I’ve fielded four calls in two days from friends in their mid-30’s to mid-40’s who have ‘good’ and relatively ‘easy’ corporate jobs at quality companies like Brocade, Cisco, HP, Juniper, etc being recruited by OpenFlow, software-defined networking or network virtualization start-ups. Each person asked a variant of: ‘what are the economics of joining an SDN company?’ which leads to ‘Should I join an SDN startup?’ and if so, “Which start-up should I join?”
Preface: These are complicated questions to answer — there’s not ‘one’ right answer. Like everything in life — what’s right for one person may not be right for another and what’s right for you at one stage of your career is likely different than what is right for a different stage of your career — mileage may vary.
In conversations about career advice — I ask three questions:
- What’s important to you?
- What stage are you in your life and career?
- Can you live with the likely economics?
Most people attempt to solve #3 first — though before you can have a productive conversation about #3 — you need to know the answers to #’s 1 and 2.
What’s important to you? and What is your passion?
This is really about — your life — and where you invest your limited time on earth. Is significant family time important to you? Do you have a favorite hobby? Are you passionate for some cause or activity? The reason this is important — is to do the start-up thing well — you have to subtract time away from one or more of these activities. Startups that tell you otherwise are either delusional or lying.
What stage are you in your life and career?
This is about the economic realities most of us deal with — which given how and where we spend our time — what are the economics we need to maintain our lifestyle. This manifests itself things like how do we soak away enough cash to pay off the mortgage, raise kids, pay for college, save for retirement, take care of parents, make annual trips back to India, take kick-ass vacations, follow the Rolling Stones on Tour, etc. — its the funding of all the obligations and passions we have — basically the $’s needed to cover your Maslow’s hierarchy of needs.
This is also about where you are in your career. Are you 6 months away from that elusive VP or Director title? Did you just receive the title and need to stick around a while to demonstrate that you are committed to those who promoted you? Are you close to that big RSU vesting event or Bonus or Commission? Will failure or limited success at the startup impact your ability to obtain a replacement job if the company stumbles.
The two questions I ask people are: 1) can you afford an effective pay cut at this stage or your life? Meaning is the loss or reduction in bonus, RSUs, or public stock option meaningful to your day-to-day life or retirement savings? Can you afford higher daycare, baby sitter, or dog sitter expense to make up for extra work or travel? and 2) if the market takes longer to mature, start-up hits a rough patch, or market never matures — are you at a point in your career where you can take the risk and financially recover (i.e find an equal or greater job to the one you have now) if things do not go as planned at the startup?
In my experience, this is the hardest question to answer when come to deciding to join a startup.
Can you live with the economics?
Assuming you get past the first two questions — you have to want to do the startup because you are internally driven to do it — for as being a startup employee, your odds for making life changing money are pretty low. Let’s take an example:
Assume a) base pay will roughly be the same; and b) your bonus will be between zero and half of what you made before. In a worse case scenario — especially if the company has been shipping for less than 1-year and / or has less that $5M in revenue – assume that there is limited cash to pay a bonus — so model what your cash situation looks like if do not receive a cash bonus.
As for equity, say you have an offer to join a SDN software company with three co-founders with the following parameters:
- Raised $10M in financing at a pre-money vacation of $10M. This values the company at $20M and investors own ~50% of the company. But as part of that deal — the company is required to reserve 20% of equity to hire employees. This leaves each of the three founders with ~10% equity stake each.
- The company will need more money (they always do). For easy math, let’s assume a raise of $20M Series B with 20% Dilution and a $20M Series C with 10% dilution on top of that. This assumes the company has only up rounds, that sales are ramping and everything goes right. That’s still $50M in venture raised.
Let’s say you are offered 1% of the company stock that vest over four years. In that scenario, you end up with 0.72% ownership stake (1% – .2% Series B dilution – .08% Series C dilution) over four years in a company theoretically worth $200M. Assuming an exit in four years for $200M – on paper you get $1.4M pre tax. Let’s subtract investor capital and preferences (typical today is 2x) — this means the investors get their $50M back first; then another $50M, before $100M is split across all shareholders — and you end up around $720k pre tax or ~$400k post tax over 4 years.
This exit assumes everything goes right and that there is a buyer for your start up at $200M. Remember that there really are NOT that many companies who can buy an SDN company for $200M. My point is even if you quibble with some numbers or run different scenario’s — there are relatively few scenarios where you, as an employee, have a high probability of make life changing money via an SDN startup. This means you need to do the startup because you have a passion for it.
Life’s decisions are not solely made on money and if you have a passion that an SDN startup will fulfill and not phased by the risk / reward profile, by all means do it. For mid-career individuals who have financial constraints, obligations, or other passions — the risk-reward profile for joining that startup to day maybe too high to justify.
Personally, at this stage of my life, I fail out at question #2 unless I’m part of the founding team or an SDN startup has $50M+ in annual revenue (e.g. Arista). The corporate spin-in is another option I’d consider — spin-ins can offer the best of startups with the best of risk-adjusted return (e.g. Insieme) short of having at least $50M+ in revenue.
Let me know your experience — I’d love to hear your circumstances and what lead you to make the decision to stay with what you are doing or join an SDN startup.