Empirical Estimates of Golden Handcuffs

Last post, I argued against common explanations for Golden Handcuffs.

Before we dive deeper, it’s worth asking, are they even real? Are employees of elite companies actually pathologically unable to leave? Is it just a stereotype with no grounding in reality?

Here are a variety of attempts to estimate the Golden Handcuffs effect empirically.

YC Founders Join Elite Universities, but Not Elite Companies

Rather than examining the psychology of employees, let’s just work backwards and count how many founders have big company experience.

A while back, I published a dataset of the top Y Combinator founders and noticed something odd.

Of the 26 founders, only 1 had held a full-time role at a FAANG company. [2] Two others had worked at Facebook, but only as interns. Outside of FAANG, only 3 founders had worked at companies I recognized at all. [3]

One explanation is the founder-as-monomaniacal-hero. Founders are totally single minded in their devotion, and would never do something as stupid as get sidetracked by prestige or status.

Except that they absolutely do. Of the 26 founders, 21 attended elite universities, mostly MIT and Stanford [1]. So maybe those universities are just incredibly good at fostering entrepreneurs, but more likely, they’re just good at attracting and selecting them. I take this as evidence that founders are not allergic to jumping through conventional hoops, pursuing instrumental goods, sitting down to take the SAT and so on.

It gets weirder when you consider population sizes. Google has around 100,000 employees, whereas MIT and Stanford undergrad programs are just 11,500 combined! And since average tenure at Google is under 4 years, each unit of headcount produces more alumni than a full degree program. [4]

All else equal, we should expect to sample many more founders from Google than from elite universities, but this doesn’t seem to be the case.

What’s going on?

Golden Handcuffs as Selection Effects

One explanation is that there are no golden handcuffs and it’s all selection effects. The kinds of people who work for Google are the ones who never intended to leave in the first place. The kinds of people who want to start great companies don’t have any interest in working for somebody else.

This is a reasonable explanation, but applies to less than half of the founders I looked at.

Only 11 of the 26 founders started a company right out of school. 14 have confirmed work experience, and another 2 have scrubbed the employment history, but have long gaps between graduating from school and founding their company.

Maybe working for a small startup shows that you’re less risk averse than a Google employee, but I don’t totally buy this. Brandon Leonardo (Instacart) worked at Webs, a company I’ve never heard of that claims to make “small business marketing simple”. Dan Kan (Cruise) worked at UserVoice, “the leading product feedback management software”. What exactly do these experiences select for?

In contrast, if you do want to start a company, working at Google seems like a great first step! You can meet co-founders and potential early employees, save money to fund yourself, gain legitimacy for investors and so on.

Of course, it’s possible the kinds of people who think about “gaining legitimacy for investors” are not going to start great companies. Maybe “real founders” don’t pursue instrumental goods.

A Third Perspective: Ex-Google Founded Companies

We’ve been dancing around the issue, but why not just go straight to the source and look at outcomes for the population we care about?

Are Google employees actually bad at starting companies?

Looking directly at startups founded by ex-Google employees valued over a billion dollars, we get:

  • Nutanix $5.8B
  • Cohesity $2.5B
  • Asana $4.3B
  • Lucidchart $1B+
  • Rubrik $3.3B
  • Instagram (sold for $1B, valued at $100B in 2018)
  • Pinterest $43B
  • Flatiron Health $1.9B
  • Xiaomi $46B
  • Affirm $2.9B

That’s a super impressive list! It doesn’t seem like ex-Google employees are bad at starting companies and pathologically incapable of quitting their jobs. Instead, the oddity is merely that they don’t attend Y Combinator.

That’s a different skew, and much easier to explain. Unlike regular YC founders, ex-Google employees may just be:

  • So wealthy that they self-fund until they can raise a Series A and aren’t willing to sell 7% of their company for $125k.
  • So tired of bureaucracy that they refuse to join an accelerator.
  • So credentialed that they don’t feel a need to go through Y Combinator to gain further credibility.
  • So well connected that they raise a Series A without going through Y Combinator.

Whatever the explanation, the fact remains that ex-Google employees do in fact leave to start companies.

