As of March 2022, within the first 5 years of a startup’s life 48.4% fail. If you stretch that timeframe out to 10 years, 65.1% will fail (Source: LendingTree). Interestingly enough, Y-Combinator claims that 90% fail[§] and then says that “more than 50% of YC companies are still alive 5 years later.” If you read between the lines, YC’s success rate is no better than the industry average’s success rate (Source: Y-Combinator).

But I’m not here to tell you why startups fail, there are plenty of articles about that. A much more important and nuanced discussion is how a prospective startup employee can quantitatively determine if they are making a wise decision in joining a startup. I would like to share with you how I’ve made my decisions over the years and what advice I’ve given to people as they have made their own decisions.

Should I Join a Startup?

The sweet spot is where Risk, Reward and Time intersect.

I’ve asked and been asked this question many times. Maybe you are asking this question right now. Behind the question of joining a startup is the fear and uncertainty around what that even means. There are very good reasons for this uncertainty. Many factors are at play making a decision very confusing, especially for the first-time aspiring startup employee. I’ve identified three questions that can be used for self-evaluation.

How much risk am I willing to take?
Are the rewards worth taking the risk?
How much time am I willing to wait?

The intersection of these three questions can help you figure out your next move. At the end there is a wildcard. This wildcard can help clarify and minimize risk at the potential cost of minimizing reward.

How much risk am I willing to take?

If 2023-34 has taught me anything, it’s that jobs are risky no matter where you look. Big and small companies alike fail and or have to take drastic measures to maintain profitability. But the allure of a startup is its potential for great reward. I say “potential,” because rewards are not guaranteed and some risks don’t offset the reward. To determine how much risk you’re willing to take, it’s good to evaluate what the risks are. Here are a few of the top risks:

Paycheck - For startups the paycheck is where people notice the pain the most and where a startup has to really sell themselves. Most startups cannot pay you with cash the market rate that you might make at an established company. Lack of pay is usually sweetened with some sort of equity compensation. The risk involved is that people often take salaries that they can’t really afford in the hopes that the equity will pay off the risk.
Equity - Since startups don’t usually pay market rates, they will compensate their employees with equity. Equity is usually spoken in terms of percentages of the overall company valuation. Equity is only valuable when either company sells (if ever) or when it changes to something you are able to sell. The risk of equity is that it’s only potential money and not guaranteed. If the startup fails and you were hoping that equity to keep your life afloat, you’re screwed.
Savings - This isn’t talked about typically, but is applicable for people who have held a market rate job. If you join a startup and are getting paid less than you were at your previous job, this means you have to make up for the difference somehow. While people could make life-style changes to accommodate, sometimes this is not enough and the difference starts coming out of savings. If a startup fails, you have now lost real money in addition to the potential money.
Time - Startups are nothing short of grueling. Yes they are extremely enjoyable and rewarding, but at the end of the day you will be sacrificing more time into the startup than you ever anticipated. There is a do-what-it-takes mentality and sometimes doing what it takes means staying up all night or working long hours.
Personal Life - The sacrifices of time can seep into all other areas of your personal life. This can affect mental and physical health, friends, family and hobbies. These are things that everyone agrees are the most important things in life, but are rarely talked about.

After reading these risks, which of these risks are you willing to take and to what extent? If there are people in your life who might be affected, are they also bought into these risks?

What are the rewards that I will gain?

Clearly there must be rewards if so many people are taking risks, right? The biggest allure for joining a startup is the potential for a massive cash payout, but there are other rewards that I’ve come to appreciate more important than money. Here are a few of my top rewards:

Money - The potential for a significant payout is alluring. Personally, I’ve run the numbers in my head, calculating out how much I’d make if ___ sold for X millions of dollars. The potential is huge, especially if you are one of the lucky ones to join a “unicorn.” But I hate to break it to you, while I have enjoyed a couple decent size payouts and am grateful for them, they were not life-changing millions. More on this later.
Autonomy - What keeps me coming back to startups is not the money. It is the autonomy. I love to be able to build things fast. I love not having all the red-tape and bureaucracy of a large company. I love to be able to use my knowledge in whatever way the startup needs at that particular moment in time. These reasons are why most people come back to startups over and over again.
Experience - There is nothing like working at a startup to accelerate every aspect of your skillset. You will be forced to do more things than you are currently good at. You will also gain valuable knowledge and skills you might not otherwise have gotten in an established company.
Influence - The point of a startup is to try to do something nobody else is doing or improve upon things that are broken. Startups have the potential to change people’s lives or even the world. On a smaller scale, startups can make their mark in the industry they are a part of. This is an extremely satisfying feeling.

There are probably more rewards, so I encourage you to think about what those might be? Do these rewards outweigh the risks?

