Startup Professionals Musings |
| All New Venture Opportunities Come With Unknown Risks Posted: 02 Jul 2022 07:05 AM PDT
According to the classic book by serial entrepreneur and former race car driver Tom Panaggio, "The Risk Advantage: Embracing the Entrepreneur's Unexpected Edge," smart business owners embrace two essential risks to every opportunity – decision and change. First, they decide on a direction to jump, and then they make adjustments and innovations to keep going and growing. In simple terms, the way you balance risk and opportunity is to look at both as two sides of the same coin. Obviously you are looking for the opportunity side to be bigger than the risk side. Great entrepreneurs have learned how to realistically assess and manage both sides of the coin in the following business opportunity and risk categories:
For entrepreneurs, both Panaggio and I agree that the first step is adopting a winner's mindset, and not become a prisoner of hope. When entrepreneurs become prisoners of hope, they look for others to solve their problem. After they decide to be a winner, the key is to embrace risk, rather than fight it, which gives you the real advantage:
Embracing risk and learning from your mistakes really is an entrepreneur's edge, since only startups and small businesses can afford to fail quickly, maybe multiple times, and all the while having the ability to pivot quickly to achieve success. In fact, these are the keys to balancing risks against the opportunities. When was the last time you felt your business was in balance? Marty Zwilling |
| Should You Negotiate Ownership Options In A Startup? Posted: 01 Jul 2022 07:05 AM PDT
For example, 200,000 shares may sound like a lot, but if the startup has issued 20 million (a common starting point), that's just 1% of the company. By the way, you will normally only be offered "options," which vest over a 4-year period after a 1-year "cliff." That means you will get none of these until after you work for one year, and the total only if you stay for four years. Plus you have to remember that these 200,000 shares could still be worth nothing in four years, depending on the "strike price" today, compared to the market price four years from now. Many employees forget that there isn't even a market for startup stock, until after the company has gone public, which hasn't happened positively to many companies in the last few years. Thus, options don't "pay the mortgage" today, so to speak. Unless you have a sizable nest egg, or a working spouse with an income to support you, I would recommend that you consider any stock options as a "potential bonus," rather than a key part of your compensation for joining a startup. With all that said, here are some "rule of thumb" guidelines on what might be a reasonable offer, as summarized from a classic article by Guy Kawasaki, and based on discussions I hear rattling around the investor community.
If you are not on this list, just worry about getting whatever your peers are getting. It never hurts to ask in a job interview what stock options are available, and don't fall for the offer which promises to "work out the equity terms later." Obviously, what you get will vary depending on what you bring to the company, and what the market will bear. The numbers I mentioned don't have a level of precision that can be associated with a particular geography, or a particular business type. Offers near the high end of a range will likely come with a lower cash salary, maybe even 50% of the going rate. Any offers of equity compensation before the first round of institutional capital should be considered purely speculative. You should also assume that your percentage will go down through dilution as the company raises additional rounds, and offer sizes will go down as the company grows. Your compensation is the total package of stock plus salary plus benefits. At best, you should view stock as "deferred compensation" or a "bonus," which has no value today, and a risk for the future that is much higher than mutual funds, or a conventional balanced public stock portfolio. Yet it has been a source of great wealth to a tiny percentage of people. Couple all this with the fact that working at a startup is much tougher than working at bigger companies – despite all the hype you see about startups which provide free food, foosball tables, and totally flexible hours. Generally, less structure means more stress, and fewer people means higher expectations, longer hours, and a job that may be gone tomorrow. The bottom line is that you shouldn't even think about joining a startup, stock or no stock, unless you believe in it and are ready for the adventure of your life. It will always be a learning experience, but it may be a bumpy ride to nowhere. It's a huge gamble. How many gamblers do you personally know that have won big? Marty Zwilling |
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