[LRUG] [JOBS] Ruby developer for new startup

Paul Robinson paul at 32moves.com
Wed Jul 11 02:53:05 PDT 2012


On 11 Jul 2012, at 08:45, Alan Buxton wrote:

> Pick an exit value. Have a look on vc blogs to see what is happening in Europe.from memory about £40 million would be as good a point as any.
> 

I really don't want to resurrect this thread, but that's a bit simplistic on multiple levels and needs challenging:

- Why choose £40 million as an average of exit values? Exits have ranged from zero to $1 billion in the last 12 months for a wide range of companies in the tech sector

- Why choose £40 million as an acceptable exit value for the specific circumstances involved in the specific case somebody might evaluate? Some firms will never be worth more than a few million even if they take 100% market share, and others will be worth many tens of billions with only 10% of market share. Not all of us are building "social tools" for hipsters you know...

- Exit value is itself a poor measure if there is a strong likelihood of dividends being part of the company's cashflow forecast. Some companies like dividends, others hate them. You need to find out what the plan is on that, and how it works in relation to the specific options you are being offered, the strike price, etc. - it could be you would make more than market rate years before an exit. Understanding the specifics of the business is vital.

- There is considerable tax benefit in being offered a tiny piece of equity for a solid firm that is paying dividends over a salary. A £20k dividend replacing £20k of salary for a higher-rate tax payer could put an extra £4k in your pocket thanks to the tax breaks on offer. If you're a director as well, you should be ideally looking for 100% of your income to come via dividends if you can, and there will be few accountants out there who disagree with me...

> Now think of your chance to successfully get to that exit. You may as well pick a number out of the air but let's say 10 per cent for the sake of argument
> 

Why? Each year 6.3% of businesses in the IT sector, and about 8% in the marketing and media sectors fail in the UK, so how have you extrapolated that into 90% of all startups failing before "exit"?

> I'm sure you can do the sums yourself but the upshot is that: if your equity stake percentage starts with a decimal point then it ain't going to be life changing, given the amount of time you well have to work for it.
> 

I sure would have loved 0.1% of Instagram - a crappy photo filter app - even if you wouldn't.

Why didn't I? Because I didn't know the guys involved, I wasn't offered a job, and I didn't have a chance to talk to them about their exit plans. If I had all of those, I'm sure I would have been a very happy man.

And you would have still told me that despite having that information to hand not available to the general market, that it was all futile and pointless and I should demand £60k-£80k/year and x% in employer pension contributions?

No wonder the UK startup scene is in such a mess if this is the level of defeatism that is prevalent within the community... :-)

> Sure there are instagrams now and again but frankly you may as well do the national lottery.
> 

I can't control how much money I win from the national lottery above £0 (i.e. I can choose not to play). If I work hard in a business with a team I trust and who share my goals, and we are constantly iterating and learning from our failures, whilst quickly getting to a product/market fit and keeping our heads above water, I can clearly have *some* input into how much money I can make.

They are therefore not comparable.

I have never seen a company where options were on the table, but the employees receiving them could not have significant input into the business as a whole, and its future successes and failures would be in no small part of their making.

Please stop trying to convince people who have a bit of entrepreneurial spirit that they shouldn't even try.

Options aren't given to developers who just want to develop. They're given to people who go above and beyond and become part of the management culture of a firm. People who are evaluating them are ultimately seeing themselves in a more entrepreneurial light, and you're telling them it's pointless.

You might set out to make a healthy pot of cash within a few years, you might set out to just take a market rate salary instead, but whichever choice you make: you'll be right.

And really, really stop confusing highly probabilistic random lotteries with the ability to build one's own future through a deterministic process that is being repeated over and over again every day.

> But back to the question about how to put a cash value on equity you are offered. if the company has had angel or vc funding then they will have an idea on current valuation so you could ask for this. Then the value its pretty easy to work out.if they're bootstrapped and not revenue generating or profitable then your guess is as good as anyone else.
> 

Do you even understand the phrases "pre-money valuation" and "post-money valuation" or how Angels and VCs come to these figures? By your reckoning, they're guessing unless there is already revenue in the business, and have no idea what they're doing.

I accept company valuation is a bit of a dark art, but there is a lot of experience out there and if multiple investors are trying to get into the same piece of equity on a funding round, you can almost guarantee the valuations are about where the money should be.

FWIW, it's not always the case the higher valuations win out. There's a reason for that, and it's the one that undermines most of your assumptions about how businesses succeed and fail. I won't go into that here though.

> If you really love what the company is doing and want to be a part of it and want to eventually share in the upside if there is any then just work out how much you need to live on comfortably and make sure your salary covers this, and them take the rest as equity, just as long add the equity feels right.
> 


This is the only bit of your email I even remotely agree with. :-)

I for one would encourage far more equity options being put into UK startup recruitment offers (they're primarily not because how the hell do you structure them with most recruitment agency contracts?), because it's the only way to generate the scale of growth we see in the valley. It's not "risky", it just requires more skills than going onto monster.com and doing an averaging job of the first 10 ads you see.

Paul

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