What Silicon Valley Already Knows: Using Game Theory to Quantify a Potential Career Move

One thing I learned in my time working in Silicon Valley, home to the highest salaries in the world, is that a large proportion of the population has a high risk tolerance. If you do not have the opportunity to see it first hand, and you are in the first half of your career - you need to read this article to understand how your choices can pay off big in the long term.

It's a scary decision to commit to making a career move. It could be as small as slowly transitioning to a slightly different role at the same company, or as drastic as going into a new field entirely. There are few instances where this decision needs to be made immediately and with no significant long-term effects on your life. Said another way – it’s an extremely large commitment and you always have the option to procrastinate. This leads to human nature (usually) winning out and leading us to err on the side of staying put. Here’s why this can ultimately be the wrong decision.

There are close to infinite combinations of things to consider (health, family, stress, fulfillment, happiness) that are completely unique for each individual and ultimately go into the decision. This article will focus on one that is easy to quantify – economic compensation – and look to use game theory to help with the determination.

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We all have varying degrees of how much we enjoy our jobs, but very few of us would work for free. This means that the economic compensation we receive in return for our time and effort is an important factor. Since we’re scoping the discussion down, we will also attempt to remove emotion and preference from the equation. This will allow us to achieve an objective result on which decision or outcome is financially optimal. Let’s use a little game theory to help us here. 

Imagine there are two traditional 6-sided dice (D1 and D2) that allow you to win money. You get to choose one and roll it once. 

D1: you win 20 times the number you roll in dollars

D2: you win 10 times the number you roll in dollars, except if you roll a 6 you get $1,050

Which die would you roll?

83% of the time you will make twice as much money with D1. If you were to make your decision based on that statistic alone – you might choose D1.

Yet, if we look at averages we can see:

D1 Average: $70

D2 Average: $200

Looking at this statistic, your intuition might now lead you towards D2 as it is the more attractive choice with a much higher average payout.

Enter opportunity cost:

By choosing to roll D1, you’re losing the opportunity to roll D2, and your chance at $1,050.

By choosing to roll D2, you’re losing the opportunity to roll D1, and your guarantee that you’ll walk away with at least $20.

Does your decision change if you’re currently $20 short on the rent that will keep a roof over your head, or $1050 short for a medical procedure that will save your life? It might. Yet, if there are none of these extreme scenarios, and you are financially secure and healthy – on average you win a lot more by rolling D2.

What in the world are we even talking about, and how does this relate to a career move?

In the analogy above, D1 is an established company that is public or has very little to no risk of going under. Your base salary is secure, guaranteed, and significantly higher as the company has more financial resources to offer. The stock is public (or about to be), meaning much lower risk, and has the ability to be cashed out at any moment. Yet, the element missing here is the economic upside.

D2 is an early stage startup. It has higher risk, less guarantees, less resources to offer, but there is a very large upside – the chance that the significant equity you get by joining a company early on, is worth a lot. In the scenario of a successful exit, your equity is potentially worth multi-millions (and makes the slightly lower salary negligible by comparison).

Even the probability of a successful exit makes your average economic compensation much higher at a startup. There have been numerous studies that look at the data of thousands of funded startups, and the percentage of a successful exit is not insignificant.

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As an early employee at a seed stage startup, you have a chance at a multi-million dollar payout. Assuming it might take two years on average for you to determine if the startup will successfully exit, you might easily be able to risk two years for that chance.

Also – your decision may change based on how many times you get to roll the dice. If you are early in your career, you have the chance to take the higher risk option not once, but multiple times.

There are a lot of different variables and data points across numerous different studies, but let’s use an example with some conservative assumptions. For a Seed/A/B stage startup, let’s say there is a 15% chance at some sort of successful exit, which as a very early employee will compensate you ~$5M. Starting with the first attempt, your cumulative chance of success increases with every shot

Deciding to embrace start-ups means: 

After 10 years, it is likely (55%+) that you’ll make multi-millions.

After 20 years, it is very likely (80%+) that you’ll make multi-millions. 

The conclusion we can draw- it is in your best economic interest to join a startup that is offering you equity. 

There are also other less-quantifiable benefits (accelerating your learning curve, increasing the breadth of your knowledge, building your network, etc.) that we have not discussed here, and that’s another topic entirely.

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There will always be that carrot dangling in front of you in your current role at a large established company. It may be some award, recognition, or a promotion – it is in the large company’s best interest to make you feel that carrot is significant, and to make you feel content. 

If not now, then when? For those of you without extenuating circumstances, there will never be an easier time in your life to take these opportunities. A question that you should ask yourself is "what is the worst that could happen?" In the end, the answer you may arrive at, the answer that much of Silicon Valley already knows: the biggest risk you can take is to sit tight, be complacent, and do nothing. 

WhatsApp, Venmo, Instagram, Slack, Uber, Square - all of these startup successes and many more were started during or right around the previous recession. After removing emotion and fear and taking an objective perspective - the numbers are telling you to go find, and join, the next great startup.