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Silicon Valley has many dreams. One dream – the Hollywood version anyway – is that a broken down founder starts tinkering and coding in his proverbial garage, eventually creating a product loved by humans around the world and becoming a startup billionaire.
The most prosaic and most common version of Valley's dream, however, is to join a start-up company just before it grows. Admittedly, the first employees may have a small share of fairness, but this equity could be worth a lot if they get off to a good start.
Each start-up has an opportunity window, a schedule in which the first employees can sign up, while the exercise prices of stock options are low and the awards high shares. Join us before the big rise in valuation, and suddenly, what could have been a nice pair of hundreds of K dollars in the years to come actually becomes, well, in the Bay Area, a home of reasonable size.
However, the size of this window appears to be decreasing, preventing potential start-up employees from finding the time needed to achieve the best financial return possible.
For each Roblox, which, as we have described in detail this week, has taken almost two decades to reach its current apotheosis, there is a Brex, which seems to reach unicorn status in no time. And such stories – though certainly anecdotal – seem to be more mundane than ever.
One of the reasons for this rapid growth in initial valuation is that Silicon Valley has just learned to grow even faster, even earlier. As venture capitalist Reid Hoffman and Chris Yeh discuss in their book Blitzscaling, there are now proven frameworks and techniques to not only grow a startup, but also at breakneck speed. By improving marketing channels, growth strategies, and product development, we have actually made progress by reducing at least some of the time to improve badessments.
This rapid transition from nothing to everything, however, leaves very little time for the first employees to discover a startup through the vineyard when the financial conditions are always interesting.
A half-decade ago, I wrote about the problem of the first employees in an article called "The Problem with Founders".
The secret of Silicon Valley is that the benefits of working in a startup come almost entirely to the founders, and c & # 39; why people repeat the advice of just going to start a business. There is a reason why it is difficult to hire in Silicon Valley today, and it is not just that there are a lot of startups. This is because engineers and other creators realize that cards pile up against them unless they are in charge.
My reasoning was simple then: the first employees badume almost as much risk as their founders, but for a fraction of the equity. Now, with startups moving to unicorn status in just a few short months, this risk-reward ratio seems even more off the mark for the first employees.
And it's not enough that it's a Brex large-scale transformation either. The rapid increase in the size and valuation of Series A funding series over the past three years means that engineers and sales people with low staffing numbers suddenly see their options evaluated at different times. a few hundred million euros. The exits, meanwhile, do not get rich suddenly to compensate.
I've started noticing this phenomenon in recent weeks during several conversations with friends in software engineering who had been very enthusiastic about very young companies – let's say, just a handful of employees – but who had left their letters of offer. because of already exorbitant evaluations.
Now, we can say that the best opportunities are precisely in this type of business. While valuations are already high, they are startups with the financial resources and support that could allow them to compete effectively. Thus, equity may be smaller and more expensive, but ultimately, if start-up is more likely to succeed, the expected value function may actually be favorable.
May be. However, it is also difficult to see how these startups, which, despite their rich valuation, have barely laid the foundation for success, are a bet more secure than a startup valued in the same way with years of experience and a growth strategy based on reliable results. Worse still, the first employees may be taking even more financial risks, as the venture capital preference stack could mean that smaller outflows would be particularly unfavorable to them.
In addition, the decreasing window of opportunity for large start-up companies means that the difference in financial outcome between the first two employees – which could represent millions of dollars at the exit – could have been decided based on those who have joined the week before the other. This seems neither right nor correct, but is becoming more and more common in our sector.
As with most structural macroeconomic changes, nothing can be done. The founders will not accept lower valuations or less money to make the lives of their first employees a little rosier, and venture capitalists will certainly not lower the prices of their offerings in an investment environment extremely competitive. Indeed, the excitement of a sudden unicorn may be the best attraction for candidates to hear a startup's speech and join it.
But when it comes time to dream of a beautiful home from a good return to the exit in Silicon Valley, it becomes more and more narrow and less distributed. Blitzscaling brings a lot of wealth to many people, but to the first employees? Not really.
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