Why a startup won't make an engineer rich
My wife and I moved to the US in 2001. As I remember there were two primary motivations for us to make this move. One is that we think the United States is a fascinating country, magical things happen. The other was that we wanted to get financially independent quickly through stock options - I was working for a wireless startup company at that time.
Looking back now, the first reason still stands. I still think the US is an amazing place. If you want to accomplish something, it provides a lot of freedom for you to get it. However I am not sure about the second reason any more, that is, an engineer can get rich through stock options. Thinking about it now I am even surprised about my own naivete. Here's math.
Let's assume that your startup makes it. (In reality, very few startup did. In fact, the way venture capital works, is that they purposely arrange it so that only a handful companies makes it.)
How much is your stock options worth?
One intelligent guess is by the estimated annual sales. Let's say your startup has annual sale of 20 million US$. This is not an unreasonable guess, as I will explain later.
An IPO or a total buy out might be about 5-7 times sales. Let's say 5, then your company is worth about 100M.
Say you joined the company really really early, and your options comprises about 3% of the company. Note that this is an extremely optimistic figure for an engineer. The VCs and the management usually owns a much bigger shares of the company.
So you get about 3 million dollars. After tax, you'll probably get little more than half, say 1.7M.
You might think 1.7M is a lot, but in certain areas of the US, it only buys you half of a house. (My cousin lives in Saratoga in the Bay Area, and nothing in her neighborhood is less than 1 million).
Also, 1.7M is hardly enough for retirement. My retirement fund web site says I'll need at least 3M if I want to retire at 50.
With all the tear and toil, is that all you'll get?
P.S.
There are two things I need to clarify:
1) 20M annual sales for a startup is not unreasonable.
Anything you are working on, which might generate revenues larger than that, is likely to have attracted large incumbent companies. They have better resources and power to make your work totally worthless.
In other words, a successful startup needs to work on niche areas overlooked by incumbents. Unfortunately, by the definition of niche, the revenue is small. At least initially.
2) I am not against joining a startup. In fact, startup is a wonderful place to work if you like the work and the people because it offers lots of freedom.
What I am saying is that you need to be realistic about the expectations.
Looking back now, the first reason still stands. I still think the US is an amazing place. If you want to accomplish something, it provides a lot of freedom for you to get it. However I am not sure about the second reason any more, that is, an engineer can get rich through stock options. Thinking about it now I am even surprised about my own naivete. Here's math.
Let's assume that your startup makes it. (In reality, very few startup did. In fact, the way venture capital works, is that they purposely arrange it so that only a handful companies makes it.)
How much is your stock options worth?
One intelligent guess is by the estimated annual sales. Let's say your startup has annual sale of 20 million US$. This is not an unreasonable guess, as I will explain later.
An IPO or a total buy out might be about 5-7 times sales. Let's say 5, then your company is worth about 100M.
Say you joined the company really really early, and your options comprises about 3% of the company. Note that this is an extremely optimistic figure for an engineer. The VCs and the management usually owns a much bigger shares of the company.
So you get about 3 million dollars. After tax, you'll probably get little more than half, say 1.7M.
You might think 1.7M is a lot, but in certain areas of the US, it only buys you half of a house. (My cousin lives in Saratoga in the Bay Area, and nothing in her neighborhood is less than 1 million).
Also, 1.7M is hardly enough for retirement. My retirement fund web site says I'll need at least 3M if I want to retire at 50.
With all the tear and toil, is that all you'll get?
P.S.
There are two things I need to clarify:
1) 20M annual sales for a startup is not unreasonable.
Anything you are working on, which might generate revenues larger than that, is likely to have attracted large incumbent companies. They have better resources and power to make your work totally worthless.
In other words, a successful startup needs to work on niche areas overlooked by incumbents. Unfortunately, by the definition of niche, the revenue is small. At least initially.
2) I am not against joining a startup. In fact, startup is a wonderful place to work if you like the work and the people because it offers lots of freedom.
What I am saying is that you need to be realistic about the expectations.
posted by 5900 at 5:49 PM
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