How Startup Employees Get Rich (without getting lucky)

There's an odd phenomenon in Silicon Valley that no one really talks about. Startup employees often make more money than startup founders. It's counterintuitive because tech YouTubers love to focus on billionaires like Elon Musk and Mark Zuckerberg. But the vast majority of startups fail, and when they do, the founders get nothing. Meanwhile, thousands of employees at high growth startups are becoming millionaires every single day. So what do the most successful startup employees know that everyone else doesn't? Well, I've broken it down into eight steps to help you get rich at a startup without getting lucky, of course. First up is actually picking which startup you want to join. If you can hop on a rocket ship, you'll be immensely wealthy in no time. But wind up at a startup that fails to launch and you'll probably make nothing and quickly be back on the job hunt. So selection is critical. But how do you know if a startup is the real deal? Well, you basically have to think like an investor. Is this startup going to solve a big problem? Are the founders extremely talented and hardworking? Can this be a viable business long term? It's kind of a terrible situation, to be honest. In order to really win as a startup employee, you not only need to hustle to land a job offer, but you also have to think like an investor and try and predict the future of a tiny company working out of a garage. But this is the core of every successful employee's journey. They believed when no one else did, just like those early investors. So what should you look for? Well, first off, the founding team needs to be solid. Great founders can't afford to just be smart. They also have to be incredibly hardworking. So you need to dig into their previous experiences and future plans to make sure everything checks out. Does it sound like the founders are just a bunch of hustlers chasing the latest hype wave? Or do they seem genuinely passionate about the problem? Could you see the team sticking it out when times get tough? Or will they bail? You also need to assess the quality of the core problem that the startup is trying to solve. Could you see yourself using this product or recommending it to a friend? To does it seem possible to even build what the founders are describing? The company's mission needs to sit nicely at the intersection of ambitious but doable. Fortunately, you don't have to do 100% of this work yourself unless you're joining a team on day one. They've probably raised a bit of money from investors, and those investors have hopefully done their research. If you see A bunch of big name investors scrambling to invest in a hot startup. That could be a sign that working there could prove lucrative. But not always. See, sometimes the founders are lying to everyone and including their investors. So you have to stay vigilant about avoiding frauds. There were employees who worked at Theranos for years before the fraud was uncovered and they walked away with nothing. You don't want to spend years of your life grinding on a project that goes nowhere just to wind up empty handed. So how can you avoid joining a startup that's destined for failure? Sadly, you can't just Google these things. But there are ways to consistently pick winners. Let's compare two high profile biotech companies, Theranos and Moderna. By now, everyone knows that Theranos was a fraud and Moderna was a massive success. But it wasn't always that way. See, if you were a talented scientist looking for a startup job in 2014, Theranos looked pretty good. Elizabeth Holmes had just been featured on the COVID of Forbes magazine and the press absolutely adored the company. If you just trusted the Google results, you could easily end up working for a fraudulent company and wasting years of your life. Fast forward two years to 2016 and once again, listening to the broad media coverage of startups would lead you astray. See, by this time, Theranos had been exposed as a fraud and the media was on high alert. So they went out looking for other, other secretive startups that could potentially be frauds. The result of this search was another spectacular misstep. They claimed that Moderna could be the next Theranos. In hindsight, we can clearly see that this was a phenomenally bad call. Moderna's valuation soared from $1 billion to over $100 billion as they delivered exactly what they promised. So just reading the headlines would have led you to go work at Theranos and pass on an opportunity to work at Moderna. Insanity. Lots of people didn't make this mistake though, and they made millions of dollars in the process. The solution to this comes back to the importance of team. Theranos was founded by a dropout and had no major Silicon Valley investors backing the company. Moderna, on the other hand, was founded by a Harvard professor and backed by one of the best biotech investment firms of all time. So when you're trying to decide if a small startup is the real deal or not, it always comes down to the people involved. Great people create great companies, but they also think long term. And that's something you'll need to do if you want to make IT at a startup. Moderna had been working on MRNA technology for over a decade before they found the right application and really took off. The best founding teams are willing to grind for years before seeing real results. Anyone who tries to build a startup to get rich quick will be in for a world of hurt. It just never works out. So when you're assessing the company, you have to look to the future. The company might be extremely small right now and the product might barely work at the moment, but if there's a seed of something great, there's a it could all pay off massively. This ties into strategy around compensation packages, which we'll get to soon. But you'll never get a huge chunk of company stock the first day you show up to work. You have to earn