Is the strategy of joining late-stage startups for the financial upside, a dead end?

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Between 2010 to 2021, one of the best strategies for maximizing your total compensation as a software engineer was to follow this recipe:

  1. Identify late-stage, fast-growing, private companies which seemed close to going public.
  2. Join the company, negotiating a large equity package on top of a competitive salary.
  3. Stay around until the company goes public.
  4. Cash in on the rising stock price.

While this strategy didn’t work every time, it did for a remarkable number of tech employees. It was a strategy I mentioned in the article Finding the next company to work at as well.

Although anecdotal, I know a few software engineers – mostly based in the US – who became millionaires thanks to this strategy. Once they had an exit, some went on to try and repeat the formula at other companies. In Europe, I also know of several people who, although they didn’t become millionaires, did make enough money to pay off most of their mortgage with a similar strategy.

In the New York Magazine article Confessions of an overnight millionaire, an employee at a newly IPO’d company shared how they felt about getting rich overnight:

“After I joined, people would say things like, “I think I’ll retire off this money.” I thought they were delusional. Then, last year, a friend called and said, “Are you ready to be a millionaire? Check the news.” That’s how I learned my company was IPO-ing. I had no idea. I would be making north of $6 million. (...)

The money is and isn’t life-changing. At this point in my life, nothing is going to change. What would I do differently? I’m only having as much fun as my peers are.”

I found relatively little data on just how many millionaires were minted by IPOs, but here are some telling numbers:

  • 600 Facebook employees – about 20% of staff – could have become millionaires during the 2012 IPO of the company, according to a Quora answer. Business Insider estimated this number to be more than 1,000 at the time.
  • 140 Expensify’s employees – 40% of staff – likely become millionaires during the company’s 2021 IPO according to Insider.
  • 350 Paytm employees likely became millionaires during the 2021 IPO of the company, Outlook India wrote.

The strategy is not without risk. Some companies did not go public and employees couldn’t realize these gains. Even when they did go public, the stock might have traded lower than employees had hoped when the 6-month lockup period ended.

Stock dropping steeply is what happened at Uber, where I was working when it IPO’d. Employees joining after 2016 were awarded double-trigger RSUs priced at $48 a piece, and the company IPO’d at a $45 share price. However, six months later when employees could sell shares, Uber stock was trading at $26 a piece.

Still, the strategy of joining late-stage start-ups was pretty sound, thanks to a several things:

  • Stock markets going up. The public stock markets were rallying. This meant the total compensation packages of those working at publicly traded Big Tech kept going up.
  • Competing with Big Tech. Private, late-stage companies offered similar compensation packages to Big Tech – and then some. If a software engineer was already working at a publicly traded Big Tech, it would have made no sense for them to leave for the same total compensation package elsewhere, as their equity would have now not been liquid. So, late-stage private companies often were forced to offer more equity to late hires, who could often get more equity than earlier employees held, as a result.
  • IPOs were common. Up until 2021, there was a steady stream of IPOs. Late-stage companies frequently exited through public offerings.

In 2022, there has not been a single major IPO, and the valuation of private companies has dropped steeply. People who joined late-stage companies in 2020-21 expecting to make big money on an IPO, are without doubt mostly disappointed. Not only is there no IPO in sight for most companies, but the valuation of these companies – and the value of any future IPO – has greatly reduced.

Suddenly, the move that seemed smart not long ago – of leaving a publicly traded Big Tech company for a pre-IPO one and waiting for it to IPO – looks like a move that might not pay off.

Late-stage, overvalued companies will be facing significant attrition. Experienced software engineers who realize their equity package is worth little, have no real financial reason to stick around any longer. As engineers whose skills are still in-demand, they have a few options which could make more financial sense:

  • a) Join a publicly traded Big Tech company, and increase their total, liquid compensation. But this strategy is becoming more tricky, as Big Tech is slowing hiring.
  • b) Join an early-stage startup, negotiating a similar base salary to what they currently make, and equity with far more upside than their current package.
  • c) Negotiate a salary raise and equity bump, to make up for the drop in valuation of the company. In my experience, this last one is the hardest to do, especially when working at a struggling company.

The dropping market is making the risks of pre-IPO companies much clearer. I used to detect an almost irrational expectation among some software engineers, who assumed scaleups which raised a lot of money would keep increasing their valuation and go public, then the engineers expected to cash out and get rich.

In reality, every company is risky. With public companies, this risk is equally present, but at least the financials are out in the open in the form of quarterly financial results. For private companies, there’s no requirement to share details which reveal financial health.

To be clear, I see a lot of upside in joining fast-growing startups which are not yet public. You get to move fast, often have lots of autonomy, and often get to grow faster, professionally. None of these upsides have changed.

What has changed, possibly for good, is that joining late-stage companies is no longer an almost guaranteed way to make big money. It most certainly was, for the past decade: but this window of opportunity seems to have closed for the majority of such companies.

This was one out of the six topics covered in this week’s The Scoop. A lot of what I share in The Scoop is exclusive to this publication, meaning it’s not been covered in any other media outlet before, and you’re the first to read about it.

The full The Scoop edition additionally covers:

  1. Klarna’s headcount changes over time. How has headcount changed at the company during the past twelve months? I got my hands on some internal data which tells an interesting story. Exclusive.
  2. How many people did Klarna actually let go in September? Klarna executed another round of layoffs at the end of September. Although the company communicated that less than 100 people were impacted, Klarna staff whom I talked with, all said they thought the number was at least 300. Turns out, the people suggesting the cuts hit more people than claimed were right, as I found out after looking at some internal data reports. Exclusive.
  3. Hiring freeze at Lyft. The #2 ridesharing company in the US has fully paused hiring. How does Lyft’s situation compare to Uber’s, and can we read anything else into this move? Analysis.
  4. Is Klarna offering a separation package for some people to leave the company? The troubled buy-now-pay-later provider is upping expectations for some people and teams, and is offering a package for people who choose to leave. What is the mood inside the company? I talked with employees to get the scoop. Exclusive.
  5. Meta bracing for a reorg? The company paused bootcamp graduations and people cannot move teams. Is doing so normal, or should employees be bracing for something unusual? Exclusive.

In this issue, we also cover numbers on Klarna’s explosive headcount growth - and its recent shrinking:

Klarna’s headcount growth 2021-2022. More details here.

Read the full The Scoop.

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