Working for a Startup Depresses Long-Term Earnings

The most lucrative career paths avoid young, small firms

Startup companies have captured imaginations, even among career-minded workers with no illusions of quick fortunes. Getting in early at a small, young company, where every job carries multiple responsibilities, can bulk up a resume with a variety of skills unlikely to be gained at a large corporation. And if the startup does take off, incumbent workers are well-placed to take more responsible positions within.

These relatively modest expectations (not dependent upon a wildly successful employer or valuable equity that only a tiny percent of startup workers gets) suggest that a career entailing jobs at small, young companies could be more lucrative than one spent at established firms. But a forthcoming study in Organization Science finds the opposite: Even a temporary stint working for a startup appears to depress earnings over the long run.

The study by UCLA Anderson’s Olav Sorenson, Aalborg University’s Michael S. Dahl, Yale’s Rodrigo Canales and Cornell’s Diane Burton compiles wages, salaries and bonuses of individual workers in Denmark for 10 years after they take a job at a startup, whether they stay there, move to another company or become unemployed.

Employees hired by companies younger than four years earned on average 17% less over the next decade than workers with careers at older firms, the study finds. The gap appears to increase over time. For the vast majority of startup employees, the experience leads to a career with one or more small firms, where wages and bonuses usually fall short of bigger company standards, the study finds.

The research quantifies several reasons for the pay discrepancies, and one narrow exception: Workers who join a startup after it reaches about 50 employees (but before its fifth year in business) report slightly higher earnings than workers who spent the decade exclusively at older firms, according to the findings.

The findings suggest that the career effects of working for a startup, at any point, are more complicated than the popular stories suggest. Can you get a bigger job title at a startup? Probably. Can you turn that experience into premium pay anywhere? That’s not so easy.

Lower Pay, More Joblessness

The study sample starts with all workers in Denmark, where labor mobility, firm survival rates and startup hiring practices are on par with the U.S. In terms of size, population, average income and industries, the nation resembles the State of Massachusetts.

Like most employees at U.S. startups, the core study subjects are not equity holders. Most Danish startups reward employees with bonuses rather than equity.

The study follows career trajectories of those who go immediately to startup jobs, as well as experienced workers who move to startups from larger companies. It excludes startup founders and other employees who joined in the first few days of operations. A formula that matched each startup worker to two similar employees from older companies helped control for demographic differences in comparisons.

The study finds startup workers earned about $27,000 less over a decade than their peers with similar credentials at established firms. Factors that contribute to the shortfall:

• Small companies pay less generally, and very few startups ever grow to beyond 50 employees. Lack of significant growth means few opportunities for career advancement. Yet their workers tend to stick with them or move to other small firms, and the career trajectories create earnings deficits that pile up over the long term. About 84% of the startup worker sample followed this path.The research suggests that the startup experience doesn’t make it easy to land jobs in larger companies. While one might get a more important job title at a new company, the responsibilities are likely to be broader and change more often than the same position at a bigger firm. The resulting jack-of-all-trades resume, they note, may disadvantage the startup candidate in competition for the more specialized jobs at large firms.
• Jobs at startups are less stable because young firms have much higher failure rates. More frequent and longer periods of unemployment drag down long-term earnings for the startup workforce.This instability may create even bigger earnings gaps in the U.S., where health care is often tied to employment and social services are weaker. Like most developed countries, the Danish government provides health care to all, as well as considerably more wage reimbursement for unemployed workers than the U.S. The researchers speculate that unemployed Americans may be quicker to take a subpar job with lower pay than those who lose jobs in Denmark.
• Startups generally hire workers with less competitive resumes; their employees are less educated and less experienced than counterparts at older firms. “In other words,” the researchers write, “these (startup) firms disproportionately hire those who would probably earn less at any employer.”Effects of these hiring practices are noted in that $27,000 average difference between those involved in startups and similarly credentialed employees at older firms. Without accounting for credentials, the average pay deficit for the startup worker shoots up to $58,000.

Where Startup Jobs Pay Off

The best way to avoid an earnings penalty in a startup job: join a bigger startup. “The larger the startup at the time of hiring, the smaller the penalty,” according to the study. Workers with stints at startups with 50 or more employees recorded average long-term earnings about 2% to 4% higher than workers at older firms.

Budding entrepreneurs dramatically increase their long-term earnings by first working for fast-growing startups, the study finds. Workers from small startups who move to self-employment average 22% less in earnings than careers in established firms. Starting a business after a stint at what the authors term a successful startup cuts the discrepancy to 3.8%.

Finding that successful startup, however, can be very tricky. Only 2% of startups reach 50-plus employees before their fifth year of operations, which makes getting in early a risky strategy. A few extraordinarily successful startups are responsible for the vast majority of jobs that young companies create, the study notes.

The researchers cite numerous reasons workers might prefer working for startups, even if more lucrative opportunities exist. The jobs may offer more interesting work, a less authoritarian work environment, or camaraderie that a corporate office might lack, for example.

But they also suggest workers may not understand the long-term consequences of startup employment. Startups are hailed as engines of job creation by local economic development teams as well as presidential commissions. Founders of even failed startups are popular hires at established firms. And of course there are a few legendary stories of young companies heaping fortunes on staff from executives to janitors upon their success. There’s little in popular culture to suggest solid employment at these innovators could constrain your bank account over time.

In reality, the study authors note, the odds of landing a startup windfall are about the same as winning millions in a lottery. To accrue wealth, the vast majority of workers must rely on their own earning power, built up job-by-job, in hopes that employers will appreciate the experience.