Some people are not founders but would still like to work at startups for the potential financial benefits. It’s OK to not be a founder. Maybe you don’t have a good idea, maybe it feels overwhelming or maybe there are already plenty of startups to join. Financial benefits of startups don’t just belong to founders, but it’s exponentially harder to make the big money if you are not a founder, CEO or C-level person at a startup.

So you’ve heard that WhatsApp was acquired for $19B by Facebook when they had only 50 employees or that Peak Games was just recently acquired by Zynga for $1.8B and you thought, “hey why don’t I join a startup and get a piece of that action”. A quick way to get rich, right? Not so fast.

There are a couple of reasons why it’s not so straightforward.

Let’s consider the options and in particular at what stage of the startup’s life or journey is the best time to join.

1) Should you be one of the first few employees?

I was the 15^th employee of the first startup I joined in California.  2 years after I joined and after 4 years the company was founded, we had a layoff because we had burned through 4 years of VC investment but had no shipping product as we had pivoted a few times. Essentially, we tried 2-3 different product ideas but for some reason or another, we decided that a different product or market is the way to go. At the same time, a recession was affecting the economy. So, not a good time to raise funding. This was our 2^nd or B round. Guess what? It was a down round.

What is a down round? It’s when the company doesn’t hit its metrics and is valued less than the previous round. Yet, you need cash. So, what do you do? You give up more of the company equity to VCs because you have no other option. You give way more than you would have had it been an up round, where the company was growing and was valued higher than its last round!

That is what exactly happened, and my shares got diluted. Essentially, when I first started 2 years ago, I owned 0.2% of the company and now I owned way less, because we had to issue more shares and sell it to the investors and because it was a down round our company was less valuable to begin with.

But I thought that if the company IPOed or got acquired for $1B, my 0.2% would have been worth $2M. And even after the dilution, which resulted in my shares going down to 0.01%, it was still worth $1M. While $1M in today’s dollars (year 2020) may not be much, particularly in the Bay Area, this was 18 years ago and I was not living in the Bay Area. So, $1M was still a lot of money. In fact, I would have been able to purchase the 10-unit multiplex that I was living in and paying rent! Not that I would have done so, but that gives you an idea of the buying power at that time for my location.

While I was upset that my shares got significantly diluted, about 40% (yes almost half) of the employees were laid off! I was lucky to still have a job.

What happened to the employees that were laid off? They lost all their shares because none of them had purchased their shares as the company was not even close to an IPO or trade sale. It didn’t make sense to purchase shares when the risk of failure was still so high. So, these employees, some of which started working there before me and who had spent very long hours had no financial gain apart from a base salary. No bonus, no profit sharing, no nothing. (that is not correct grammar, but it sounds cool!). On top of that they had lost their jobs during a recession. Yikes!

Essentially, being an early employee did not pay off for these engineers. But the few who managed to stay until we got acquired had accumulated enough shares after 5 rounds of funding (not all of them down rounds) made some money when the company was acquired 11 years after it was founded and 9 years after I started.

2) Should you join in the middle of the startup journey?

Just earlier in this blog post I mentioned that the first startup I joined was acquired after 11 years it was founded and that in its 4^th year, we had a down round. It really took a couple of years for the startup to pivot a couple of times and figure out the right product market fit and what we should really develop to be successful. That took us to years 4 and 5. Some people joined the company in this time frame. They skipped the “I’m trying to figure out what to do while I burn investor money phase” and joined when the company figured out the right product, right vertical market and the right strategy.

But we did not yet have a shipping product. It took us another 2 years to get the product out. We started to see some sales, but the cash flow was nowhere near profitable. We definitely could not sustain ourselves. We needed to raise funding again. More delusion of shares, but at least it was an up round. So, while you earn fewer shares of the pie, the pie is much bigger.

Is this a good time to join? I would say no. It’s better for the company to not only figure out the product-market fit, figure out the strategy and the customer focus but also it should get the product out. You really will not know the initial reaction of the customers until the product is out, they buy it, use it and recommend it. The best indication is sales numbers.

Many customers will not trust doing business with a startup on their first product. This is particularly true for a B2B company. Think about it? Many startups fail. 90% to be precise. As an enterprise buyer, would you bet your job by purchasing a product by a startup? You might if it’s cheap and it won’t affect your operations if it doesn’t deliver what it promises. A small wifi hot spot for one employee in a large, 10,000-person enterprise might not be a big issue. So, sure you might try a startups product in such a limited fashion. Or just a small innovate printer for a few employees? Why not. There is no harm.

But, how about completely replacing your SalesForce database? How about spending $3M on a security system for your data center to protect against hacks? Will this startup be around to add new features as more hacking methods are discovered? Will they provide 24/7 support? Will they be around 2 or 3 years from now to fix bugs?

See, it’s not so easy to sell to the enterprise your first product. You might see some success here and there, but chances are it will be small in quantity. It’s very difficult for B2B startups to show success in their first-generation products. On the other hand, B2C is very different. You can be a startup and start selling earphones to consumers

3) Should you join once they have a proven product and good market traction.

By the time we were in our 7^th or 8^th year we had 2^nd or 3^rd generation of our product out, way more customers (definitely more than you can count with two hands) and a reasonable order volume. But we were still not profitable. We still needed VC funding.

But everything else was pointing to the right direction. Given that we were acquired on our 11^th year, this means, it still took us another 3-4 years of hard startup work (this means long work ours and weekends being in the office) before we saw some of the sweet acquisition money. In the meantime, we released the 4^th generation of our product and were working on the next one.

We were still not profitable and to grow we needed to hire more salespeople, more business development people and even more engineers to keep up with the demands of our new customers that were asking for custom features. And when you are a startup, desperate for business, you just cave into customer demands and say yes. We were desperate for more people to join the company to help us grow and if the economy is doing well, then to compete against larger companies who would also be doing well, you offer generous base salaries and equity.

This is really the best time to join.

The best time is to join a late-stage startup

Majority of the startups are not acquired just a few years after they are founded. I’m sure you will find anecdotal evidence of some miracle companies, but the majority are acquired much later 7-8 years is not out of the question with many more in the 10-12-year range.

Lessons learned from my 9 years at a startup

1) By waiting to join the startup, you can avoid many of the early mistakes and risks

2) You can be confident that the startup has figured out a profitable or sustainable business model

3) It will be either closer to an IPO or there might be larger companies eyeing to acquire it.

4) If you join when the company is about to accelerate growth and the economy is doing well, then you can negotiate a really good package with a generous equity package.

5) If the company still fails, you would not have spent 10 years in the same company. It’s a numbers game after all. You can try another startup and not feel like you spent your best years all for nothing (at least nothing in the financial sense. I covered a number of good reasons outside of financial gain to join a startup in this blog).

From a risk-adjusted return point of view, joining a late-stage startup as a non-founder delivers the best financial return for a regular employee.

Would love to hear what you think particularly, if you have experience in this area!