Tony Wright has an excellent insider’s post on what to expect from that offer you’re considering from a startup. It’s from way back in 2008 (an age on the internet, of course), but it’s still worth reading.
He starts with a wakeup call:
Employees with decent salaries and options will almost NEVER get rich in a liquidity event. The people who might get rich with startup equity are the founders and the investors (not coincidentally, the people who took significant risks).
That shouldn’t be news, but it’s worth a reminder. He goes on to talk about what options are and what they’re worth:
The best way to look at options are as a high-risk investment– it’s important to look at the cost of the investment, the chance that the investment will “hit”, the likely magnitude of the return on investment, and the percentage you’ll likely have in your pocket at the time of a liquidity event.
By the way, a liquidity event is when stock is turned in to actual cash. This could be an IPO or a buyout from another company, as two examples.
And the final bucket of water on your dream of getting rich quick:
Obviously, all of these perks are really only perks for people who see themselves working on/in startups in the future… For people like this, the $10k price tag (when you roll in the high-risk investment op) is a great investment. For folks who are just chasing the idea that they are going to get rich taking decent-paying jobs with post-funding startups, they are in for a long series of disappointments.
However, if you understand what you’re getting in to, it’s potentially a good investment; go read the post, and you’ll understand what we mean.
Mr Wright definitely has the foundation for giving advice on Internet based startups.