It is definitively possible to diversify: Just do an agreement with other programmers to put all (or, say, 50%) your incomes into a common pot and distribute the content of the pot among all peers. Just set up terms and conditions and let everybody who is part of this agreement sign them.
Just because you can't diversify doesn't mean its not still a good idea to pick your employer in the same way an investor would.
An investor in startups is going for high risk, high reward investments. For every individual investment they make, the chance of any sort of return is quite low; they make up for this because the rare startups that succeed make enough to compensate for this low success rate. Since they are making a lot of these high risk/high reward 'bets', they can be fairly assured they will receive the expected value in return.
As an individual, you only get to place one bet on your employer. For most startup employees, that means they are very unlikely to get any sort of payout because of company success. It doesn't matter that the 'expected value' of working for a more-likely-to-hit-it-big startup is higher than for another company, since the probability is that you will not hit it big.
As an individual, you are more concerned with things like salary, working conditions, and personal enjoyment of the work. Those are the things you are CERTAINLY going to experience; the tiny chance of huge success is most likely not going to affect you.
I think there is a good analogy to poker here; in Texas Hold'em, two aces are the best starting hand. There is almost no situation where it is best to fold them before the opening flop; your expected value is always positive against ANY other combination of opponent hands.
However, there are a few cases where even though you have the highest expected value for your hand, it is in your best interest to fold. One such case is if you are playing in a tournament, you are in the money, and two people with much larger stacks have already gone all-in. In that case, your best bet is likely to fold; even though you have the highest odds of winning the hand out of everyone, if you LOSE, you are out and can't keep playing. Even if you win, you will still have the smallest stack and are unlikely to move up any spots and win more money; if you fold, though, someone else is likely to be knocked out and you can move up.
It seems counter intuitive, but this holds because expected value only works as your primary decision making point when you can make many bets; if you only get one bet, lower risk with lower reward is often better for you even if the expected value is lower.
Think about it this way; lets say you only have $1,000, and you need it to pay your monthly rent (if you don't pay, you will be kicked out and be homeless). Someone comes up and offers you a bet; you bet $1000, and you get a 1% chance of winning $200,000. In terms of expected value, this is a great deal! If you made the bet many times, you will expect to win $1000 for each bet made! However, 99% of the time you are going to be homeless. For most people, the choice is to go against the expected value and play it safe.
If your goal is to maximize your financial outcome
I call this the startups::"active investment" versus slow-and-steady::"index investment" comparison. For the majority of software engineers who are not rock stars with commensurate 400K+ total annual compensation plans, it's not clear to me participating in the startups/SF-Bay ecosystem is statistically worth the financial instability risks, just as for the majority of retail investors, index investing is currently the most statistically consistent path to wealth accumulation.
If you are a "retail" engineer (perhaps there is a signaling indicator like if you aren't negotiating a compensation package directly with VC's or founders and not their representatives, then you're "retail"), then like most retail products, the vast majority of your value, half and more, is reserved for capital holders. It is your call whether or not if there is any statistically increased long-term job precariousness involved with accessing that startup/SF-Bay ecosystem, and if the tradeoff is worth it to your personal situation.
Investors on the other hand get thousands of at-bats. They're only limited by the amount of money they want to invest, so they can diversify all they want.
This is the bit I take issue with. I've done the whole startup thing, worked for 4 different companies in under 2 years, and it worked out great for me, but I did it in the Tennessee Valley, not Silicon Valley.
The Bay Area is not the only place with startup jobs. It's just the place with the biggest multi-national corporations still pretending to be startups.
Our next blog post is going to be about this (how engineers decide between offers, and how they can perhaps do it better)
Also, a lot of the time when I'm working at these startups as an employee (rather than a founder), the ongoing success and cashflow of the business are made utterly opaque to me and every other employee. Which means, if a potential hire came and asked me whether the company I'm working for has good growth/revenue... I wouldn't be able to tell them. I'd have an impression, but it'd be just that: an image created by the salesmanship of the business side of the company. Which means that asking others when I'm looking is just as useless.
> username: rememberlenny