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How to get wealthy working at a startup

How to get wealthy working at a startup

Strategies, risks and lessons on money, wealth and startups

Giammarco Pacifico
November 22, 2023

Money and financial stability are among everyone’s top priorities for a career.

Many people believe money is the single thing that would improve their lives the most and everybody seems to be obsessed with making more money.

In reality, it’s rarely about money. It’s about wealth.

Money vs Wealth

Money is easy to measure and keep track of. It’s a scorecard that many of us look at regularly. At the end of the day, it’s a number.

Because it’s so visible, it becomes a way to compare people, which intrinsically turns it into a competition.

There is nothing wrong with competition when it drives us to do more and get better but every study agrees that over a certain threshold, more money has diminishing returns.

The number at which satisfaction starts to decrease varies based on where you live and how much money you need to survive (e.g. rent, mortgage, childcare).

If you think about it for a second, it’s obvious how an increase of €5k has a vastly different effect if you have €30k or €300k. The same amount of money has an outsized impact on a lower income.

Practically speaking as your income goes up and your basic needs are met, you’ll start spending more on discretionary items, which will not proportionally increase your long-term satisfaction.

But what does it mean to you?

In reality, studies show that there are three thresholds on the way to wealth:

Positive effect threshold: until this point, every additional amount of money has a large impact on your wealth and life satisfaction
Diminishing return threshold: after this point, a small increase won’t make a noticeable difference and won’t practically affect your life
Life evaluation threshold: after this stage, most people have achieved the highest levels of Maslow’s hierarchy of needs. Self-esteem and self-actualization become very important

Based on European standards, the graph would look like this:

Although the study uses income, I recommend replacing income with net worth

What is wealth?

Let’s think of wealth as the ratio between income and expenses.

A person with €100k in their bank account is much wealthier living in Chile instead of living in London because their average expenses are objectively much lower.

Wealth is also correlated with freedom of time.

When your wealth goes beyond the life evaluation threshold, you start having more options with your time. You might still need a job but you can take some time off to find the right opportunity or decide to work part-time if you’d rather start your own business or raise your kids.

Why does everybody tell you to focus on money?

At first, I could not understand why everyone around me would suggest I double down on money.

Even wealthier people I trusted kept giving me the same advice, although they didn’t follow it themselves in the past.

Recently, I came across an old essay from Paul Grahm, the founder of Y Combinator.

He points out how parents, amongst others, will tell you to err on the side of money not because they are materialistic but because they share risks more than rewards.

His metaphor is as powerful as a thousand words:

If your eight-year-old son decides to climb a tall tree, or your teenage daughter decides to date the local bad boy, you won't get a share in the excitement, but if your son falls, or your daughter gets pregnant, you'll have to deal with the consequences.

Paul Grahm

Knowledge is wealth too

If a self-made billionaire would go broke again, they would become wealthy again in not a long time, because they have acquired the knowledge to get there.

That’s why most old rich people would give everything away to go back and be young again. It’s simply because they know what they know and they have no doubt that using such knowledge would make them a lot of money.

Knowledge is not a goal in itself though.

Learning for the sake of learning usually gets us nowhere.

But knowledge is required to become wealthy. Think of it as a tax that you have to pay with time or money.

If you’re young, ambitious and not rich (yet), you need to gain knowledge through time by putting in hard work.

If you’re rich instead, you can usually find someone who knows how to do what you want to do and massively speed up your process. This is why people pay $19M for a lunch with Warren Buffet.

Startup Equity: The Golden Ticket to Wealth?!

When it comes to startups and money, you’ve probably heard very contradicting stories.

On one end, you are warned that people who work at startups take massive financial risk and get underpaid while other sources tell you that startup employees with equity end up making millions.

If you feel confused, you are not alone.

To make it simple there are 3 ways to make money at a startup:

1. Join the right startup at the right time

The objective is to pick a future market leader (e.g. Google, Facebook, Novo Nordisk) when they are still young, ideally with less than 100 employees.

