Is it Time for You to Earn or to Learn?

Posted on Nov 4, 2009 | 121 comments


This is part of my Startup Advice series

I often have career discussions with entrepreneurs – both young and more mature – whether they should join company “X” or not.  I usually pull the old trick of answering a question with a question.  My reply is usually, “is it time for you to earn or to learn?”

Let’s face it.  If you’re thinking about joining as the director of marketing, product management manager, senior architect, international business development lead, etc. at a startup that has already raised $5 million the chances of you making your retirement money on that company is EXTREMELY small.  That’s Ok.  Not every job you have is supposed to be your big break.  It’s Ok for that to be your job to “learn.”

Yet I often hear people asking about these types of opportunities express their questions to me whether I think this company is going to be a big hit.  It’s clear to me that many people confuse learn with earn.  I will do a simple calculation for them that goes like this.  OK, you would own 0.25% of the stock.  They raised $5 million in their B round.  Let’s assume that the company raised it at a normal VC valuation, which means it gave up 33% of the company and thus $5 million / 33% = $15 million post-money valuation.  If you never raise another round of venture capital (a big if) and if your company is sold for the normal venture exit ($50 million on average for 200 or so annually that get sold) then what is your stake?  $125,000.  Yup.  Simple math would have solved that but people rarely do the calculations or think about it.

And let’s say that it took 4 years to exit – that’s $31,250 / year.  Now … these are stock options and not restricted stock so you’ll likely be taxed at a short-term capital gains rate (see comments section for why).  In California that averages around 42.5% so in my state after tax you’d make an extra $18,000 / year and that’s in a positive scenario!  BTW, this ignores liquidation preferences which actually mean you’ll earn less.

DollarsSo let’s go CRAZY!  You get 1%, you sell for $150 million and it’s in 3 years (e.g. you won the lottery).  That’s an after-tax gain of $287,500 / year for 2 years.  Not bad.  Doh!  Wait a second.  Stock vests for 4 years.  You didn’t get acceleration on a change of control?  Sorry bud.  We’ll have to either cut your earnings in half to $143,750 or you’ll have to complete 2-years at BigCo that bought you making the money spread out over 4 years so it’s $143,750 / year for 4 years.

Don’t get me wrong.  This isn’t shabby money.  But given that a home in Palo Alto or Santa Monica will set you back $2 million it’s hardly riding off into the sunset.

I’m not trying to depress you.  I’m just trying to be realistic.  If you want to “Earn” (and by earn I mean the chance to buy your house outright or greater) – you have to start a company or join as a senior executive.  Or you have to hit the lottery and be an early player middle management player at Google, Facebook, MySpace or Twitter.  Let’s be honest – how many of those are created per year in the entire country?  1?  2 max?  I spoke with an investor recently who told me that 1,500 deals get funded / year in the US, 80 (5.3%) eventually sell for $50 million and only 8 (0.5%) eventually sell for $150 million or more.

stanfordSo when the Stanford MBA, the ex senior technology developer or the former Chief Revenue Officer of a company is calling me and asking my advice on their next gig you can see why I start with “are you ready to earn or to learn?”

For most people it’s learn.  I only emphasize the question before I find it much more helpful to join a company with realistic expectations of what you want to get out of it.  My advice is often, “make sure that what you get out of working at this company is one or several of the following: a great network of talented excutives and VCs, more responsibility than your last job, specific industry or technical skills that will help you in what you do next, a chance to partner with companies that will increase your industry relationships, etc.”  Learn now to earn later.

When I was CEO of my first company (where I admittedly F’d up everything before I figured it all out) we initially calculated for people how much there options were going to be worth some day.  It was 1999.  Ventro was trading at $8 billion on sub $2 million of revenue.  It was easy to do these calcs.  Over time I realized that this created a rotten culture.

Over time I took to telling people the following, “join BuildOnline because you think you’ll get great experience.  Join because you like the mission of what we’re doing.  Join because if you do a good job we’ll help you punch above your weighclass and work in a more senior role.  And if you ever feel that in the year ahead of you you don’t think that you’ll increase the value of your resume and you’re not having fun then go.  Join because we pay well but not amazing.  Stock options are the icing on the cake.  They’ll never make you rich.  Don’t join for the options.”

