I'm trying to come up with a rough formula to help decide if I should join a startup. I'd like to weigh my current pay vs joining a startup, taking into account opportunity costs and possible final payout, all weighed against the inherent risk of joining a startup. Here's what I'm thinking ATM:
curr(time) = time * CurrentPay Startup(time) = time * (BaseSalary - OpportunityCost) Investment(time) = curr(time) - startup(time) (e.g. the amount of pay cut you took) Payout = (net?)SellPrice * EquityShare TimeToSell := how long you were at the startup before it sold <= BreakEvenTime = curr - (startup + Payout) SuccessProbability := odds that a company will be sold for the assumed price Roi(time) = Equity - investment(time) / investment(time) MakeMeMove(Investment, Payout, TimeToSell, SuccessProbability) = ???? = do it!/don't do it!
That last part is where I'm stuck... How do I turn Roi/risk into a "make me move" number? Given a statement such as "If the payout is a cool million then I'm willing to take a chance on a company that has a one in ten chance of succeeding.", what formula could I use to evaluate an offer?
Completely arbitrary Example:
Person joins company with 50% chance of selling for $10M in the next two years. Person gives up a job making $100k to make a base salary of $80K plus 1% equity. Given an equivalent amount of work, this person could make an additional $10K/yr in side work had they stayed at their old job. Company beats the odds and successfully sells for $10M after two years...
Curr = $200k
Startup = $140k (salary - opportunity cost)
Investment = $60k (curr - startup
Equity = $100k
Roi = 67% on an investment that had a 50% of returning nothing
- How much equity share is typical for a: founding engineer (at a software company)? A non founding engineer(e.g. Brought in, say 2 years later). Vague question I know, just looking for some general guidelines...
- What is the avg time taken to sell a startup? (again, looking for hard and fast guidelines)
- If the company does sell, is your equity payout based on the sale amount or net profit? Other mitigating factors?
- How is the payout taxed? Cap gains? Income tax?
- Are there any tax benefits/liabilities to being an equity holder?
Any advice would be greatly appreciated!
Edited title to highlight the financial focus of the question.