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“There’s nothing more humiliating for employees than deals like Instagram,” Jeff Bonforte, CEO of startup Xobni told Business Insider.Facebook just cleared its last regulatory hurdle to buy Instagram, a photo-sharing startup, for cash and stuck currently worth around $740 million.
That largesse is going to Instagram investors and its 16 employees, each of whom stands to make a substantial fortune.
“For the Instagram employees its fantastic,” he explained. “For startups around the Valley it’s terrible, those kinds of exits.”
A deal like Instagram “perpetuates this myth that you can somehow do a startup” and have instant success, he says. “So now the bar is, that if we’re successful, we’ll all make $400 million.”
Bonforte is a former Yahoo vice president and Internet-bubble era wunderkind. He was CEO and founder of I-drive, an early cloud-storage company that grew to 100-plus employees and 10 million registered users in the late 1990s. He eventually sold the technology to EMC after the bubble for an undisclosed sum—but let’s just say it wasn’t enough for Bonforte to retire forever.
He says as a startup CEO, he has to counsel employees about that kind of reality.
“Listen, this is your equity stake, this is how much money you’d make on a $100 million exit. You’d have to have 1% of the company to make a million dollars on a $100 million exit. It’s not that common for an employee to have one per cent.”
Plus $1 million isn’t considered that much money in the Valley. It might get you a two- or three-bedroom house in San Francisco in a middle-class neighbourhood.
At a $1 billion exit, a 1% stake is some serious money: $10 million,” says Bonforte. But by the time most startups are worth $1 billion, each employee surely won’t have a whole 1%. Look at Box. With it’s last VC round, its now worth over $1 billion—and it has over 500 employees.
It’s typical for startups to reserve 10% to 20% of their equity for employee stock options.
Of course, there are the outliers, like Facebook. Bonforte’s wife was offered a job as one of the first salespeople at the social network, for instance. She turned it down—she didn’t want to commute.
The net effect: When something like Instagram happens, “people become instantly discontent with a job they were happy with the day before,” he says.
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