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Best reason to join a startup? Not to get rich

A study finds that startup employees don't earn more in the long run. But that doesn't mean the route isn't worth considering.

One point in the pro column for working at a startup is the potential for an exciting environment with a unique sense of camaraderie. But it's important to consider how even this may one day peter out.

The United States - and indeed, the rest of the world - has such an infatuation with startup culture that many have wondered: Do startup employees earn more in the long run? The answer: No.

Or so says a recent study that analysed the long-term consequences of startup employment in Denmark from 1992 to 2012. It found those who joined a startup that had been operating for four or fewer years earned 17 per cent less in the following decade compared with those who joined an established company. The researchers chose this particular setting because Denmark's economy, according to their paper, is representative of other high-income countries including the US.

As someone who spent two years of her early career with a startup - as one of its earliest employees - this finding struck a chord with me. And it should give others planning their careers pause as we continue into the pandemic recession.

One key takeaway is how startups are particularly vulnerable to economic downturns, and how startup employees can find themselves on the job hunt at the same time employment becomes hard to land. Being unemployed in a recession has a significant and long-lasting impact on earnings and is one of the reasons startup employment can depress wages over the long term.

Does this mean you shouldn't join a startup that's hiring? Not necessarily. A lot rides on your risk tolerance, expectations of a job and, perhaps most importantly, your other employment prospects.

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Of course, there's an argument that working at a startup is about more than just immediate compensation. You could get equity stake, with the potential to get a big payoff later. However, this isn't off the table if you join an older firm. Some companies offer an employee stock purchase plan or similar incentives that pay handsomely on top of compensation.

Another common thought is that a startup provides significant opportunity for learning and growth because there's less of a structured hierarchy and you'll likely wear multiple hats. Unfortunately, the study found that this "jack of all trades" approach often results in a "master of none" outcome. That may be why job titles at startups don't always translate to similar positions at established firms.

Sweet spot

One point in the pro column for working at a startup is the potential for an exciting environment with a unique sense of camaraderie. But it's important to consider how even this may one day peter out. Whether your company gets acquired by a large brand, or grows and becomes the establishment itself, the once-laissez faire attitude that perhaps dominated your company culture will morph. That's important to plan for. Of course, this is even if your startup makes it that long.

There is, according to the study, an exception to the finding that startup employees earn less than those who work with established firms. It appears there is a sweet spot for joining a new venture: After it reaches about 50 employees but before it reaches its fifth year in business. Those who started at this point actually reported slightly higher earnings than those who opted to work at an established firm from the start of the study period.

Perhaps one of the most discouraging takeaways from the entire study is wrapped up in these two sentences: The press loves to cover the janitor or receptionist who became rich from being employed at a high-tech startup. But these events are as likely and as representative of the common experience of startup employees as is the multi-million-dollar lottery winner among those buying tickets.

Long-term compensation

Basically, it suggests that finding your fortune in a startup is akin to playing the lottery. But I would argue this is largely dependent on your industry, so it's not entirely outside the realm of possibility that working for a startup will increase your long-term compensation.

For those who work in tech, it makes sense why a startup is perhaps emotionally thrilling, but a gamble career-wise. After all, going to an established firm does mean high pay, usually competitive benefits and perhaps an employer stock purchase plan.

What about those of us in other industries like media? When I moved to a startup, my salary went up 30 per cent and within two years I was earning nearly double what I had prior to joining. This helped reshape my perception of what I could earn. Yes, the exception does not make the rule. However, it's important to consider that startups employ a lot of people in various industries and for some of us, that leap might actually make a lot of sense. BLOOMBERG

  • Erin Lowry is the author of Broke Millennial, Broke Millennial Takes On Investing and the forthcoming Broke Millennial Talks Money: Stories, Scripts and Advice to Navigate Awkward Financial Conversations.

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