Obviously you should only take jobs that you enjoy and that let you be passionate about coming to work every day.  That’s a given.  Don’t blindly join a company without knowing why you’d join or asking the right questions.

So a friend recently called to ask for advice on becoming the CTO of a startup.  He’d be employee number 3.  The company was being spun out of a larger company.  I asked him how much of the company would be owned by the parent company and how much would be owned by management.  He hadn’t thought to ask.  When we next spoke he had found out that the CEO had about 5% and there was no management option pool in place.  My advice was … run!  I said, “all the hard work is ahead. Why start the game with a company with a structure that’s likely to fail.”

Another talented young man I recently met called to talk shop.  He had an offer in NY, an offer with a well known startup in the Bay Area and an offer with a startup in LA.  He also has his own company that he started 6 months ago.  He’s not even 21.  He wanted to know what to do.  I told him that he needed to decide whether to learn or to earn.  He’s young enough to do either but know why you’re doing it.  I advised against the SF role because it was a bigger company and his role would be pushing paper from one side of his desk to the other.  If you’re going to learn then at least go work somewhere exciting where you can really do something.  If it works you can stay and grow for the next 5 years.  If it doesn’t you’ll have done 3 startups by 26.  And you’ll be ready to earn.

On the other hand, at sub 21 you have the ability to swing for the fences and try and earn if you’re so inclined and if you think you have the skill sets and the idea.  When you’re 40, have 3 kids and a mortgage this is much harder.

Now, for the “Earn” part.  Another friend of mine is a very talented executive.  He went to Harvard undergrad, Harvard Business School and has worked at 3 prominent startups and 2 well known big companies. He’s worked in the US and internationally.  He’s in his early 40’s.  Whenever he calls me he must think I’m a broken record.  I always say, “Dude (I live in SoCal now!) – it’s time to EARN.  Stop dicking around with another number 2 job (he always gets offere the number 2 job). It’s time for you to be in the driver’s seat.  Either start a company or go somewhere where they need a CEO.”

If you really want to earn you need to be in the top 3-4 in the company.  Best to be a founder.  Very few people can do this.  It’s a rare skill.  Be realistic about your skills, background and ideas.

Anyway, I hope this post hasn’t been too harsh.  I’m not all about the money.  I think working in a startup can be an enormously rewarding experience.  I wouldn’t recommend it any other way.  But you need to match your talents, age, skills, ambition and economic situation with your current reality.  At a minimum be realistic about the outcomes.  And make sure you ask yourself the question, “am I here to earn or to learn?”

  • http://bothsidesofthetable.com msuster

    For most young people I suggest the “learn” route initially provided they do meaningful roles rather than being paper pushers. I think most young folks don't have the skills to run a company successfuly so being close to others is a chance to learn. But … if you want to run your own show some day (not everybody does) then I suggest to people to try before your 35. After that it just gets harder because you have more life commitments. But … after 35 you can always fly in as CEO to an existing entity if you're proven yourself enough at more junior roles.

  • http://bothsidesofthetable.com msuster

    Without the details I can't give you precise feedback but let me say the following:
    - you know when you aren't learning any more. Most people fall into a habit of just staying put.
    - if you have a chance to move to a new role in your current company and continue to learn go for it
    - if you can't it's time to look around. I would warn you (and others) that job hopping is also a problem. When I see people who worked for 5 companies in 6 years I usually won't hire them. No loyalty. So as with everything in life it's a balance
    - as for when it is right to try and go earn – it's a personal decision. Most 24 year olds aren't ready to run their own show. But then there's Mark Zuckerberg and Bill Gates who go and prove us all wrong.

    Good luck!

  • http://bothsidesofthetable.com msuster

    Thanks, Bob. Living so close it's a shame we never meet in person. Let's rectify that!

  • http://bothsidesofthetable.com msuster

    If I'm honest I don't actually agree with your premise. Let me elaborate
    - almost no companies achieve $500 million exits. So your chances of being at that company are small. Even if you are your chances of holding on to your role (ask anyone who joined Facebook early), not getting diluted, etc. are small
    - on the other hand, being the CEO of a small company gives you all the freedom in the world. If you run the show, for the most part you decide when and how to exit. If you don't raise too much money and 4 years in get an offer for $15 million but you own 45% of the company that's a pretty great outcome for most people. Do the math on what that would take in most other scenarios.
    - the key advice I give to people who are ready to be the #1 is … when you're ready go for it. If you're number 2 and you want to exit at $15 million but the CEO wants to shoot for the moon – guess who wins!

