🤓[DS:Culture] Startup Math and Opportunity Costs
Should you join a startup or a big tech company?
This article is probably more for seasoned data scientists with 4-5 years of experience.
Despite all the layoffs happening in tech, as a data scientist I’m still getting recruited by big tech companies. DS is in short supply and likely will be for a long while, especially as the rate at which companies
Companies that “democratize data science” are all the rage, and will be for a while. So whether you’re head-hunted by one of these companies or you’re the sucker hired to buy and use their software, you’ll be in demand for at least 2-3 years until ChatGPT5 comes out.
The opportunity cost of a startup
Math is simple: work at a big company, get big bucks. Work at a small company, get small bucks but potentially big stock.
Let’s do a thought experiment:
I got a recruiting email for a position with $230-$240k base with up to $450k total comp at a big tech company.
I currently make $275 base with $150k in total stock over four years.
Let’s assume you’ll stay at the job for four years.
Let’s assume I’m solely optimizing my career for maximizing economic yield, with no regard to networking or the bad look of opportunistically switching jobs every 6 months.
Which is the better deal?
The Math
Scenario 1: Both companies maintain their current value and no stock market crash.
Big Tech: $450 * 4 = $1.8M in total.
$275 + $150/4 = $312.5 * 4 = $1.25M in total.
Assumptions: Your early-stage startup gets acquired or makes it public and the returns are worth $150k. This is actually a good return, because a ton of companies don’t return anything:
Look at look at that document I just before before, but I want to show you this basically, I pulled all I. P. O. Since 20 twenty's. This excludes all. SPAC mergers and real estate finance material, energy utility. So kind of the big bulky private equity type stuff. So it's mostly tech, consumer 627 I. P. O. Since 2020 More than half of them are basically half of them are trading at less at .2 times the total cash they've burnt.
Scenario 2: You get a 10x return on your startup stock.
$275 + $150*10/4 = $275 + $375 = $2.6M
Seems pretty lucrative right? But by comparison, what’s the probability that you achieve the 2.6M outcome?
If 50% of IPOs end up trading at 20% of the total stock invested in them (which is usually 20-30% of their expected valuation), then we can roughly assume that 50% of these IPOs are worth a 4% of the stock you were offered.
Or thought another way: don’t think of your stock grant in terms of the VC valuation. Think of it as a function of your company’s total raise. Because at the end of the day, for 50% of IPOs the company’s valuation is only 20% of the total amount invested.
How do we get to that 10x outcome? To 10x in four years, you need 1.78 growth each year (1.78^4 = 10.03). This is also 1.05^(4*12) growth per month.
That’s 5 new customers per every 100 you currently have on the books.
Expect 2 churned customers per month (2% churn rate)
That’s 7 new customers per month (or new services offered)
Is your company achieving 7 new customers per month? This means that you need to be constantly pushing for growth, and you need to be tracking your progress regularly.
It's crucial to be realistic about your growth potential. If you are not growing at a rate of 5% each month, it's not realistic to think that you will suddenly start growing at a rate of 78% this year or achieve 10x growth in five years. Of course, there are some exceptions to this, such as businesses that benefit from network effects. In those cases, growth can be exponential as more users join the platform, creating a positive feedback loop. But if you’re a SaaS company or B2B, it’s not likely you’ll achieve that growth.
Given all this, the 10x growth is probably less than 50% likely. More likely that it’s like 20% chance of happening but I’m just spitballing.
So really, the math is $275 + 150/4*20% = $1.13M over four.
Roll the dice
It’s pretty clear that the economic valuation is in favor of bigger, more stable tech. But hey, if you roll the dice four times over sixteen years perhaps one of those will eventually pay off? You do the math.
Money isn’t everything. That’s not all there is to life. Startups are fast moving and focused on solving the problem whereas big tech is about bureaucracy, managing expectations, not getting sued, and incremental lift above what the project creators invented four years ago. If you’re not building, you’re maintaining. There’s a lot to be said for what your personality is and what you’re interested in.