Stocking Up

1st Guy: “Decided to leave the corporate world, mate. Got headhunted by a startup.”

2nd Guy: “Wow, sorry to see you go man. We were doing so well here. They must have offered you a sweet package?”

1st Guy: “Not really. Well below what I am currently earning if I’m honest. Good stock options though and that’s the big win.”

2nd Guy:  “Cool, can you cash them in whenever you feel like it?”

1st Guy: “No.”

Joining a startup is a rite of passage. A bit like the gap year for millennials.

Basically, if you don’t join a startup these days, well, you’ve sold your soul to the bitter world of capitalism.  Don’t even think about picking up a craft beer – you aren’t cool enough, mate.

But what is the dream like, versus the reality?

1. Vesting

Those options you were granted? Not technically yours. Got to work for a few years before they “vest”, or confusingly, “reverse vest”, and become yours. Until this time, well, you’re just working for a below par salary.

2. Down rounds

7% sounds like a good healthy figure. Nice to tell your mates down the pub. What I wouldn’t give to own 7% of Facebook, etc etc.

What if the Company raises more capital? Your holding is diluted.

What if the Company raises this capital at a reduced share price?  Your holding is smashed.

3. Liquidity

On paper, I have won as many Premiership Titles as Steven Gerrard. I therefore must be his footballing equal.

On paper, you own 7% of a Company worth £12M. However,  try and take this down to the mortgage assessor – see what they make of it.

The problem is share options have no liquidity. They are purely paper based, a theoretical indicator of value. For now, they have no worth. Why? Because nobody is going to give you any money for them.

This is of course entirely different to owning stock in a publicly traded Company, wherein these options have an entirely real value.

Weight it up

The virtual reality is that 9/10 startups fail. 90%.

A career in Venture Capital has taught me that it is very difficult to pick the winners, but it is very easy to avoid the losers.

Let’s say you’ve picked yourself a loser. You devote 5 years of your life to it. A hell of a ride. You took a 20% pay cut to join and have waived a pay rise for the duration of your stay. You own 7% of the Company. For simplicity, let’s say you earned £100k in the corporate world, £80k at your local startup. Let’s also assume a 5% annual salary increment in the corporate world.

By the time the administrators arrive at your startup to sell off the ping pong table and bean bags, you will have earned £153k less than you would have.

What if?

Soleio Cuervo

Not a household name admittedly.

His net worth? $3.8 Billion.

His claim to fame? Invented the “like” button on Facebook.

Left a well paid gig in web design to work for Facebook zero cash, just stock options. It paid off.

As always in the start-up world it is a matter of balancing risk with reward and I applaud those who give it a shot.

Phil Patterson