If you like money you ought to take a that lucrative corporate job. The other day a colleague asked me for some interesting career advice. Basically he wanted to know if he should join an early-stage startup as CEO or take a lucrative corporate position as a vice president. In general starting, early-stage companies is something people do because they love building things more than they love money. But in this case, my friend was focused primarily on securing the best financial return on his time over the next decade. I thought it might be interesting to write about his particular situation as a case study.
My friend is 50 years old and has an extensive startup and corporate experience as an executive. His first option is with an early stage startup (seed funded with an MVP). Working with the founder the plan would be to raise a relatively large round from the founder’s existing backers — a process that would take 60–90 days. Upon funding, he would receive a fairly typical salary of $180,000 per year plus between 10–20% of the company.
The other option is with a large Fortune 1000 company running a division leveraging his experience in the space. He would receive an annual compensation package worth about $500,000 plus various other fringe benefits and annual stock grants. Living in a high-cost area with children in college he needs about $250,000 to cover his annual expenses.
Assumptions:
- Meaningful startup exits take on average 8–10 years.
- Less than 10% of funded startups reach meaningful exits (M&A or IPO).
- 50-year-old startup founders are 2.8X more likely to succeed than a 25-year-old founder.
- The typical successful corporate executive can expect 3–5% annual salary increases.
The Corporate Option
If my friend took the corporate position he could reasonably expect to gross approximately $6 million dollars over the next decade. If his standard of living remained constant (he is post-mid-life crisis) he’d have about $3.5 million in savings and investments.
Given his clear interest in the startup space and access to Silicon Valley deals it isn’t far fetched that he might invest $700,000 of the $3.5 million in around 28 early stage tech startups (about $25K each). This would give him a lot of exposure to early-stage companies that could benefit from his experience and contacts and scratch his startup itch.
The Startup Option
If my friend took the startup position he could expect to earn $180,000 in his first fifteen months. Given the fact that 90% startup CEOs are terminated within a year of raising outside capital it is more than likely this is where the story will end. However, assuming he either retains his CEO title or a similar one with a similar compensation package he could expect to gross $1.8 million and net a negative $700 thousand (i.e. each year he worked at the startup, given his $250K living expenses, he would be investing $70,000 a year into the business by covering the shortfall).
Thus after a decade, he’d be $700,000 in the hole with only a single investment to show for it — his startup. The chances of a startup providing a meaningful exit are between 1–3%.
Given the fact that older founders are 2.8X more likely to achieve success, we could assume that his startup might have a 10% chance of success. Successful startups usually raise four rounds of equity capital and the founder/founder team usually keeps about 15% of the business when it is all said and done — my friend as the hired pre-funding CEO would receive 20% of that or 3% of the total. Assuming the company raises $10 million and achieves a $100 million exit (i.e. 10X) my friend could expect to make $2,700,000 or $2 million net (less his $700,000 investment).
Conclusion
99.99999% of the time it is better for your wallet to take a lucrative corporate gig over a startup opportunity. In this case, without any appreciation or investment, my friend would make $1.5 million more than taking the corporate job. This doesn’t take into account that the odds against a successful exit are almost insurmountable.
If you take into account the fact that at least one of his 28 early-stage investments might actually succeed and that he would likely generate fairly positive stock market returns on the rest of his money the upside would likely be FAR greater.
Of course, there is a chance than he might be starting the next Google or Facebook. At the end of the day, people join startups because they love the startup game. Some of us in the startup world can’t get those lucrative corporate jobs because we’re just not wired for them.
If you want to make the most money possible and you’ve got the chops to secure a lucrative corporate position I’d highly recommend you stay out of the startup game — you’re going to be disappointed. Instead, invest your money in those of us who can’t do what you do…
P.S. my friend took the startup job.
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