The Case for Risk

It was a terrific scene in Office Space. The collection of office drones, the near unanimous dull cow-eyed expressions and body language. Then came the reveal, a lifeless banner asking: "Is This Good for the COMPANY?" The obvious answer being that that environment was clearly not good for either the workers or the company. The palpable dissatisfaction, the apathy, the doing just enough to not get hassled mentality, the easy and wholly unearned ascension to power after consciously choosing to not care about or do anything. It was just close enough to reality to touch a nerve. For that 99 minutes, we were all Peter Gibbons.

But that was IT in 1999.

Today in Silicon Valley, most startup employees are granted stock options as a part of their compensation packages. Which means each employee is part owner. So, if the company IPOs or is acquired for a price substantially more than the most recent funding round, those employees stand to make considerable sums of money. Unlike the disaffected code monkeys of Office Space — engineers, PMs, data scientists, and designers — all have it well within their interests to earnestly and repeatedly ask each other: "Is This Good for the COMPANY?"

Those rewards don't completely kick-in until there is sustainable output to fuel exponential, power law outcomes over extended periods of time. Just like at Initech, if a startup employee ships a few extra units, that employee still won't see another dime. If, however, that startup employee discovers a way to ship a hundred or a thousand times more units, that person has the opportunity to receive a potentially massive windfall.

But there's a catch: Some startups have taken on so much funding that each employee is already committed to shipping that hundredfold improvement but also the next hundredfold after that. Their common shares are priced less than the preferred shares which set those valuations, but those employees carry all the risk involved with failing to fulfill promises they might not even realize they've made. In response to that increased exposure, employees demand better pay and more benefits to dilute that risk. Which in turn means startups have to raise more real dollars at even higher valuations and dilute every employee's ownership stake. More pay means more money to spend on apartments which leads to competition and landlords raising rent to take advantage. This snowball has been rolling for some time now.

VC's are pumping money into this system where they are somewhere on a spectrum between: 0/ assuming all employees know how it works and the deep commitment that's priced into these valuations, hoping for the best for all portfolio companies equally; or 1/ indifferent because they capture real dollars on fees based off a percentage of the money distributed to many different startups hoping for that one power law company to rescue the fund. I think (and hope) something closer to 0 is the common case but even that is nevertheless dangerous because assuming all employees know how this works is a pretty big assumption to make. There are so many new people injected into this system daily that a lot of things are no longer obvious[1]. Worse yet, a well distributed blog post can substitute for critical thinking[2].

These things have not become less obvious due to malice, but rather due to contentment. A deep cultural complacency that was catalyzed by a competitive recruiting market, large funding rounds, and easy early growth made possible by fortified monopolies of mid-sized market segments.

You can play "keeping up with the Google's" in an attempt to distract yourself with comfort... the off-sites, the gourmet lunches, the talks from esteemed guest lecturers... but what do you want those lecturers to tell you? That you can push yourself while still remaining perfectly comfortable? That your company's latest valuation is too big to fail?

Here's what they should be telling you: You cannot have great reward — whether those rewards are monetary or in terms of impact you've had on the world — without great risk. But somehow there has been a cultural shift to deny this reality[2]. It's not that SV has taken on too much or been too cavalier with risk, it's that everyone — from VCs to ICs — has bit by bit tried to remove risk from the equation entirely while still expecting a guaranteed reward. Everyone is guilty... whether it be through liquidation preferences and ratchets or hoarding too much equity or high salaries and oversized benefits.

Working for a startup should be risky. The real possibility of abject failure should drive you to accomplish that which you did not think yourself capable. That fear should drive you to these extremes of highs and lows where you will create truly remarkable and memorable experiences. The discomfort from the insecurity of forging ahead in the face of jokes people make because you know that if you're right — if you're actually fucking right — you will have created or contributed to something that has impacted the lives of hundreds of millions of people. The risk should also give you pause when accepting job offers. Do you really want to spend the next four years of your life working on this vision and creating that future? Does the central vision have what it takes to exceed the expectations set by the founders and investors?

Risk creates an environment where employees should act like a filter where only the best visions targeted at the right markets can pass through but this only works when everyone agrees to think critically and embrace reality. Working for a startup is risky. It has to be to offer the potential for its rewards. It has to require sacrifice, hard work, long hours, smarts, and, yeah, cunning. If that is not appealing to you, then work at Google, Facebook, or Initech.


________

[1] It's no longer obvious that...
• every single person with equity (regardless of amount) is closer to Bill Lumbergh than Peter Gibbons
• you can do diligence — thinking for yourself and pulling at that thread of "maybe the last funding round really wasn't at a realistic valuation", or, if the last valuation was realistic, that it will only materialize if and only if you are able to ship an additional 100x improvement
• you don't have to outsource the incredibly valuable work of determining which companies are winners to the VC's
• a great product itself is not enough to create and sustain an exponential growth curve
• you are the single most directly responsible individual for determining your destiny
• it's healthy and encouraged and good to ask yourself and your coworkers, "Is This Good for the COMPANY?"
• you have to work hard and be uncomfortable for extended periods of time to have the chance at the opportunity to reap the rewards of your time and emotional investments

[2] A had B and C where Z was Q to get Y and X, becomes: B when Z is all you need to get Y and X, becomes: you can't get X without B.

December 23rd, 2015