Wealth Joining a Startup

[TheEcho]

Hey all!

Curious about anyone with experience around starting businesses/joining startups. Just chatted with the founder of a startup looking to automate many aspects of real estate, including the portion I was aiming at. Their focus is more consulting, mine is more underwriting/licensing a suite, but they will automate the same things I will, plus more. They have actual programmers on board, so their speed and capacity will be much higher than mine, but I should be able to be making considerable money before my lunch is threatened too badly (can hire my own coders at that point, assuming AI doesn't outdo average human coders).

The offer is 5% equity as Chief Data Architect (or something similar; designing Excel spreadsheets), plus a promote for ideas I bring that I help turn into products. Supposedly, money would be coming in as early as mid next month, until then, it's pure equity (guess it works that I'm at home). My biggest concern is if things aren't going well, I'm NDA'ed out of my own pursuits, though I feel like getting into the startup field could let me make a decent splash, being both a frontman/salesman and data cruncher.

Thoughts? I asked specifically to be able to do underwriting on the side (given direct pay is an unknown for now) and automate it as I wish, with the intention of bringing that experience into the company. If the NDA didn't limit my ability to automate underwriting freely, whether I stay or leave, I'd 100% do it, but that may be too big an ask. Let me know your thoughts!

Thanks all!

P.S. The founder did say let's think on things and he'll get back to me with a tentative offer.

 

[Chase]

@TheEcho,

Most startups fail. The majority will never make much money at all.

Many of them live off this "I'll give you equity if you'll work for free" ethos. It's a good way to get workers when you don't have funds.

Here's a pretty great breakdown on Quora answering someone's question of "Why won't consultants work for equity?":

I’ve run a consulting firm, founded a tech startup, and worked with a lot of investors and early stage companies. I usually advise consultants and service providers not to trade their work for equity. Here’s why:

Trading your work for equity (instead of cash) is a form of investing. You’re taking the cash you would have earned, and turning around and investing it right back in your client. At this point, you’re probably thinking “duh - that’s the point”.

However, professional investors - people who pick companies for a living (venture capitalists, angel investors) - only have about a 50% success rate at picking the right companies. In a typical venture fund, half of the investments will go bad, a few will break even, and they’re hoping that one or two will do so well, they cover all the losses and make a bunch of money on top of that.

So, if you are going to trade your services for equity, you either need to do it a lot (to spread your risk over dozens of companies, hoping to find the one or two that will make up for all the losses you’re likely to incur), or you need to be much better than a professional investor at picking the winners.

So, let’s talk about picking the winners. A typical professional investor will look at around a hundred companies for every one he or she actually invests in. I’ve heard ratios as high as 600:1. That means, in order to get to ten investments, with one or two being the winners that make up for the losses, you need to evaluate at least one thousand investment opportunities.

Now, think about your customer base. Do you have one thousand clients to choose from, in order to pick the top ten that are possible winners, knowing that half will probably fail, and you’ll have to make all of the money from the other half? Even if you do, what are the chances that those ten are the same ones who want to trade their equity for your services? Probably pretty low.

The math just doesn’t work in favor of a consultant, because you have to be really good at consulting and be really good at picking investments and do a lot of both.

That doesn’t mean it can’t be done. I’ve seen this model work in a few cases, but they usually have experienced, professional investors involved - not just marketing people or accountants. Unless you have a professional investor on your staff, and you understand the risks, my advice is to stick to your expertise and don’t try to mix investments in with your client base.

A few more perspectives:

https://www.reddit.com/r/startups/comments/2pgij2

The Pros and Cons of Working for Equity | Entrepreneur

From scope creep to the opportunity to cash in, a look at the good and bad of working in exchange for equity.

www.entrepreneur.com

Anyway, the consensus in the startup community is working for equity may be fine when you're young, living super cheap, and have no family. It's not usually going to work out but sometimes you just need to have that experience first.

Once you're highly skilled in some domain, you will not accept working for pure equity (or equity plus commissions).

Also, be wary of "we could be profitable as soon as next month." One of our founders was telling that to everyone we hired on a pure commission basis for a startup I ran in 2011. Newsflash: we never made money and those sales guys didn't make a cent.

So, you can still do it... when you don't have experience with startups, the starry-eyed optimism tends to override anything else... just be aware going in of what the realities tend to be.

Chase

 

[TheEcho]

Going to review this at least once more tomorrow. Thanks a bunch Chase! Yeah, riding hard for being free to use my spreadsheets and do underwriting at the same time. The experience of trying to automate things on my own today is worrying, but I don't think it's impossible if I applied myself to learning machine learning and doing underwriting to get data to feed the machine. If they do bring me an offer, I'll be spending A LOT of time parsing it, probably checking portions with ChatGPT.