Dustin Moskovitz thinks it’s often more financially rewarding to try and be an early or mid employee at a really good-looking startup than start your own. This meme has been going around a lot recently—I’ve seen lots of people make claims that there’s an unreasonable dearth of early employees relative to founders. Often there’s some implication that this is a market inefficiency because it’s glamorous to be a founder and not to be an early employee. How true is this in practice?
If it were true, it would be pretty cool, since it’s much easier to find the next Dropbox-at-100-employees than to build your own startup. But that’s why it seems implausible to me
Dustin Moskovitz spitballed that Dropbox might give 10bp of equity to their 100th hire. That seems high based on various sources (e.g. the Wealthfront startup salary tool, unfortunately now taken offline). For another thing, employee #100 at Dropbox would have joined in late 2011 or early 2012, when Dropbox was already valued at $4 billion. That would make 10bp of equity worth $4m already, which is kind of unbelievable. If that’s what they were actually paying, Moskovitz’s advice is more like “work somewhere that pays really well,” not “take advantage of a market inefficiency”—the reason you would have made money from Dropbox is more that the equity was already worth a lot than that it had high risk-adjusted returns. (Dropbox was valued at $10b in early 2014, for a return of 35% annually.)
What about other companies? As a rough proxy for being “Dropbox-level” obviously a good idea I’ll use startups that got nominated the TechCrunch “Crunchie” awards for “Best Overall Startup” in ‘08, ‘09, ‘10, ‘11, or ‘12. It’s annoying to figure out how much equity each of them actually gave employee #100, and some of them haven’t exited yet so it’s not clear what the eventual payout will be, but we can still treat someone’s equity in a company as an investment and figure out how much it grew. If the companies all give roughly the same nominal dollar value of equity to each hire (a questionable assumption to say the least!) then that will be a good proxy for how relatively lucrative it would have been to work at each one. I’ve put my work in a Google Sheet.
Of those companies, two were acquired too quickly for someone joining at that stage to see much return (Instagram and ngmoco); two were unequivocally duds so far (Zynga and Fab) and two more were probably bad ideas by the time they got nominated for a Crunchie but it’s harder to say (Tumblr, Groupon). Four more (Gilt Groupe, Hulu, Quora and Square) haven’t raised in over a year and so it’s not as clear how much of the return employees will eventually realize.
The other 9 of them had a geometric mean IRR of 58%. It’s not clear whether you should count the questionable 8 as giving essentially no return but no loss on average (which would lower the overall IRR to 27%) or what. Either way, it’s not too shabby of a return. That’s especially true if you compare it to the counterfactual of working somewhere with a high cash salary and investing it: if you work at a startup you get 4 years of vesting worth of equity at the price when you joined, which effectively gives you a big advance on the principal you can invest. Of course, there are lots of caveats, like that IRR is a pretty bad metric here since VC equity and employee equity are pretty different, or that you should take into account the present value of the option grants, not just future returns. Looking at the IRR is just a very rough first pass, nothing more.
Finally, it’s worth keeping track of which companies you might apply to if you were using this strategy today. The nominees for the 2014 Crunchies (the last set available) were GoPro, Snapchat, Stripe, Tinder and Uber.