| "By now everyone knows that expected payoff of working at a start-up is the same or lower than a big company, but with much higher variability. Everyone knows this." I actually happen to agree with the statement but 1) I think the author doesn't understand the mathematical meaning of his statement (or he would have put an AND not a BUT) and 2) It is definitely not possibly true that "Everyone knows this" In pure probability / economics terms, if I have three payoffs: a) 50% probability of +1, 50% probability of -1; expected value = 0 b) 50% probability of +5, 50% probability of -5; expected value = 0 c) 25% probability of +5, 75% probability of -5; expected value = -2.5 a) and b) have the same expected value, so: -- I am "risk neutral" if I am indifferent between the a & b -- I am "risk averse" if I prefer a) over b (lower variance) -- I am "risk loving" if I prefer b) over a (higher variance - a gambler) In financial terms, any investor would absolutely prefer a) over b) [the lower variance bet]. c) is obviously worse than both b/c it has a lower expected value (and it's "doubly" worse than a) b/c it has a higher variance AND a lower expected value). If now, the argument is that startups have both a lower expected value AND a higher variability than established companies (i.e. they are like bet c)), then, if everyone knew this, the startup community would not exist not least because investors wouldn't be willing to fund it, but also b/c no one should be willing to work there. What are the caveats? 1) People's behavior isn't always rationale (people pick c) over a) --> for example, the lottery 2) There is a fair amount of evidence that most VC's don't make any real return at all (That putting your money in stocks is on average a way better investment.) Hence, perhaps it is true that startups are like bet c). 3) That the payoff of a VC is different (and better) than that of an employee who suffers from asymmetric information (VC's get access to the "best" companies to invest in whereas workers may not), lack of diversification, being screwed on equity structure, etc. So, it is possible that for a VC, there is expected value equal to that of comparable investors, but that for an employee, on average it is worse in all ways (lower expected value AND higher variability) to work at a startup as an employee than for a larger company. |