Adjustments and Proportionality

Of course, we now have to ask if they do so proportionally. Even if Google has produced the founders of nearly a dozen billion dollar companies, we shouldn’t be impressed until we’re confident that they’re actually hitting above their weight.

Wikipedia lists 495 startups worth over a billion dollars, putting Google at 2%. But if you only include US based startups, Google is at 9 out of 122, or 7%.

To figure out the appropriate reference class, we’ll start with the number of software engineers in the US (4 million), then identify how many ex-Google employees there were 10 years ago when most of these founders started their companies.

A partner at google has compiled and released historical headcount data. This is a good starting point, but remember that we’re actually interested in the total alumni population rathern than point-in-time headcount.

To make this estimate, I assume 3 year average tenure and run a simplified simulation where 33% of the workforce quits at the end of each year, then Google rehires up to next year’s headcount.

Running this simulation from 2000 to 2010, we get that there were 50,000 ex-Google employees in 2010. They’ve previously said the workforce is 40% technical, so that’s equivalent to 20,000 engineers. [5]

Pitting that against the 4 million software engineers in the US [6], we get that ex-Google engineers were around 0.5% of the relevant population, but started 7% of the US based billion dollar startups. That’s a mulitple of 14x, and fairly good evidence that Google employees are not particularly bad at starting companies. [7]

Conclusion

Taking a step back, recall that what we’re actually curious about is not whether Google engineers are disproportionately successful at starting companies, but whether they even try in the first place. In other words, do they appear irrationally bound by Golden Handcuffs?

Compared to a randomly selected US based engineer, Google engineers have all sorts of benefits. They’re well credentialed, well connected, largely based in Silicon Valley, and supposedly smarter than average.

It’s entirely possible that their success rate is 140x that of a typical engineer, but they only try one tenth as often. The fact that Google engineers start successful companies doesn’t preclude the possibility that Golden Handcuffs are holding them back.

Further, consider that “rationality” in this case is really a function of both odds of success and opportunity cost. Even if Google engineers are less likely to start companies, it could be a perfectly reasonable choice given their relatively high opportunity cost.

So at the end of the day, the empirical data tells us a few interesting things, but can’t present a decisive conclusion.

[1] The other universities I count as “elite” are:

  • RISD
  • Joint RISD/MIT
  • 2 x Harvard
  • University of Waterloo
  • Berkeley, Columbia MBA

The ones I don’t include are:

  • USD
  • San Jose State University
  • Rice
  • Duke
  • Claremont McKenna College

I do include 4 founders who attended Stanford for grad school, but did not attend an elite undergraduate institution.

[2] Apoorva Mehta of Instacart spent 2 years at Amazon.

[3] Tony Xu of DoorDash was an intern at Square, and worked full time at McKinsey for 2 years, and eBay for another 2. Fred Ehrsam of Coinbase had spent 2 years at Goldman Sachs. Brian Armstrong of same had interned at IBM and Deloitte, then spent a year at Airbnb. Though notably, this was in May 2011, back when Airbnb was a small Series A startup with under $10 million in total funding.

[4] This ends up being a bit complicated. Reportedly, Google has an average tenure of 3.2 years with a median of 1.1. This is possible, but odd, and I’m not sure how they got these numbers. It’s tricky because at any given time, some population of employees has not left and you don’t know how long they’ll stay. If you count their tenure as their tenure-to-date, you’re undercounting how long they’ll actually end up staying. If you only count employees who have left, you’re skewed toward employees with short tenure. Also, Google has grown over the years, and we’re looking at founders who are successful now but started out 10 years ago when Google was around 25,000 employees.

[5] Data here. And yes, it’s possible the proportion of engineers has changed over time and this analysis is off.

This also helps explain why there are relatively so many founders from top universities. In the same 10 year time span, Stanford and MIT undergrad graduated around 115,000 alumni.

[6] Maybe we should be looking at the number of people who have been software engineers from 2000 to 2010 including retirements, and this number is actually higher. Assuming 40 year careers, and a constantly total number of engineers, it should be something like 25% higher, and Google is proportionately 25% better than it appears in the main text.

[7] There are lots of over corrections you could apply here, so don’t take this too literally. Maybe the relevant population is all people, not just engineers. In that case, Google ends up looking way better since the general population is much less than 40% engineers.