How much time am I willing to wait?

At this point you’ve weighed the risks and rewards and hopefully the rewards outweigh the risks. Let me throw the wrench of time into your decision making process. There are two limiting factors that affect everything about the risks and rewards (no this isn’t the wildcard yet).

Runway - Remember in the risks section how you usually have to give up market rate pay and potentially live beyond your means while burning through savings? Burning through savings cannot happen indefinitely. Rewards need to be realized before you run out of your own runway.
Depreciation - I have never heard people talk about this in public, only in the back channels of Slack. But the longer you have to wait for the rewards, the less valuable that reward becomes. Let me rephrase that. Over time there comes a point where the risks start outweighing the rewards.

“The longer you wait for the reward, the less valuable that reward becomes.”

Depreciation - The Dirty Truth
Depreciation of the end reward is possibly the best kept secret in the industry. It’s tricky to talk about because I have benefitted immensely from startups but have also been victim to depreciation. The reality is that most employees of a startup do not see the types of monetary rewards they are expecting and the monetary risks they put in typically don’t get compensated in the drastic ways they are hoping for.

For example, let’s say you had to take a 20% pay cut and are also burning through 5% of your savings each year. To recoup this money you would need to make 25% per year in some sort of monetary payout. The more years a startup exists and the longer you are working at sub-market rates, the more money you have to make back in the end. If you only make back what you put in, you’re going to be sorely disappointed monetary gain was the only thing you were looking for in a startup.

The Wildcard - Size

The beauty of my advice is that you can adjust the variables of the whole equation by taking into account the size of the startup you are looking to join. So let’s say you have determined that you want to work at a startup for various reasons, but the risks are holding you back. If you target a specific size of startup, you can maintain some of the rewards while reducing the overall risk.

Size affects stability - If you are someone who needs stability, finding a startup that is a little more established can give you the kind of stability you are looking for.

Size affects autonomy - If you are someone who needs more business structure, but still like a bit of autonomy, a larger startup may be able to provide better overall processes and structures to work within.

Size affects responsibilities - Joining an early stage startup is great because it’s easier to be a CTO. But being a CTO at a small startup could very well be a Senior Engineer at a larger startup. This could be good or bad depending on how you look at it. If you want startup life, without the ultra high expectations and responsibilities, sometimes it’s better to take that “lesser” title at a larger company.

Size affects speed - Startups can be the Wild West. Move fast and break things is sometimes the unsaid motto. But not everyone wants to work in that freewheeling environment. Similarly to autonomy, going to a larger startup can also bring a bit more thoughtful process. Speed is traded for a somewhat slower more thoughtful approach.

Size affects reward - Larger startups bring more stability. Stability reduces risk. Lower risk reduces overall rewards. Larger and later stage startups are able to pay you what you are worth, but this comes at the cost of equity dilution. If you’re happier with a better paycheck versus a big payout someday, larger startups might be for you.

As you can see, there are a LOT of factors that change the narrative around whether working at a startup is a good idea. It’s important to look at things are holistically as possible and adjust the parameters accordingly until you feel comfortable. You feeling comfortable is the key phrase. Some people are willing and able to take greater risks than others. Never take a greater risk than you feel comfortable taking. Never force someone to take a risk they do not feel comfortable taking.

What About My Journey?

Let’s get personal. I have been a part of multiple startups and was almost a part of another. One startup failed, a couple were mildly successful and one was extremely successful. The one that I was almost a part of was extremely successful.

I have never put in physical money into any startup that I’ve been a part of. I’ve never had and still don’t have the luxury of that type of cash to invest. My investment has come at the cost of my salary.

The one time that I took a significant pay cut I regret. It was a bad decision for me and my family to make. It was also with the startup that failed. I came out of that experience financially in the hole with no job, no backup plan and started to quickly burn through my savings.

The successful startup that I didn’t join, I don’t regret not joining. Even though it would have meant significant (life changing?) cash, I would have sacrificed my own personal mental health and family in the process.

The other startups that I have been a part of have had varying degrees of financial success. But I realized that when my biggest success occurred, selling Simplecast to SiriusXM, I was never in it for the money. Money would not buy back any of the things I might have sacrificed along the way. The payout, while decent, was not life-altering. I’m thankful that I always evaluated what I was willing to sacrifice versus what I was looking to gain.

If working with startups had only been about making millions I’d be an extremely disappointed person right now. The one thing that kept me coming back for more were the joys of startup life. Working with really smart people. Building really cool things. Disrupting industries.

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§ If you can find the actual source of this number I’d be grateful. I’ve scoured a bunch of articles, but most articles to link to other articles and eventually lead to a dead-end with no statistic.