My Friend’s question
I’ve been asked to be a founding member of a start-up. The founder has scaled a previous company to $150M in annual revenue and expects this new venture to be their final one. Salary is low, but ownership is almost 4% with a target IPO of $1B. What would you do?
My answer
I think it depends on whether or not you can afford to have nothing to show for it other than the salary you will receive. Realistically speaking:
- Most startups fail when they run out of operating capital. Before the current economic crunch, raising capital at favorable valuations was easy, but that’s no longer the case. Multiple startups have delayed raising funding because VCs no longer value them at their desired price or are only willing to supply funds at reduced valuations.
- An exit at $1B was doable when the stock market was frothy; that’s no longer the case. Nearly all tech stocks are down significantly YTD for 2022 (Apple is down 28% YTD, Meta is down 65% YTD, Netflix is down 50% YTD, etc.) Growth stocks, in particular, have been the hardest hit. A $1B IPO exit is unlikely until we see a global economic recovery. Even if the company does everything right, the timing can’t be pinned down until the economy recovers.
- Repeat founders don’t always succeed in their next ventures. You’d need to assess how much of the market conditions that existed with their earlier successes (e.g., a booming economy) were instrumental to that success. It’s too easy to take environmental factors for granted when they’ve been constant for long stretches. We now live in a post-pandemic world with at least one superpower embroiled in a war that has no clear end in sight.
If you are passionate about the new company’s mission and can afford not to worry too much financially (i.e., you’re fine if all you ever get is the salary), then it’s certainly worth exploring.
Going into it without acknowledging that the chances of success are probably well below 50% while the economy is floundering would be foolhardy. Going into it hoping it will work out when you have financial obligations that can’t be realistically met with the quoted salary will surely give you stress on both the work and home front.
Some alternatives could perhaps be negotiated, e.g., a higher salary for a lower cut of equity. Given that the overture is coming directly from the founder and you’ve worked together previously, I expect that’s something that can be discussed.
Caveat: I’m risk-averse with financial obligations so view the foregoing with that lens.