The Golden Handcuffs Were Inside of You The Whole Time

I consider the phenomenon of “Golden Handcuffs”, first as corporate perks, then as pay, then as Silicon Valley’s cost of living. I reject every explanation.

Golden Handcuffs as Corporate Perks

You get kombucha on tap, organic granola, a masseuse on staff. Soon enough, you forget your passions, get comfortable, and never leave.

I hear this all the time, but it doesn’t actually add up.

After a few years, an engineer at Google is making around $350,000. In contrast, organic kombucha is $0.14 an ounce. So even if you’re drinking 12 ounces a day 240 days a year [1], that’s just $400, or 0.1% of total compensation. To frame that otherwise, one year’s salary could buy you a 1000 year supply of kombucha.

What about the other perks? Google’s granola supplier sells to the public for $7.20 a pound. I don’t think it’s reasonable to eat a pound of granola day, but if you really wanted to, it would still only cost $1,700 for 240 work days. A nice massage is maybe $100, so if you go once a month, that’s another $1,200. Lunch is a pretty big cost, say $20 per day, or $4,800 per year.

What about your home office? The Wirecutter office chair is $1000, their 4k monitor is $500, and a top-line 16-inch MacBook Pro is $4,500.

So that’s an annual cost of $8,100, or just 2.3% of total compensation. Plus an upfront cost of $6000, amortized over several years.

I have a really hard time believing this is why people fail to quit large companies.

Golden Handcuffs as Corporate Pay

If perks represent only a tiny fraction of total compensation, then surely it’s the compensation itself that’s keeping employees in check?

This also ends up being tough to swallow.

Let’s say you quit your job, apply to Y Combinator, get in, pitch at demo day, and raise a Series A. Great news! You now have millions of dollars in the bank and can pay yourself a market rate salary again.

The odds that things do not go this smoothly are maybe 99-to-1 if you’re a randomly sampled founder. [2]

So let’s say you’re screwed and earn nothing as a founder. What’s the opportunity cost? Well in that year, it’s the full $350,000, or 100% of total compensation. But over your lifetime, the opportunity cost of taking a year off to pursue your dream is just 1 year out of a 40 year career. Around 2.5% of lifetime earnings. [3]

Is it not worth paying 2.5% of lifetime earnings to give your passion an earnest attempt? If you truly believed in something, would you really be unwilling to sacrifice even a miniscule fraction of all future income?

I’m sure this is part of the explanation, but it can’t be more than a small piece.

Golden Handcuffs as Bay Area Cost of Living

Ajay Royan of Mithril Capital writes:

How are you supposed to have a startup in a garage if the garage costs millions of dollars?

That’s a great one-liner, but it’s also garbage logic. Sure, home sale prices are in the millions, but if you just want to rent a garage, he’s off by a factor of 100.

Here’s a CraigsList search for homes in mountain view with attached garages. They seem to go for around $1,200 / bedroom. If you rent this 4br for $4,500 (perma) rent is $13,500 / year, or around $16,000 in a typical pre-covid market [4].

That seems expensive, but again, not compared to total compensation.

Let’s say you work at Google for 5 years, making $190k the first two, $260k the second two, and $350 the 5th. Post tax, that’s $793,000 in earnings. In those same 5 years, you spent $80,000 on rent, so you’re down to $713,000 in savings.

As discussed in the corporate perks section, Google takes care of every need you might have, so there are no other costs. [5]

Let’s be really conservative and say you didn’t invest any of your earnings during those 5 years. [6] And let’s continue to be conservative and say you’re using a 5% safe withdrawal rate [7] instead of living off the principal.

With those parameters, you are still pulling in $35,650 in passive income. More than enough to afford the $16,000 for rent, $8,000 for kombucha, granola and massages, and still have over $11,000 left over. [8]

Even one year at Google would net you $126k post-tax, which is $110k after rent. So at 23, you could quit your job and still have 4.5 years of runway to pursue your dreams. And you can do this while continuing to eat superfoods and living in the most expensive rental market in the world.

To summarize: Rising rent costs are nothing compared to corporate tech salaries. Royan’s argument that garages have gotten too expensive for startups is totally unconvincing.

Conclusion

If it’s not perks, pay or cost of living, what’s going on here?

