Posted in: web20

Web 2.0 as the “Founders Game”

There are a lot of good reasons to join start-ups, especially in the web 2.0 space. However, I was talking to a friend of mine from undergrad who mentioned to me that he wanted to join a web 2.0 start-up to “get rich” (as opposed to work with good people, learn, grow, etc). For awhile I have been really thinking that the web 2.0 world really is a “founders game” for all intents and purposes. So what’s a “founders game” you ask? Well, it’s a situation where the economics so greatly favor the founder(s) that employees joining a company must do so for reasons other than the economic payoff. To test this hypothesis I tried to cobble together some basic assumptions about what my buddy from undergrad is likely to face should he join a start-up to “get rich” quickly:

  • Company has raised one round of institutional money
  • No future financings (in other words, no more meaningful dilution for him a common shareholder)
  • M&A exit valuation in the range of $50 million
  • Options equivalent to 0.5% – 1% ownership at the time he joins (I’m assuming he’s not a VP or a big-time CEO)
  • Company is acquired fairly quickly (time to acquisition is less than 24 months)

Assuming the above numbers work out, our hypothetical employee ends up with $250K to $500K in pre-tax winnings in a fairly short period of time – not bad if you ask me. However, those winnings might be contingent on hitting milestones or some term of service with the acquiring entity. In the event that the exit valuation is not in the $50 million range, the numbers get a lot smaller very quickly and you begin to approach numbers that can be achieved by simply “working for the man” in some other company with less risk. The same is true if you assume future financings which dilute common. My take is that the opportunity to “get rich” in the current web 2.0 start-up environment is only open to the founders or maybe the CEO if he/she is not a founder.

In the end, I think it’s not so bad that line employees won’t necessarily “get rich” from the current crop of web 2.0 startups unless some of those core assumptions change. One of the most important things about work, no matter where you work, is the quality of the people around you and opportunities to grow and do interesting work. If you want to do the get rich thing in web 2.0, I think you need to be a co-founder or find a YouTube.

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