Start-ups, Biggies, ESOPs, ESPPs

I have been part of both types of companies - start-ups and established companies. For those who are seeking thrill, start-ups provide a great platform. Unfortunately, this thrill can be short-lived because most start-ups do not succeed. There are many reasons for failure of start-ups. The most significant one in my opinion is working on something hi-tech or cool rather than actually solving some real world problem. Other important reasons are that start-ups are mostly run as per whims and fancies of one person - the founder. His judgement is central to the success or failure of a start-up.

On a different note, why do people get attracted to start-ups. One reason is they seek thrill in their work. Start-ups do offer a lot of exciting work with stiff deadlines, but more often than not, a person ends up doing a lot of direction-less work. In contrast, things proceed at slow pace in an established company. A thrill seeker will definitely get bored by the time the project actually starts. I like both forms of working, as long as there is some direction and vision associated with what I am working on.

Another reason why people opt for start-ups in ESOPs. 20000 ESOPs worth 1 cent. Sounds great. Even if the stock gets listed at 1$, one will make 20000$. By this time, one actually starts counting the money in his own hands. All this is complete eye-wash. Many even agree to salary cut, and opt for the start-up instead of joining an established company. Quite foolish in my opinion.

Let me tell you why I consider all this foolish -

1. First of all, if you are chasing big money, you have to realize that very few start-ups actually make it big; so the chances that your 20000 ESOPs will see any reasonable valuation is very very slim. Even big companies play the ESOP trick quite well. When the stock is over-valued, they give large no. of ESOPs and when the stock is low, they give less no. of ESOPs.
2. Big companies give you the option of ESPPs. With ESPPs, if you time things right, you can make decent amount of money. Taking into account a minimum post-tax return of 10%, the annualized return for ESPPs is much higher. (10% for 5 months, 10% for 4 months, ..., 10% for 3 days). You can do the math.
3. Another benefit with ESPP is that you can start with as less as 1%. Some times when the stock price is high or market is falling, invest small amounts. The benefit is that in a falling market, your lock-in price keeps getting revised downwards. When the market starts going up again, increase your contribution to full 10%.
4. Another benefit is RSUs and bonuses. RSUs are like ESOPs but with a base price of 0, so you always make money on RSUs. The no. of RSUs given is generally a fraction of no. of ESOPs.
5. If you file patents, you can make decent amount of money with them. If your patent is business critical, every year you can make some money on it.

In short, if you want to make money, I think you can make enough money in a big company and you need not join a start-up. Join a start-up if the start-up is doing something radically new (not if it is doing some thing low-cost which more often than not turns out to be low-quality also, or is trying to outgun biggies like HP, IBM in an existing market etc), and you want to be part of it. Judging this is quite difficult and depends on one's experience and judgement. However, one has to always be prepared for some frustrating times and wasted effort. The good side to all this is that you can make some very nice friends and have some very nice conversations.