I’ll provide my own theory in the next post, but here are some possibilities:

If none of those excuses apply, what are you doing instead?

Presumably, you have some values, and those values are not maxed out. They might be hedonic (your life is not as pleasurable as it could be), altruistic (the world is not as good as it could be), or narcissistic (your status is not as high as it could be).

Whatever the case, day jobs seem to be the proximate cause holding you back. I realize that quitting your job won’t magically turn you into a dream-fulfilling machine, but it is probably a good first step.

Everyone knows this. Everyone knows that it is best to directly pursue instrinsic value instead of getting distracted by instrumental goods and side quests.

So again, what are you doing?

I’m not asking rhetorically and this isn’t a motivational essay. I genuinely want to know.

Seriously, email me.

[1] I’m assuming 20 days of vacation, holiday, sick leave, etc.

[2] If you already work at FAANG, odds are probably much better. This reduces opportunity cost, and strengthens my point.

[3] Of course, the early earnings compound, but your salary also goes up later in life. Maybe that’s not exactly a wash, but this is all back-of-the-napkin anyway.

[4] https://www.sfchronicle.com/bayarea/article/Rent-prices-drop-again-in-S-F-and-other-Bay-Area-15692584.php

[5] I’m sort of kidding, but seriously, what else are you spending money on?

[6] For the record, the S&P is up 70% in the last 5 years, or around 11% annualized.

[7] I know you’ve heard 4%, but 5% seems reasonable. MarketWatch, Reddit.

[8] To be clear, this is not a financial independence blog. It seems great in theory, but given how many people seem to struggle with fulfillment afterwards, I can’t strongly recommend it. I’m not against it either, but I’d like to figure out what’s going before I start giving life advice.

The Best Writing Against, For, and On Substack

Many good points have been made on both sides, I’m compiling this writing here. If you’re aware of other examples, please send them over.

Against Substack

Packy McCormick (#11 Free): Personal Email

their product velocity is dog shit… don’t do anything for discovery… it crashes all the time… It absolutely blows my mind that they’ve raised as much as they have and have improved the product as little as they have.

Gwern: Comment on Reddit

One additional aspect of this is that Substack, technically, [is] just not very good. When I moved over, I ran immediately into multiple problems: the tracking links are so long that my newsletters get cut off, subscripts/superscripts just don’t work, etc. (Other problems have come up: AlwaysKillSticky is broken on Substack because they do really abominable things with comments, and we never did figure out why a Substack page is constantly firing off requests to the server.) I don’t aspire to make my newsletters as awesome as my website, but I expected Substack to at least be as decent as your raw dumped-HTML Mailchimp newsletter.

The Scholar’s Stage: Why I am Bearish on Substack

This is a recipe for intellectual sterility. A media ecosystem composed of the New York Times, a few other large newspapers, and a swarm of hungry Substackerati will starve itself out. The big Substack names will continue to rake in subscriptions, of course, but what will they have to talk about? Only the same old ideas they had been playing with for decades.

Applied Divinity Studies x Nintil: How Substack Became Milquetoast

The most damning thing about Substack is not any of these theoretical structural mechanics, it’s the easier more intuitive understanding that nothing great will be written here. Each piece we read and publish is a bite sized dose of momentary stimulation. It follows an unwritten contract between each party: I will not try too hard to write anything serious, you will not try too hard to understand my writing, and both of us will be happier for it.

Rob Hardy: The Case Against Substack

This is a top down, rather authoritarian approach to community. People can discuss things, sure, but only when you explicitly allow them to. If your fans want to find, connect with, and converse with other like-minded audience members outside of that structure, they’re shit out of luck.

For Substack

Nadia Eghbal: Twitter Thread
Re: Homogeneity within newsletters:

On the contrary, we encourage, and see the best success from, writers who actively take risks with their newsletters. You should try to filter for your most loyal fans. This problem is endemic to creative work generally… if anything I think Substack reduces this issue more than other social platforms (e.g. Twitter). A lot of ppl feel pressure to acquiesce to fans, but they’ll be rewarded more if they don’t.

