Folder:
116 Life Lessons
File:
116.101 Life Lessons - Expected value for a startup

Expected value for a startup

Which is better?

Job-type-job

$500k/yr - HUGE salary!
$300k/yr - after taxes, still amazing
$3M in 10 years

The math in this case is... really easy. Just multiply by 10.

Startup

Assume that I end up with 20% equity in the company after many funding rounds.

An expected value calculation for the eventual financial outcome of the company's exit (no science here, just guesses, but I'm getting pretty good at this game):

Chance Result
1% chance of $10B outcome $100M
5% chance of $1B outcome $50M
10% chance of $100M outcome $10M
20% chance of $20M outcome $4M
30% chance of $5M outcome $1.5M
34% chance of $0 outcome $0

Add up the results ($165.5M), divide by my equity (20%), and I have a strong likelihood of ending up with:

$33.1M

This is a 10X improvement over the guy with the massive salary. Even if I significantly lower the odds of outcomes (which I won't, because I'm fucking good) I still have a better outcome.

BOOM.


Source:
  • Me