You Should Get Wealthy Joining Startups

Startup success is not a "lottery ticket" -- a framework for evaluating opportunities.

Many talented people view joining a startup as "buying a lottery ticket." This bothers me because it makes the whole enterprise of working on a startup seem like a random game of chance. This outlook keeps talented people sidelined at big tech companies instead of using their talents to build a better future. It keeps them from building real wealth for the world and for themselves. There’s luck involved in startups, of course, but you can immensely improve your odds over a random baseline. In fact, you can increase your chance of choosing a winning startup to join by an order of magnitude if you learn the following:

1) how to select a startup to join

2) what questions to ask the founders

3) how to evaluate their answers

I’m going to address topic 1 in this post and will leave topics 2 and 3 for future posts.

How to select a startup to join

The first thing to understand is that not all startups are the same. You should understand that there is learnable, non-public information that can help you investigate which startups to consider. It’s a lot of work to get all this non-public information by yourself so it helps to have a network of people who can help you source and evaluate the information.

5 Stages of Startups

Start by narrowing in on which stage of startup you might like to join. Think of startups as fitting into roughly 5 lifecycle stages of traction. There is never a guarantee that one phase will progress to the next. Note that these stages are entirely irrespective of funding milestones. Funding rounds can be a confusing signal for traction — we’ll address this topic in a future article. The 5 stages we’ll consider are the following:

I. Pre-pmf

II. Initial compounding

III. Vertical wall

IV. Initial flattening

V. Big company

1. pre-PMF (pre-product market fit) - at a pre-PMF startup you are taking on huge risk, almost like that of a founder. You should do this if you love the people, the mission/vision/problem, the technical challenges/work, or you think of the role as preparation for founding your own company in the future. And you should be explicit that you’re trading off more likely near-term wealth generating opportunities for these other aspects you value.

2. initial compounding - this is the very best time on a risk adjusted basis to join a startup if you want to get wealthy. The vertical wall is not guaranteed, but if you can get an inside look at the data (customers, users, revenue, etc. - we’ll discuss how to evaluate the data and the accompanying narratives in future posts) you can know before the market knows that this startup has a shot at greatness. The company is not being flooded with resumes yet since the talent market doesn’t yet know the inside data. And you can likely still get a substantial enough equity stake that if 100x growth occurs you’ve probably secured some meaningful wealth. It’s probably unfashionable to join a startup at this stage. Your peers and parents might think it sounds like a bad idea. But if you’ve done your research you’ll have a lot more data than they have and you can make a better decision about the risks involved and the likelihood of a positive outcome.

3. vertical wall - this can be a good time to join, but the growth is probably more obvious to everyone at this point (including the founders) so the equity packages are much smaller. In order to generate substantial wealth joining at this point you really need some surprises to the upside that seem possible, but are still uncertain. Once things get going in a technology startup they often open up a lot of adjacent opportunities. But you should be evaluating, “how big can this core thing get?” or “how does the core provide strength at entering new adjacent markets that themselves could 10x the growth from what everyone is already expecting at this point?”.

4. initial flattening - this is probably the worst time to join a startup on a risk-adjusted basis. Huge growth has occurred and everyone is still pricing their assumptions about the equity as if you’re on this vertical wall, but the reality is that the company has huge revenue, growth is slowing down and you’re entering the “big company” phase. Unfortunately, the market makes a huge mistake about this. This is the time when peers and parents think it sounds like a good idea to join the company because they’ve heard about it and heard about all the success - maybe they’ve even read about it in a national news outlet. If you’re going to build wealth in tech you have to be exposed to risk. Unless you believe in a strong Act 2 that could surprise to the upside you should be very cautious at this point.

5. big company - this is just what it sounds like. The company has well established products, revenue, process, hierarchy, and teams. The big compensation at this point will be granted to executives or people climbing career ladders - because of the decrease in risk there is also a decrease in upside surprises that generate wealth. The typical builder is getting a “market rate” in cash compensation. Equity matters so little that job seekers are often granted a phantom version of equity called RSUs that can be reconfigured at the will of the HR department - this is very different from “owning a piece of the company”. You can still build wealth at a company in this phase, but the techniques for doing so are vastly different from building startup wealth. So much so that they’d require a totally different framework.

If you want to maximize your chance of building wealth in startups you should be trying to identify companies which are either just beginning to compound (2) or are on a vertical wall (3) that you suspect have a lot of running room left to grow. A nice side-effect of joining type (2) and (3) companies is the network and diaspora. Your colleagues will be similarly talented and ambitious. You’ll build a great network that itself will lead to future quality career opportunities. Many of your colleagues may start companies and you’ll have proprietary relationships to angel invest in these talented colleagues.

Generating a candidate list of startups

If you are indeed looking for companies of type (2) and (3) you should make explicit asks of your network to meet such companies. Make these asks among venture capitalists or well-networked friends/angels. Because venture capitalists and angels build broad portfolios of startups and spend their days evaluating/discussing a wide range of startups they can be good sources of high quality information. You can make specifics asks like, “I’m looking to join a company which has recently achieved product market fit. What are your best recommendations?”

However, any given VC has some conflict of interest. They’ll almost certainly recommend you focus on joining one of their portfolio companies. If you’re not specific about what you’re looking for they may even guide you toward a company that is having a tough time hiring. So use these conversations to generate a candidate list of startups. But recognize you’ll still have to do your own research/vetting. The stakes are high, so it’s worth the extra work.

Your secret advantage over investors

If you’re contributing your labor in exchange for startup equity you have one huge advantage over investors and this is rarely discussed. As an investor it is always a challenge to get the opportunity to invest in the most obviously inflecting companies. The inflecting companies only need to raise a fixed amount of capital at any given moment so they only have space for a limited set of investors. The faster a company is scaling the more employees they need to hire so you are competing for a much less constrained number of spots. Some of the best signals you could get from investors is to hear about the companies they tried to invest in and couldn’t. In many cases you can walk right in the door, get a job, and begin earning valuable equity there.

Join us, we can help!

I was fortunate to join Google while it was relatively early on this vertical wall (3). At the time it was only a search engine and had under $100m in annual profit. There was no Maps, Gmail, Chrome, YouTube, Android, Play Store, Cloud, or Waymo. All of those were surprises to the upside. The choice to join Google at that time resulted in life changing wealth for me.

I’ve also invested in hundreds of companies and seen what it looks like from the earliest days when something is really starting to work, but before the market recognizes it. I’ve seen this happen dozens of times. I guarantee that there are learnable patterns to greatly increase the chance of you selecting one of these for your career.

I want to see more people get wealthy through startups. I hope that in sharing this framework you can make more informed career decisions to help you achieve this. We host a monthly startup event called Founders You Should Know where we showcase founders of the best startups we’ve seen. Apply to meet the founders at our next event.

In parts 2 and 3 we’ll discuss “22 Questions to Ask Founders Before You Join Their Startup” and “how to evaluate their answers”.