Byrne Hobart: Subscriptions and Incentives ($)

This is true—a newsletter with exclusively evergreen content is closer to a library than to news. But it’s possible to work within this constraint, by focusing on evergreen themes that are illustrated by day-to-day news. And this enforces good intellectual hygiene: a theory that never produces evidence in its favor is a pretty useless theory, and pure theorizing without practical examples is boring to read

Applied Divinity Studies: How to Become Famous on Substack Overnight (in Ten Years)

I’m pretty confident saying that these overnight successes tend to take ballpark 10 years, either in building a mailing list, gaining expertise, or struggling in obscurity writing words no one will ever see… [this] strengthens Substack’s argument that it is genuinely a place for writers to achieve financial stability and own their relationship with readers. This isn’t some horrible new wave distinct from all previous media, it’s just a better format for the same authors.

Petition: Yes it can work

So f*ck it. If you have a good idea — a differentiator — and you have the stamina to give it a go, you should. Be the exception to the rule (if it is even, in fact, a rule). Don’t listen to the naysayers.

The Atlantic: Why Matthew Yglesias Left Vox

Like Andrew Sullivan, who joined Substack after parting ways with New York magazine, and Glenn Greenwald, who joined Substack after resigning from The Intercept, which he co-founded, Yglesias felt that he could no longer speak his mind without riling his colleagues.

The Geyser: Site of the Year: Substack.com:

Clearly, Substack has tapped a need in the market, and their technology, while still nascent, is effective and easily adopted. By embracing the subscription model, Substack has also made writing commercially viable again, something many newspapers forgot how to do years ago, to their peril.

Neutral

The Guardian: Why are public thinkers flocking to Substack?:

It’s a Faustian bargain to commodify your personality. You’re free from the limiting influences of institutions… Yet, input from editors is inevitably just replaced with the pressure of analytics… In a few years’ time, I predict we may look back at the chaotic information ecosystem of the 2010s as a sort of social media interregnum. Seduced by the seemingly magical qualities of our new powerful technological tools, we deluded ourselves into believing clout and exposure could be a replacement for dollars and sense.

Alexey Guzey: The most we can say about earnings of Substack’s top writers

Below is the full table of the best possible earning estimates of all the top Substack writers, as of 2020-11-15, based on both bounds-based reasoning and the changes in orders of magnitude of the number of paid subscribers in October-November 2020.

u/nansenamundsen: The Case For and Against Substack

It makes the web less open. Each blog/website has its own culture and aesthetic. Each Substack pretty much feels the same. It also makes it much harder to find content online without each author’s home looking different.

Put A Number On It!: SubOnlyStackFans

People talk about how the 90s promise of the internet as a medium of unconstrained individual expression turned into a reality of social media monopolies forcing people into homogenous boxes for data harvesting. But if you have something to express and show the world you don’t have to stay boxed up. Let the internet be your canvas.

Napkin Math: Substack Rhymes with Medium

However, the big question is their cost structure. For each publication, they take 10% of the subscription revenue. At the beginning of a publication’s life, this is reasonable. Maybe even a steal. But once a writer builds a business that makes hundreds of thousands of dollars a year, what’s stopping them from moving to another platform like Ghost or building their own tech in-house to save money?

Writing On Substack

Earlier, I wrote “the most damning thing about Substack is… that nothing great will be written here”. Accordingly, Substack’s true redemption lies not in theoretical arguments, but in the writing itself. Screw the incentives, the mechanisms, the fixed or variable payments schemes and arguments about media ecosystems. Either Substack produces great writing, or it doesn’t.

This is a difficult point for me to make, because I don’t read Substack! But there are still a few pieces and blogs that have stood out to me. If you email me your favorites, I’m happy to take a look and add them to this list.

High Tea
As far as I can tell, High Tea is the only good “explainer for Gen Z culture” out there. It achieves this distinction largely by not functioning as an explainer, but as a language immersion experience. If you’re old, the first post won’t make any sense, but by the 3rd you might feel like you genuinely understand something beyond the top line demographic trends.

The Dispatch

Tyler Cowen mentions over email that he reads Bill Bishop’s Sinocism.

I also like The Diff by Byrne Hobart, but I liked his pre-Substack writing even more.

Changelog:

  • Added Sinocism
  • Added Napkin Math article
  • The Geyser emails me their own article
  • Sean Monahan emails me his own article