Risk reward evaluation in a new venture

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Topic Author
chenzi
Posts: 125
Joined: Thu Aug 06, 2015 3:07 pm

Risk reward evaluation in a new venture

Post by chenzi »

Technologist family, working with one of the large tech companies that would put our 2017household yearly compensation 700-800K (More than half of our yearly salary is stock and it has appreciated significantly). We are at early to mid 30s family.

Received an offer from a tech startup (currently valued in $100m range and revenue growing 200%+ yoy in a niche area).
The stock options given would theoretically provide a payoff of $1.5mil if the company hits $1.2bil valuation and Ipo say in three years. The financial payoff looks better if the company hits $2-3B valuation but the probability to do that is unknown!
I could stay in my job and get first kind of payoff. It isn’t a rational financial decision to consider this startup offer (the area of work for the startup is quite interesting and a change would be refreshing).

Trade off - Approximately 50% of my yearly salary for the startup equity. We would still be in 500K+ income range - reasonably comfortable to pay our monthly mortgage and other expenses. Our savings would take a hit, but I have been too comfortable in my current job that thinking to make myself uncomfortable and learn new stuff. If things doesn’t work out, I can hopefully find similar job / come back.

I have been trying to rationalize my decisions financially but the risk reward doesn’t look great considering my current state. I tried getting advice from Silicon Valley friends who say that moving to startup isn’t a rational financial decision but an emotional journey and the “journey and experience” matters! This could be SIlicon Valley Koolaid but still thinking of trying out.

What framework / how do I evaluate this decision? Any experiences would be very helpful.
Ron Scott
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Re: Risk reward evaluation in a new venture

Post by Ron Scott »

The pot at the end of that rainbow does not blow me away in comparison to your current situation. There will be plenty of start ups coming down the line and I think you’ve done all the modeling you need to at this point in time. Bottom line I would wait for a better opportunity and enjoy what I had
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.
123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Risk reward evaluation in a new venture

Post by 123 »

I would tell you to stay put. As the earlier response said you can always think-up at pot of gold at the end of the rainbow in the land of greener pastures for that alternative job. Lots of things happen with start-ups, in spite of your skills and business acumen, a simple pivot of some type happens and you could be out of the picture. Sounds like you've got pretty much of a "sure thing" where you are at.
The closest helping hand is at the end of your own arm.
Topic Author
chenzi
Posts: 125
Joined: Thu Aug 06, 2015 3:07 pm

Re: Risk reward evaluation in a new venture

Post by chenzi »

Thanks everyone for your advice. It’s a lesson well learnt taking a significant paycut - I joined the startup company and the product isn’t doing that great and many things inside aren’t as rosy as projected outside :-) it’s been six months with the startup and am looking out to keep backup options :(. The company is a typical HBO Silicon Valley startup with lots of koolaid to drink in terms of culture.

But thanks due the the crazy job market, I am able to find another offer in a top 10 tech firm and negotiate upwards. I have been offered a management role with around 500kish total compensation (220k base, $1 millionish in stock/4years with yearly refresher on top and 40k signon). This is much more real money compared to startup paper value that is projected to provide similar returns. The opportunity cost is that I lose any stocks in startup as I didn’t complete a year.

While it’s a no brainer from financial perspective (this would also put our household income at $1mil+/year due to spouse also doing well at work), I keep wondering if i should give few more months to startup or just change for money and financial safety. I am tending towards the larger company again! It does feel little unreal more than doubling my compensation in last three years due to crazy tech boom, hoping to have decent safety net before any crash if/when it happens .
Zombies
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Re: Risk reward evaluation in a new venture

Post by Zombies »

Having been in both types of companies, it’s not the comp that stands out but the environment. Some of the big companies aren’t fun but with the right teams they can be great places to work with reasonable hours and comp equivalent to hitting a double at a startup.

Based on your comments, it seems like the startup is not a great working environment so bouncing back to a large company seems fine. If you said you love it there, the founders are inspiring, and you think the product is going to have meaningful impact, I would suggest the opposite, even if it means lower comp. But that’s not the case here.

Liking the place you work is so darned important for your happiness. Tell the big company you have the offer from (potentially it’s my company based on those numbers ;) that you would be forfeiting soon-to-vest startup equity of $X so you need more to make the deal happen, and they’ll probably do it.
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PhysicianOnFIRE
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Re: Risk reward evaluation in a new venture

Post by PhysicianOnFIRE »

Did you end up sticking with the startup or making the jump to the large company? Did the startup survive?

:beer
-PoF
chenzi wrote: Mon Jun 25, 2018 8:13 pm Thanks everyone for your advice. It’s a lesson well learnt taking a significant paycut - I joined the startup company and the product isn’t doing that great and many things inside aren’t as rosy as projected outside :-) it’s been six months with the startup and am looking out to keep backup options :(. The company is a typical HBO Silicon Valley startup with lots of koolaid to drink in terms of culture.

But thanks due the the crazy job market, I am able to find another offer in a top 10 tech firm and negotiate upwards. I have been offered a management role with around 500kish total compensation (220k base, $1 millionish in stock/4years with yearly refresher on top and 40k signon). This is much more real money compared to startup paper value that is projected to provide similar returns. The opportunity cost is that I lose any stocks in startup as I didn’t complete a year.

While it’s a no brainer from financial perspective (this would also put our household income at $1mil+/year due to spouse also doing well at work), I keep wondering if i should give few more months to startup or just change for money and financial safety. I am tending towards the larger company again! It does feel little unreal more than doubling my compensation in last three years due to crazy tech boom, hoping to have decent safety net before any crash if/when it happens .
Topic Author
chenzi
Posts: 125
Joined: Thu Aug 06, 2015 3:07 pm

Re: Risk reward evaluation in a new venture

Post by chenzi »

Yeah jumped to the larger company! The startup is surviving with layoffs, depressed valuations and lot of attrition.
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