Go west, young MBA: Important rules for building wealth in San Francisco

By Bryan Goldberg , written on November 21, 2012

From The News Desk

These days, a lot of people are moving to San Francisco or Palo Alto to launch their post-college or post-MBA careers, which is a pleasant change from just a few years ago, when the best and brightest minds were finding new ways to market financial 'products' on Wall Street.

According to Fortune Magazine, four of the top eight most desired jobs for MBAs are in Tech at Google (#1), Apple (#3), Amazon (#6), and Facebook (#8).

There's just one problem. Most MBAs are hopelessly bad at navigating the Valley.

Because technology is the new chic thing, and because so many East Coasters are moving to San Francisco to jumpstart their careers, I have decided to put together a primer on how to get rich out here in the Wild West of business.

I'm going to begin by immediately discouraging people from working at these massive companies. These may be great places to work for a couple years — to learn the ropes and make some connections — but one would be ill advised to stay there for more than a short time, because it would violate the first and most important rule in this primer…

Lesson 1 -- Salaries do not allow you to get rich

While there is always some appeal in working for large companies with (supposedly) sophisticated operations, I would argue that a job at Facebook or Google eliminates the single greatest incentive to work in the Bay Area -- equity upside.

For those whose parents never explained how money works, here is a simple rule to keep in mind: It is damn near impossible to get rich from a salary. In fact, at times it seems like God himself has conspired with the federal government to make sure that your salary will never make you rich.

Young people are routinely guilty of falling for this misconception. They think that their manager's high salary, even one that seems very high -- $300,000 a year -- is somehow going to make them rich.

It won't.

Because as your salary grows, so too will your taxes, the size of your family, the cost of the education of your children, your mortgage, the exoticness of your vacations, the shit you buy to keep up with your richer friends, that surgery, and the Audi you need to assuage your mid-life-crisis.

Salary will never, ever be enough to satisfy your wealth needs.

That $300,000 per year will be quickly whittled down to a five-figure number after taxes and expenses, and if you live very modestly and send your kids to public schools, you may save a bit more. Congratulations, you will be a millionaire when you're fifty.

What will make you rich are the occasional "hits" from when your company gets acquired or IPOs, and you get a one-time check for a few hundred thousand, or possibly a few million dollars. It only has to happen once or twice, hopefully when you are younger. But equity is the key, which brings us to the next point…

Lesson 2 -- You are not valuable, your equity is valuable…

Do you think that the 28-year old kid with a degree from Arizona State University who got a job answering user complaints at Facebook in 2007 is rich because he is smart and talented?

No, he's a nobody. But he's a nobody with equity. And that is even better than being a somebody who doesn't have equity… Like that Harvard MBA who just started her job at Facebook this year.

And there is only one way to get equity…joining a company early enough that they can give you a meaningful quantity of options at a low strike price. There are no exceptions to this rule. Once a company is big, you cannot get a meaningful share of it at a low price. Even if you add tremendous value and the CEO loves you, it is too late. The laws of capital are no less rigid than the laws of physics.

Indeed, some of the most valuable people join a company after it is successful, and they will not get nearly as wealthy as they should.

Do not be that person. That is the worst person to be.

In most cases, venture-backed startups have a pool of shares that they have to give away to early employees -- it's called an ESOP, and it is a cheap and tacky negotiating ploy used by VCs to get a better valuation for their investment, even though every last one of them will deny that's what it is. But that's neither here nor there. It is a cheap and tacky negotiating ploy that yields one big winner: early employees.

So, you, as an aspiring businessperson need to constantly say to yourself, "How do I get my share of a great young company's ESOP?"

This leads us to the next important point…

Lesson 3 -- You will not be given equity, you must take your equity… 

Walking into the office of a hot new company that has just raised an angel or Series A round of financing, and practically demanding a job that revolves around your particular skill set may seem like a stretch…

Calling or emailing the CEO of a startup -- even though he is a complete stranger -- and insisting that he meet with you so that you can tell him why his company is fucked without you being part of his life, then demanding a compensation package rife with equity from his ESOP along with a market salary may appear far-fetched…

But thanks to there being way too many startups, and not nearly enough proactive people in San Francisco, you can do exactly that.

It may seem unrealistic, but let me clearly describe the scenario that every startup faces once they raise a round of venture capital, as this happened to me several times:

The entrepreneur tells VCs an amazing story about how big and valuable his company will be, and he lays out a plan to hire 20 people in three months, each of whom is described with generic placeholder names like "Engineer 3" or "Business Analyst".

Then he actually gets the check for $5 million, and his first reaction is to get drunk. But his second reaction is to say, "Holy shit, how am I going to hire twenty people in the next three months!?"

That is precisely the moment when you need to strike, and move in on his company's equity.

Good entrepreneurs -- and those are the ones you are targeting -- hire people because they like them. They like how sharp the applicant is. They like how proactive the applicant was in scheduling a meeting over LinkedIn. They like how the applicant says flattering things about the company, and is able to elucidate exactly why the company is so special.

A good entrepreneur doesn't care if your credentials are an exact fit for a position, because in most cases, he doesn't even know what the position is actually going to do...because he doesn't fully know what his company is going to do.

This is where you swoop in and get the equity, and then get more equity every time you help shape the direction and fate of the young company. It's like you are an entrepreneur now too, except you don't have to do the shitty parts of being an entrepreneur (which, believe me, are super shitty).

Which brings me to the next point…

Lesson 4 — It's not hard to find the companies that just raised money…

Back in the 19th century, aspiring oil barons or gold miners -- the precursor to the modern tech titan -- had to rely on a blend of luck, guts, insane risk, science, murder, awesome hats, lies to Native Americans, and bribery to stake out the exact location of a million-dollar bounty.

Today, you can find it on one of three websites: VentureBeat, TechCrunch, or PandoDaily.

Read these three websites, and you will know exactly who has raised capital, how much they have raised, and at what valuation. You can also see who the CEO is, and figure out if he is a schmuck or not.

Each week, you can pick two or three newly-financed companies that appeal to you, and whose product seems to make sense, and you can contact the CEO to ask about meeting in person. You will be surprised how often he takes the meeting. In most cases, it's the CEO who is answering the '[email protected]' email box. CEOs hate giving up that job function. It's just one of those things…

Your letter to the CEO can go something like this…

Dear ____,

Congratulations on raising your round. I'm extremely impressed with your product. I think that I could add value to your company in several ways. I'd love to meet with you, at your convenience, to introduce myself and see if I could be of any help to your company. Only better than that.

Then you meet up, and you demonstrate a great knowledge of his product, make some groovy suggestions, and get a job with some bullshit title like "Director of Operations" or "Marketing Manager" or one of those horrible only-in-SF titles like "Business Ninja".

Within twelve minutes of starting the job, you will discover that the startup is (a) disorganized, (b) in over its head, (c) teeming with flaws, (d) aware of problems it has no intention of fixing, (e) potentially a billion dollar company.

Now you get to work…

Lesson 5 -- If you do this 10 times, at least one will hit…

This is the law of pretty big numbers.

The amazing little startup you just got the job at may make you a millionaire, or maybe it will flop. But even if it does, that's okay. You don't need all of them to be big successes. Only one or two.

And once you play a critical role in a venture-backed startup, it will get easier and easier to get the next job, identify the good companies, earn promotions through merit (as opposed to corporate haggling), truly add value to those companies, and know how to maximize the equity you get.

But what happens if you do this ten times, and you still cannot manage a single hit?

At this point you are old and going to die soon anyway, so you will have precious little time to lament your horrible luck.