Summary: A short guide to get a job at a Silicon Valley startup. Andreas has worked at more than 25 startups. He also built two startups and is on the advisory board of several more startups.
Venture Capitalists (VCs) put up the capital (the money) for new companies (called startups.) They create startups by bringing capital, management, and connections. Yahoo, Amazon, and Google were all startups.
Update: Before you start job hunting, read my book on Startups.
Startups Are Cool!
- You join at the beginning
- You learn how to do everything
- You get lots of responsibility
- You show up whenever you like
- You get to bring your dog to work
- You make lots of money
- Paris Hilton’s ex-chef serves organic, locally-grown portabello mushrooms, hand-grilled over a mesquite hibachi.
- Your career skyrockets. Two months ago you were an intern. Now you’re a director in charge of 18 countries.
- You get pre-IPO stock options, become a zillionaire, and your parents can’t figure out what you do for a living.
- You buy an island next to Bono
- You burn out before your stock options become valuable
- Nobody teaches you nothing and you have to learn it on your own time
- Everything is dumped on you
- You work +140 hours per week for nine months straight
- You gotta bring your dog to work or the poor pooch will starve to death in your empty apartment
- You want money? Are you a greedy pig or what? It’s an honor to work at this startup. We work for stock, not salary.
- You get cold pizza and cold coffee
- You’re responsible for 40 people, $100 million dollars, and you must grow sales by 600X within 45 days or everyone will be fired and you haven’t the slightest idea what to do
- The startup crashes, your stock options are worthless, your health is wrecked, your dog runs away, and your parents say “We told you so. Why can’t you be an accountant in Baltimore like your little brother Seymour?”
- “Hello, Seymour? Can I work for you?”
Show Me the Money!
If you join as staff at a startup, you get a salary. You may also get stock options and a stock purchase plan. Just because it’s a startup doesn’t mean that you get this automatically. You negotiate these items.
- Stock Options: This generally means the right to purchase stock at a set price. For example, during your salary negotiation, the stock price to you may be set at $5. If you get 1,000 shares (just an example number) and the startup becomes a success and the stock shoots up to $200, your options are worth $200,000. You exercise your option by buying the stock at $5/share (or $5,000) and taking possession of $195,000. (I’m using simple numbers here. The actual amount of stock will depend on how many shares have been issued, etc.)
In some cases, you can ask that a company give you stock options instead of a signing bonus.
- Pre-IPO Stock: If you join the company before it goes public, then you may be granted pre-IPO stock options. (IPO stands for Initial Public Offering.) Generally, these are very low, such as $2/share. If the company goes up to $200, your 1,000 shares become $200,000.
You should not count the pre-IPO stock as income. Pre-IPO stock is extremely speculative.
- Employee Stock Purchase (ESP): As an employee, you may have the right to buy additional stock at a discount. For example, can be set to the lowest price that the stock reaches on the stock market during a six-month period.
For example, you join the stock purchase plan in December. Starting in January, up to 10% of your annual salary will be deducted (for example, you earn $100,000, so $10K is deducted. Monthly, that’s $833.) On the stock market, the stock is at $40. In February, the competition comes out with a killer product and your company’s stock dives to $15. So everyone works 16 hr days and in May, your company ships a mega-killer product and your stock skyrockets to $60. At the end of the six month period (January-June), your company’s CFO (Chief Financial Officer) issues you the right to buy the stock at the lowest point that it reached during the past six months, namely, $15. You send an email to the stock broker with a “same day buy/sell”, which means you buy it at $15 and they sell it on the market and you get the profit. (You may also just buy it and hold on to it.) In this case, $60 minus $15 is a $45 profit. Since you bought $5K of stock (half of the yearly $10K), you got 333.33 shares (at $15/share) and you sold them at $60 and earned $15,000. Your $5K turned into $15K.
Again, these are example numbers.
So What Can Go Wrong?
Most likely, everything. Someone else comes up with a better idea. The public refuses to buy your company’s silly product. Your company’s engineers leave for a better company. The VCs were using the whole thing as a front for a insider trading scheme to loot the investors. The CEO gets hauled off in manacles by an FBI SWAT team. The investment bankers flee to Brazil. (Who says the computer industry is dull?) 95% of startups fail within two years. That’s right: only one in twenty survive. So what happens to your salary, stock, and dreams?
You work at a startup either as an staff employee (IRS W-2 wage earner tax status) or as a contractor (IRS 1099 tax status).
- If you work as an employee (W-2) and the company goes bankrupt, your stock options become worthless.
- If your stock options are set at $15 but the 22-year old CEO goofs up and the price dives to $3, then your stock are said to be “under water.” You still have the options, but you’d lose money to exercise the options, so it’s worthless. So you hang on, hoping it’ll rise.
- If you work as a contractor (1099), you can get excellent rates. However, you rarely get pre-IPO stock, stock options, or stock purchase.
If the startup goes bankrupt, you will probably lose your unpaid bills. So you should NEVER work without billing weekly and getting paid within 15 days. Otherwise, you run a very high risk of not getting paid (as I said, 80% of startups fail within two years.) If you work through an agency (IRS W-2 status to a recruiter), your recruiter’s contract generally won’t protect you. If you work as a contractor directly to the startup (1099 status), you are an unsecured creditor. If the startup goes bankrupt, you are at the end of a long line. You might get a small fraction of your bill after 6-18 months. On the bright side, the loss is deductible.
How Do I Pick a Startup that Will Be Successful?
Someone once actually asked this. If anyone knew how to tell which startup will be successful, they’d be richer than Bill Gates. Startups are new companies with new ideas in new markets. No one knows if they will be able to build the product, get it to market ahead of the competitors, build something better, or whether the customers will like it.
Find out as much as you can about the company, the people, the idea, the competitors, and their market. Ask your friends who have real experience.
Startups can be a great learning experience and financial opportunity, but they are not easy jobs. If you want a stable job and a steady paycheck, forget startups.
Enough Philosophy. Where Are the Jobs?
Go to my page on jobs in Silicon Valley.