If you are a young engineer or scientist (aka an individual contributor), this is practically your only chance to make considerable money.

Of course, you have to get stock options as part of your compensation but on the bright side, even 0.01% of a company that ends up going public is a very sweet deal.

The challenge is that once it’s clear that the company will be a success, everybody will want to join and the competition will be brutal.

So you have two options:

Joining before everybody else because you know how to spot the right companies and/or you have the network to spot it for you
Being world-class at your job so that you’ll stand out from the crowd of applicants who want to get rich

2. Be an executive at a small startup

If the company is less than 30 people, executives are usually given a lot of equity because of their essential role in the company’s success (and because their market value is usually higher than what a startup can pay in cash).

The advantage of this situation is that you don’t need to be working at a company that achieves massive success or goes public.

Even if you get 1-3% of a company that sells to a large player after a few years for €100M, you’d be making quite a lot of money.

The challenge here is that only executives get enough equity for a small exit (for Venture Capital standards) to be meaningful.

If you are a junior engineer with 0.1% in stock options, you probably won’t get much, if anything at all.

3. Found a successful company (of any size)

By founding a company, you’ll have a large enough ownership that even a very small exit of €10M might make you rich (depending on how much money you raised)

In short, this is the reward for taking the risk of founding a company and everything else that comes with it.

How you can make money at a startup

The bottom line is that if you’re not a founder or an executive, your only chance of making significant money as a startup employee is to join the right company as early as possible.

How much early depends on you and the kind of risk you are comfortable with.

Keep in mind that you’ll get a lower equity compensation as the startup becomes bigger and has less risk: from 5-7% for an early employee to almost nothing if the company has raised $500M and is close to IPO.

If you are convinced that joining a startup is for you, the most important part is knowing what you value most: equity or salary.

This will determine which kind of companies you should consider.

Everything else is just not going to work for you financially and you’d be better off getting a job at a large company, with a higher salary and more benefits.

Of course, the best scenario would be getting a high salary with a good potential financial upside while learning a lot in the process.

But this is not how the world works.

Most of the time, you can either learn or earn.

It might sound harsh but this is a classic example of the Pareto Frontier, an efficient situation where choosing one criterion will make the other worse off.

If you optimize for learning (e.g. in a startup) you will most likely end up not making a lot of money while if you optimize for earning (e.g. in a large company) you will make much more money but not learn as much or even stop learning completely after a while.

Before joining a startup, keep in mind the graph about income vs satisfaction above and place yourself on the path to wealth. Based on your situation, a startup might be the best decision ever or a quick path to being stressed all the time.

If you end up deciding to work at a startup don’t do it hoping to get rich with your first company or you’ll risk getting disappointed very quickly.

Instead, do it for the chance to work on things you like with the smartest people out there. Even if your first startup doesn’t work, you’ll be in the perfect spot to join another one and bring your learning there to make it a success.

Only by investing your career into multiple startups while getting better each time, you’ll keep making progress and maximizing your chances of building true wealth.

This week's top scientific reads

First gene editing therapy approved in the UK (Wired)
A further step against brain cancer (Nature)
A gel for local therapy against cancer (Advanced Healthcare Materials)
AI faces are more real than humans (Psychological Science)
Hunger controls how you make decisions (Neuron)

Read my comments on these articles here.

Latest European funding rounds in health & bio

Ready to turn this news into your next career opportunity? Here is how

NMD Pharma raised €75M to further advance their pipeline of small molecules targeting patients living with neuromuscular diseases 🇩🇰
Pregnolia closed a CHF 2.2M round for clinical trials on their medical device that detects the risk of premature birth 🇨🇭
Ymmunobio raised a $1.4M Seed round for the development of their innovative treatments for cancer patients using new classes of antibodies 🇨🇭
Frieda Health closed €2.5M for their digital health platform to help women better cope with menopause 🇩🇪
Biovitae raised €3M to advance their product that sanitizes air and surfaces using LED light 🇮🇹

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