  • http://bothsidesofthetable.com msuster

    I agree 100%. I say this all the time to people, “chalk one up in the W column. Then figure out what next.”

  • http://bothsidesofthetable.com msuster

    Yeah, I found that while tempting to not have the honest discussions up front about the value of stock options, it's always best to have employees who join for the right reasons and have the right expectations.

  • http://bothsidesofthetable.com msuster

    Thanks, Juney. Now, in your case … GO EARN !!! ;-)

  • http://bothsidesofthetable.com msuster

    Well, it depends on your skill sets. No reason to raise friends & family money if you don't have the idea, experience or talent. I'd much rather tap people for money when I know what I'm doing. But directionally I know what you mean. My advice, sooner rather than later but not too early.

  • http://bothsidesofthetable.com msuster

    Thanks, Chris. Do a search for cap table at http://www.venturehacks.com – I think they have some stuff.

    But here's what you need to do:
    - know the “fully diluted number of shares”
    - know how many you own (e.g. the “% ownership of fully diluted shares”)
    - know how much money was raised in total and what the terms of the liquidation preferences are. This is complicated but VentureHacks and Brad Feld's site have great info http://www.feld.com
    - when the company is sold (different in an IPO) the investors take their money back first. Depending on the liquidation preferences they make take more. This is more complicated because if the company sells for a very high price they MAY not take a liquidation preference. You really have to understand LP to do this calculation.
    - Then you can begin to calculate how much you'd own of the remaining company. You also need to know whether you're vested and if not vested whether you have “acceleration on a change of control”
    - It would be hard to build a calculator without knowing the terms of the company but at a high level this is the process.

  • http://www.DavideDiCillo.com Davide Di Cillo

    Saved in my “good advises” backpack.

  • http://www.r4-ds.com.ar/ r4i

    Thanx for the valuable information. This was just the thing I was looking for, simply fantastic post man…… keep posting. Will be visiting back soon.

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  • http://www.victusspiritus.com/ Mark Essel

    Instead of the either or, I believe the top earners never stop learning.
    Learning is part of their DNA.

    In fact, they begin to value learning much more than $$. After understanding the foundations of business development, startup cycles, outside investors, and building multiple successful companies what's the point of more earning?

    It's only the folks that haven't learned enough yet, that get blinded by earnings. It's not the capital, it's what you can do with it that makes you a great founder.

    Either way, great post. Got me thinking and I appreciate it.

  • http://www.fiftybyfifty.com/lifeoffarhan/ farhanlalji

    The difficult thing is making the transition between the learn and earn, and I'd add the burn situations.

    Burn – being in a big company thinking you're going to learn and leverage your lessons into your start up career.

    Doing the hard stop from the burn to learn or earn is difficult.

    If you're in a learn situation and the founders swinging for the moon you're in it for a while and next thing you know you've got a mortgage and mouths to feed which makes leaving to go do the earn thing difficult.

  • http://thedreaminaction.com/ Ryan Graves

    Tristan-
    Take a screen shot of Marks comment and hold him to it :)

  • John Hawekotte

    Mark -

    You should check to see if you might be entitled to state and federal tax refunds for the last few years. The maximum tax on long-term capital gains in California is 24.3% — 15% federal and 9.3% state.

  • http://jared.tumblr.com jaredhecht

    This is the most useful and relevant post I've read in months. Thank you.

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  • http://www.r4-ds.com.ar/ r4i

    Thanx for the valuable information. This was just the thing I was looking for, simply fantastic post man…… keep posting. Will be visiting back soon.

  • http://twitter.com/djdan85 Dan

    Great post. The simple math is powerful yet often overlooked!

  • http://www.bogdanionita.ro/ Bogdan Ionita

    Whenever I hire people for my company, I always tell them that I will not keen at all to offer them stock options or any other similar long-term shady 'benefits'. I would very much prefer to give them a higher salary or better bonuses (things that employees can 'taste' for real).

