along the way so, in the success case, you aren’t giving up 8 years of matching. (They more or less have to, or else they can’t compete for talent for whom they can no longer give meaningful upside via options.)
Yeah I think it has become more common. Still I’d say the majority don’t but I don’t have data on that, just in my history of sneaking with them.
I’d say I’ve seen a trend towards better compensation at A and especially B startups in recent years VS the more traditional large equity grants to early rank and file. Maybe VC money has just gotten so easy and early deals so big that there’s the money for it?
What I’ve found in my own analysis and with friends looking to join a new place is we tend to undervalue the established, current company and overvalue the startup. It’s difficult to calculate the odds of success at a startup and everyone has a different current arrangement with their existing company but in many cases I’ve calculated that the startup would have to be valued at many billions 7 or 8 years down the road to break even in total compensation. Especially so if your current role is at a post-IPO success story (that will add a lot of value over the next 8 years) where the RSU’s are fully charged, have great benefits (yay for matching 401k’s!) and a very good salary.
It not getting there means fairly bad returns so you really need to be going for the “right reasons”. Seeing startup gold is not it.
Of course the other side of it is the startup is a huge success in 8 years and your cumulative ISO’s are worth a fortune. And that dream is so alluring to people. And so unlikely.