those shares over several years. So if you don't have a long term mindset, you'll burn out before having an impact. One mistake that startup employees often make is underestimating the growth that can occur at a really successful startup. Many people look at the generous pay packages at big tech companies like Apple and Microsoft and assume they can compare those directly to smaller startups. That's a big error though. See, Big Tech might be able to grant you stock worth a million dollars, but the odds that your stock becomes worth $10 million is very low. On the other hand, fast growing startups often see their valuations more than 10x every few years. If they're really onto something now, obviously there's more risk associated with joining a high growth startup. Things could flatline, a new competitor could emerge or the team could just fall apart. But if you've picked well, the total economic upside is nearly limitless. Once you've found the right company and convinced yourself that it's going to be huge in a few years, you have to actually negotiate your offer. And just as there is a risk trade off between working at a big established company and a small scrappy startup, there's also a big risk trade off in the structure of startup pay packages. Startups are always cash strapped, they aren't profitable yet, and the team is often working hard to find product market fit. That's a big part of the reason why they offer shares in the company as compensation. It would be impossible to get a talented engineer to leave a cushy job in Big Tech and take a massive pay cut if there wasn't a substantial upside. In general, the stock that a startup grants early employees is meant to offset lower cash salaries, but there's always room for negotiation. Sometimes people have big families to take care of and simply can't afford to take pay cuts, so they need more cash upfront to join a startup. This usually results in a smaller stock option grant, but if you're really optimistic about the company, it can make sense to try and lean in the other direction. Ask the startup to give you as much equity as possible and keep your living expenses low while you grow the business. If you play your cards right, that incremental bump in equity could wind up being worth millions, and you might not actually need to give up that much cash to get it. There are, of course, other ways to get a larger stock grant at a startup. The more critical your job is, the more equity you'll get with some early executives earning 3 or even 5% of the total company. Basically, the earlier you join, the more you'll get, because that's where you're taking the most risk. Joining early isn't the only way to get bigger stock grants, though. Technical roles are usually in higher demand, and that means more stock for early engineers. It's not always easy to switch career paths, but if you're young and willing to work for it, developing an in demand skill set will pay off massively when you eventually join a company. Management skills are also valuable, even at early stage companies. If you're someone who can come into a startup and and help scale an entire division of the company, you'll be handsomely rewarded. Startups are tricky because often you'll need to be willing to get your hands dirty at the early stages and build things yourself, but then quickly evolve into a good manager as the company grows. This is extremely hard to do right, especially for founders. But the most successful startup employees I know have always had the foresight to prepare for what's next. So you found a great company, landed the job, and now you're looking at an offer letter with a bunch of legal jargon and can't figure out how much your stock is actually worth. Don't worry, you're not alone. Stock options are an incredible invention, and in many ways they're a big part of why Silicon Valley has been so successful. But stock options are unfairly difficult to decipher for startup employees. So let's untangle them. Founders can calculate their ownership extremely easily. When they start the company, they divide up the shares and that's what they own. Investors also have it pretty easy. They buy their shares at a set price, and then they just need to know the latest share price to value their positions. But startup employees have a much harder time judging the value of what they're given. See, in bigger tech companies, employees are usually given restricted stock units or RSUs. These are real stakes in the company worth actual money on the day they are granted. And since these big companies are publicly traded, it's fairly simple for employees to sell their stock for cash whenever they want. But early stage startups are much more complicated. Instead of actual stock, employees are given the option to buy stock. This is done to avoid upfront tax burdens. If a startup gave you a million dollars of stock upfront, you'd have to pay taxes on that million dollars immediately. If the startup went bankrupt the next year, you'd wind up with nothing but a massive loss. It would be terrible. So instead, startups give employees stock options that are, at least in the eyes of the government, worthless. You heard that right. You could join the hottest startup and get a massive stock option grant, but when you send in your taxes, you you'll tell the government that they aren't worth anything yet. That's because these options merely give you the right to buy the stock at a future date at a set price. Now, the price is determined by what's called a 409 valuation. And with a name like that, it should be obvious where this valuation comes from. That's right, the government's tax code. So basically, a team of independent accountants tell the government what the startup is currently worth for tax purposes. And. And that's the price you get to buy your shares at in the future. There's a problem, though. See, that 409A valuation is typically much lower than what investors