    Although stock options may help the employee feel more involved in the business (which is something that I would like, as the company founder), in the vast majority of real-world cases it's just a BS due to the same calculation point that you made in your article. And I do my best to explain it to them. To me, it is more of an employer's trick than a real benefit.

    Indeed, there are people that wouldn't want to get involved unless they are offered stock options. If it's really a must-have for them, so be it.

    About learning vs earning, I totally agree that the way to go is to start your own company or to get to be a senior exec. But you shouldn't try to learn 'everything' before you start your own company. I often see people that are “not yet prepared” to start a company. If they don't do it soon, most of them will never be prepared. You should start it trying to earn as much as possible from it, but most likely you will end up learning a lot from it… probably more than you would learn by working for somebody else.

  • http://www.victusspiritus.com/ Mark Essel

    Instead of the either or, I believe the top earners never stop learning.
    Learning is part of their DNA.

    In fact, they begin to value learning much more than $$. After understanding the foundations of business development, startup cycles, outside investors, and building multiple successful companies what's the point of more earning?

    It's only the folks that haven't learned or earned enough yet, that get blinded by earnings. It's not the capital, it's what you can do with it that makes you a great founder.

    Either way, great post. Got me thinking and I appreciate it.

  • http://www.fiftybyfifty.com/lifeoffarhan/ farhanlalji

    The difficult thing is making the transition between the learn and earn, and I'd add the burn situations.

    Burn – being in a big company thinking you're going to learn and leverage your lessons into your start up career.

    Doing the hard stop from the burn to learn or earn is difficult.

    If you're in a learn situation and the founders swinging for the moon you're in it for a while and next thing you know you've got a mortgage and mouths to feed which makes leaving to go do the earn thing difficult.

  • http://www.artistichub.com/ Jimmy Hendricks

    This is great. In the first year I had several talks with my co-founder about this topic. The risk is higher doing it on our own I said, but if we fail we will have learned a lot more starting something than working alongside someone else.

  • http://shanacarp.com/essays ShanaC

    Let's push this further-

    I'm going to be an undergraduate alum of where you went to B-school. It's definetely time for me to learn. I have a wierd situation due to my deparetment in which I finish classes in 5 weeks, but don'tgraduate until june. You know this scene- do you stay in Chicago? What is here? Or SHould I go and also be working towards my undergraduate,, knowing how crazy the undergraduates are?

    (And We Are)

  • http://thedreaminaction.com/ Ryan Graves

    Tristan-
    Take a screen shot of Marks comment and hold him to it :)

  • http://ventureswell.com LukeG

    Great piece.

    In my own limited experience, it feels like I've learned more in the 18 months since starting a company than I have in the rest of my life. If you're in a position to bring together a team and take a shot at a promising opportunity AND you're young enough that your opportunity cost is pretty low, I highly, highly recommend it. There are few situations in the world that will lead to as much personal growth and professional development *in terms of true capability.* If you're trying to climb a corp ladder, it's a much riskier approach.

    (I worked at a bootstrapped startup in college and for a venture-back co for a year after graduating. Both were important but can't even begin to compare to this.)

  • http://jared.tumblr.com jaredhecht

    This is the most useful and relevant post I've read in months. Thank you.

  • djdan85

    Great post. The simple math is powerful yet often overlooked!

  • http://www.bogdanionita.ro/ Bogdan Ionita

    Whenever I hire people for my company, I always tell them that I will not keen at all to offer them stock options or any other similar long-term shady 'benefits'. I would very much prefer to give them a higher salary or better bonuses (things that employees can 'taste' for real).

    Although stock options may help the employee feel more involved in the business (which is something that I would like, as the company founder), in the vast majority of real-world cases it's just a BS due to the same calculation point that you made in your article. And I do my best to explain it to them. To me, it is more of an employer's trick than a real benefit.

    Indeed, there are people that wouldn't want to get involved unless they are offered stock options. If it's really a must-have for them, so be it.

    About learning vs earning, I totally agree that the way to go is to start your own company or to get to be a senior exec. But you shouldn't try to learn 'everything' before you start your own company. I often see people that are “not yet prepared” to start a company. If they don't do it soon, most of them will never be prepared. You should start it trying to earn as much as possible from it, but most likely you will end up learning a lot from it… probably more than you would learn by working for somebody else.

