Three Financial Risks for Startup Employees
Apr 30, 2021
Startup Employee Series (Part 1 of 3)
Contrary to what the investor experiences, there are three inherent financial risks for startup employees.
Investors are an integral part of the startup ecosystem. They risk their capital on the ideas and reputations of startup founders, and their teams, to help bring a new company to life. The average person would probably consider the amount of money investors risk on any given venture to be significant. However, it is most likely the case that the money invested in a high-risk startup venture is not the money an investor lives on, day-to-day.
For startup employees, however, this is probably not the case.
Startup employees have a unique opportunity. They are the group of people that get to solve the problems that lead to discovering something new and/or better. And then put that out into the world.
But they also take on a unique set of risks. Unlike the investor, the typical startup employee probably does rely on the startup company for income to live on, day-to-day.
Before continuing, let me say that this is not a commentary on the ethics of the investor/founder/employee relationship. There is nothing wrong with investors having capital with which to make speculative investments. Nor is there anything wrong with an employee taking on the risks associated with working for a startup. Startups need money and startups need talented, risk-taking, big-picture employees. The point of this article is simply to point out that there are risks. Risks that can be minimized if aware of them.
Down-markets can create a situation of triple-pain for startup employees:
- Unemployment
- Slashed retirement savings
- No access/control of savings when needed
Unemployment
Q:What is your greatest asset?
A: Your ability to earn an income.
Having gone through two popped bubbles in Silicon Valley, I know the effects of down economies on employment in the startup world. Employment status is inherently less stable with startup companies.
If you are earning a market pay rate to work at a startup company, but that startup company has a 50% chance of failing and laying you off, are you still earning a market pay rate?
Do banks, investors, or other lenders charge the same amount of interest to high-risk borrowers as they do standard or low-risk borrowers? Go check out one of the peer-to-peer lending platforms, like Prosper.com or Lending Club, and look at the loan rates offered to people with different credit (risk) profiles. You’ll see the answer is “no.” Higher-risk borrowers are charged a higher interest rate to offset risk.
As a startup employee, you are kind of like the “lender,” charging the startup company “interest” (wages) for your labor. Should you charge a 1 yr old startup the same amount of “interest” as you would, say, The Walt Disney Company which has been in business for 95 years?