pay for the stock, and it's way lower than what the founders think the stock will be worth in a few years. So how should you value your options? Well, the first way is to look at the difference between the 409A price and the share price that investors most recently paid. If the 409A valuation says that each share is worth $10, but investors just paid $50 per share, you can reasonably expect to make $40 in profit per share. But that doesn't tell the whole story. See, it's very rare that companies wind up being worth exactly what investors paid years earlier. Typically, they either take off or go bankrupt. So if you're confident that the startup you're joining is going to become massive, you should treat your stock options like gold, because they could wind up being worth millions. That's inevitably what happens when startup employees hit it big. They get a bunch of stock options at the very early stage that have an extreme price, and then every option is worth hundreds or thousands of dollars when the company goes public. But all this focus on material gain misses an important point. The reason that these startup employees wind up making so much money is because they really have a massive impact on the startup's success. Startups are all about people, and it doesn't matter if you have a visionary CEO presenting to packed theaters if the team isn't building a great product. So once you get your stock options, you have to work hard to make them valuable. It might be possible to get a nice equity grant at a big tech company and spend four years basically doing nothing. But at a startup you will kill the company, get fired, or both. There is a silver lining here though. See, most of the time stock option grants have a vesting schedule. This means that you don't receive the stock options upfront, you have to work for them. Typically, the stock grant will vest over a four year period and you won't get anything if you leave the company within one year of joining. This is called a cliff, and it's meant to stop people from joining, collecting options, and then immediately leaving. The beautiful thing about stock is that after you've earned it, say by spending four years of sleepless nights growing your startup, you'll have that stock forever. This means that as the company grows, you can still make lots of money if you hold on longer. And this really does happen all the time. Facebook More than 10x the stock price after going public. Lots of early employees had left the company by then, but they still made a killing on their Facebook stock. There is another problem though. It's not always cheap to exercise your options, especially if your startup hasn't IPO'd yet. Your stock grant might be worth millions of dollars on paper, but it still might cost hundreds of thousands of dollars to actually exercise the stock options. Remember, you didn't get actual stock when you joined, just the right to buy stock at a later date at a set price. Fortunately, there are solutions to this problem. Some companies will offer what's called a cashless exercise where they basically give you a one day loan to buy the shares and sell them in the same day. You don't have to put up any of your own money and you get the full value of your stock options immediately. There are also investors who will loan you money to exercise your stock options in exchange for a small portion of the upside. This can be a win win scenario if you're strapped for cash but still believe that the options will be worth a lot in the future. Riskier options exist as well. You could mortgage your house to come up with the cash. But if the stock crashes, you could be in a world of hurt, so be very careful if you're taking out a loan to buy stock options that is backed up by anything other than the value of the options themselves. Sometimes companies will extend what's called the exercise window to let employees hold onto their options longer without needing to exercise them. This is great because early employees can spend four years working at the company, then move on and still make money from their options when the company eventually sells or goes public down the road. No need to find the cash to buy the options on their last day of work. People don't often talk about what happens after you've worked at a hugely successful startup, but they should. If you're an early employee at a big success, you can kind of write your own ticket. Sometimes you'll have enough money to just sit on the beach and drink pina coladas for the rest of your life. But it's always more exciting to see someone double down and dive right back into the startup world. Although maybe after a few pina coladas. This is the real benefit of making an impact at a successful startup. Everyone will want to work with you. We've all heard about the PayPal mafia. Lots of people pay attention to what those co founders went on to do, and that's reasonable given that Peter Thiel started Founders Fund and Elon Musk built Tesla and SpaceX. But there's an entire class of early PayPal employees who went on to have massive impacts in Silicon Valley. They didn't need to continue working, but they did anyway because they wanted to build the next generation of technology companies companies and solve real problems. Big, ambitious projects are extremely hard to get off the ground, but having a major success under your belt can unlock an entirely new set of opportunities. No one would have given Elon money to start a rocket company before he sold PayPal. And I've talked to dozens of successful startup employees who went on to start ambitious companies after cashing out of a successful startup. So congratulations, you're now ready to be incredibly successful while you're working at a startup. But there's still one major how do you actually land the job? Well, I've mapped out a simple three step process for landing a new job quickly in this video here. So go watch that one next. Thanks a lot.