How to join a startup and not get screwed - 2023 BigTech Layoff Edition

This letter is for my friends in the tech industry that recently got laid off - especially those in my former alumni at Google and Amazon. However, this article really applies to any worker that is looking for a job right now, and is considering to join a startup company. This is an update to a 2017 article that takes into account the special circumstances of 2023.

Why you need to especially be careful right now

Joining a startup is exciting and a very new experience. However, because of the economic downturn, its easy to join a company where by your stocks are essentially worthless. Here is why:

1. Company valuations are significantly lower in 2023 than in 2021
2. Investors most likely have special clauses that could result in employees getting screwed out of their stocks

Recalibrating what your stock is worth

Usually your compensation is a combination of stock and cash. Employees are usually granted a set of stock options for a period of time (e.g. 4 years). To understand the "value" of the stock options, it's important to know what the last "preferred stock option price" is of the startup at the last raise. However, if the startup you joined last raised money in the height of the 2021 frenzy, more likely than not the company was valued at too high of a price. The actual value of the stock is also dependent on the sector that you are joining too. For example, if one is joining a B2B SaaS company, you might want to discount your stock options by 50%, where as if you are joining a crypto startup, you might want to discount your stock options by 70%. Similarly, it really depends on the stage that the company is at as well. For example, Series A companies have had a cut in valuation on average by about 30%, where as a Series C company that is about to go IPO may have valuation cuts of 70%. This is especially true for "hot" startups.

Here are the 3 questions you need to ask your employer:

1. What is the preferred share price of your last raise, and when did it happen ?
2. What is the is the target preferred share price of your next raise, and when will it happen ?
3. What is the average industry decline in valuations for similar companies ?

If you can't get an answer from #1, don't even bother joining. #2 and #3 might be harder to get and you might have to do your own homework. That's why it is best to always join a company that your friend is the founder.

Beware of investor clauses - Anti-Dilution and Liquidation Preferences

By now, everyone knows that Silicon Valley startups screw employees by having special clauses that end up diluting employees. Here are the 2 types of clauses that cause issues:

1. Anti-dilution Clauses - Investors are worried about the dreaded down-round, and they often have a ratchet to ensure that employees get diluted if the subsequent raise results in a valuation per share that is lower than before. There are two types of anti-dilution clauses - full ratchets and weighted average. These are fairly technical terms so you need to do your own homework. Worse yet, founders who raised money in 2021 often agree to terms such that they investors get to make a certain multiple on (e.g. 2x) their next raise, otherwise the common share holders get diluted. More often than not, companies that have gotten sky high valuations have these types of terms that ultimately screw employees.
2. Liquidation Preferences - Similar to anti-dilution clauses, these clauses stipulate allow investors to claw back money from employees when the company is sold. Essentially, there are terms that first allow investors to get back their money with a multiple, then they get their share. You need to do your own homework to understand these terms. In the last 1 year, investors have been insisting on high liquidation multiples and participating requirements, resulting in massive dilution of employee stocks.

Here are the questions you need to ask:

1. What are the anti-dilution and liquidation preferences of the company ?
2. What increase valuation does the company need to raise its next round so that common stock holders are not subject to more dilution than preferred stock holders.
3. If the company gets bought at the same valuation as the last round, how much money will I make.

There is a high probability that the company will not let you know #1, but number #2 and #3 are work around questions to get to the same answer.

Re-adjust Expectations

Over the last few years, BigTech employees between 35-45 years old can easily command salaries in the $400-800K range, with approximately 2/3 or more in stock compensation. If you were making this kind of money, you need to re-adjust for the following reason:

1. Low Interest Rates inflated the stock of BigTech more than any other asset class.
2. Quantitive Easing especially - namely the government buying S&P500 stocks to artificially boost prices - has been especially kind to BigTech valuations

These conditions simply do not exist anymore, so you need to adjust accordingly. My back-of-envelope calculation is that you need to discount your previous stock grants by about 50%.

Negotiation Strategies

If you did your homework, and the startup you are joining looks as good or better than your BigTech job after adjusting your expectations - go for it. In the most likely scenario that it is not or you can't get a straight answer - here is what to do:

1. Join startups that your friend is the founder - As a rank and file employee, you will likely get screwed by investors and the founder. I'm sorry - that's just how things work in the world. Having a founder as a friend significantly reduces that probability. You can ask your friend for straight answers such as the liquidation preferences or anti-dilution clauses. In the case of an acquisition, the founder usually has the power to create very favorable employment clauses for their closest friends. Founders ultimately can give their stock to you if you want more, or create special employment packages for you when you join OR when that dreaded down-round occurs. That being said, this is a 2 way street - by leveraging your friend's relationship to ensure you are protected - you can be creating more disharmony in the company you joined. If there are too many red flags, despite your friend being the founder, just walk away.
2. Ask for straight cash - if you don't believe in the valuation of the startup or its valuation prospects, this might be the safest way. Asking for cash will work only in special situations - namely if you have a skill that will require 2-3 employees to replicate OR you have "BigTech Reputation" that will help the startup raise money at a higher valuation. It's not unusual that ASIC designers from NVidia get paid $1M in salary at a hardware startup. I recommend that you ask for this special provision for only a certain period of time (e.g. until their next funding cycle).

Final Thoughts

If you've been recently laid off from a BigTech company, joining a startup is unlikely to be more financially rewarding that either joining another boring public company OR founding your own startup. However, being part of a boring public company means you are unlikely to be working on the cutting edge of tech. Being a founder of a startup is just incredible stress. So being part of a startup is a good balance between the two. Good luck in your job search !

If you like this article, feel free to check out my 2017 article too.