  • http://www.artistichub.com/ Jimmy Hendricks

    This is great. In the first year I had several talks with my co-founder about this topic. The risk is higher doing it on our own I said, but if we fail we will have learned a lot more starting something than working alongside someone else.

  • http://shanacarp.com/essays ShanaC

    Let's push this further-

    I'm going to be an undergraduate alum of where you went to B-school. It's definetely time for me to learn. I have a wierd situation due to my deparetment in which I finish classes in 5 weeks, but don'tgraduate until june. You know this scene- do you stay in Chicago? What is here? Or SHould I go and also be working towards my undergraduate,, knowing how crazy the undergraduates are?

    (And We Are)

  • http://ventureswell.com LukeG

    Great piece.

    In my own limited experience, it feels like I've learned more in the 18 months since starting a company than I have in the rest of my life. If you're in a position to bring together a team and take a shot at a promising opportunity AND you're young enough that your opportunity cost is pretty low, I highly, highly recommend it. There are few situations in the world that will lead to as much personal growth and professional development *in terms of true capability.* If you're trying to climb a corp ladder, it's a much riskier approach.

    (I worked at a bootstrapped startup in college and for a venture-back co for a year after graduating. Both were important but can't even begin to compare to this.)

  • http://bothsidesofthetable.com msuster

    The issue isn't with long-term capital gains taxes, it's with short-term capital gains taxes. For stock option plans to be categorized as long-term you need to have exercised your stock and held it for one-year before selling. This almost never happens. So most people get stuck with short-term capital gains taxes. In CA these come out to 42.5% approximately all in.

  • http://bothsidesofthetable.com msuster

    Thank you for stopping by and I appreciate the feedback.

  • http://bothsidesofthetable.com msuster

    I agree with you 100%. My broader point is that too many people are looking to “learn” as in working in a more junior role in a company rather than learn from being the CEO (or other top executive) where the could earn while they learn. The best people are never done learning.

  • http://bothsidesofthetable.com msuster

    Yes, it's hard to try to “earn” while you have mouths to feed. It's why I encourage people to try when they don't have encumbrances.

  • http://bothsidesofthetable.com msuster

    Thank you for the feedback.

  • http://bothsidesofthetable.com msuster

    Funnily enough, most people don't even bother to do the math. I always wonder why.

  • http://bothsidesofthetable.com msuster

    Thanks, Bogdan. I agree people should try the “earn” route to “learn” even before they've learned everything. I also agree about hard cash. I often find that employees in startups don't appreciate soft benefits.

  • http://bothsidesofthetable.com msuster

    Too true.

  • http://bothsidesofthetable.com msuster

    Luke, where people have the right skills sets I totally agree with you. But some people just don't have a natural predilection for business so would benefit by working with other talented people before branching out on their own.

  • http://bothsidesofthetable.com msuster

    The issue isn't with long-term capital gains taxes, it's with short-term capital gains taxes. For stock option plans to be categorized as long-term you need to have exercised your stock and held it for one-year before selling. This almost never happens. So most people get stuck with short-term capital gains taxes. In CA these come out to 42.5% approximately all in.

  • http://bothsidesofthetable.com msuster

    Thank you for stopping by and I appreciate the feedback.

  • http://bothsidesofthetable.com msuster

    I agree with you 100%. My broader point is that too many people are looking to “learn” as in working in a more junior role in a company rather than learn from being the CEO (or other top executive) where the could earn while they learn. The best people are never done learning.

  • http://bothsidesofthetable.com msuster

    Yes, it's hard to try to “earn” while you have mouths to feed. It's why I encourage people to try when they don't have encumbrances.

  • http://bothsidesofthetable.com msuster

    Thank you for the feedback.

  • http://bothsidesofthetable.com msuster

    Funnily enough, most people don't even bother to do the math. I always wonder why.

  • http://bothsidesofthetable.com msuster

    Thanks, Bogdan. I agree people should try the “earn” route to “learn” even before they've learned everything. I also agree about hard cash. I often find that employees in startups don't appreciate soft benefits.

  • http://bothsidesofthetable.com msuster

    Too true.