After Zynga goes public tomorrow, hundreds of its employees may see their wealth soar into the millions of dollars. The same appears true for possibly thousands of Facebook employees, when it holds its offering next year.
But while Silicon Valley appears awash in easy money once again, the reality is that getting rich at a startup has never been so complicated.
It’s not exactly news that valuations are skyrocketing into the stratosphere at a rate not seen since Internet Bubble days. Four-year-old Zynga will price tomorrow at a $10 billion valuation — half what was expected five months ago. Meanwhile, three-and-a-half year old Airbnb, which lets people rent their homes to travelers, and two-and-a-half-year old Square, which has developed an easy payment method for mobile devices, are each reportedly valued at north of $1 billion.
But while one might think these jumps in valuation would be great news for current and future employees of these companies, that’s not always the case. “Obviously, if you can get in early on, that’s the ideal situation,” says longtime recruiter Bill Beer of Daversa Partners, whose clients include high fliers like Zynga, Airbnb, retailer Gilt Groupe, and Twitter.
Once an Andreessen Horowitz establishes a towering valuation, however, the picture can change quickly, dramatically altering strike prices for existing employees who haven’t yet exercised their suddenly pricey options. It also leaves far less upside for potential recruits.
“Two years ago, [senior] candidates could count on getting 1 percent,” says Beer. “Now, private companies are offering .001 percent. Once a company has $50 million in revenue, you’re not getting 3 percent of that company, no matter how high up you are,” he says.
No wonder Beer recommends that startup employees focus on their potential upside, not company hoopla. “I don’t care that Zynga will go out at $10 billion,” he says. “[Will it] get to $20 billion? What are the chances it will double in value?”
As an example, Beer points to a corporate client that may go public in the next two quarters. The company hasn’t had to raise a round in years; as a result, it’s still enjoying a $150 million market value. Since one of this company’s closest competitors is a public company with a $700 million market cap, a new employee at this startup could “see [a] 4x or 5x [increase in his or her equity] just for walking in the door,” says Beer.
In fact, startup employees who want the best odds of getting rich should probably assemble as broad a portfolio of equity as they can. “You have no idea what’s going to pay off,” says Beer, “and there’s never been a bigger opportunity cost for any decision you make.”
Yet focusing on money alone has its consequences, too. At a recent panel held by Founders Den, a San Francisco-based office space for experienced entrepreneurs, Rusty Reuff Rueff — a public company executive and startup CEO turned angel investor — spoke alongside Beer about what startup employees should know about their equity. According to Rueff, who spent seven years at Electronic Arts beginning in 1998, job hopping is a mistake.
“It’s too bad that people have again forgotten that notion of, ‘Let’s go where we think we’ll be happy and fulfilled,’” Rueff says. “When you’re fulfilled, and you work with people you like, you’re a lot less likely to look over your shoulder at every past decision.”
Rueff knows whereof he speaks. Back in the ’90s, Steve Jobs offered him a position at Apple that came along with 300,000 shares of Apple stock priced at $14 per share. The Apple shares could have made Rueff a “bazillionaire,” he says. But he insists he doesn’t regret the decision. “At the time, [working for EA] was like playing for a Triple-A baseball team that was about to play for the pennant. [The offer from Apple] was like getting called up to the majors. But I couldn’t leave the team; I was needed.”
With so much money at stake, choosing company culture over the opportunity to build equity at multiple startups isn’t for everyone. Then again, working solely for some great future payout can prove a fruitless undertaking, particularly given the capriciousness of startup equity packages.
One of the few things startup employees can depend on either way? That getting rich in this market is a whole lot harder than it looks.
(CORRECTION: We misspelled Rusty Rueff’s last name in the original version of the story.)