Last week’s post, You Need Equity To Live In Silicon Valley, generated quite a bit of emotion from our readers. A number of people missed the point of the post, which explains the economics of living in Silicon Valley. We pointed out that it’s hard to make the numbers work if you don’t own equity in a business that could be worth something in the future.
Unfortunately a number of people misinterpreted the article as a condemnation of Silicon Valley. Real estate is expensive in the Valley because so much wealth is created here. You can waste your time making a value judgment about whether it’s good or bad that the wealth we create, combined with a low inventory, drives home prices into the millions in good school districts. The alternative to judging is figuring out how to cope.
The average home price in Santa Clara County this spring is $800,000, and in the neighborhoods that are desirable because of good schools, you’d be hard-pressed to find a home for less than $1.5 million. You cannot afford those home prices even on a pair of very good, upper-middle-class professional salaries, while you save for retirement and your kids’ education.
Equity is an attainable goal
To fill the hole, there’s really one viable way that is open to anyone: equity. (You could count on inheriting money, but I wouldn’t advise that).
Some commenters parsed the spreadsheets we made available to look for ways to trim their budgets. But the hole – which, depending on your circumstances, could be as much as $600,000 – is just too large to address with spending cuts. Some commenters seemed to find the pursuit of an equity win tantamount to buying lottery tickets.
That is far from the truth. Over the course of the first 20 years of your career, you’ll probably work at five different companies. If you have reasonable judgment and prioritize choosing a company that is likely to be successful over the seniority of your position then the chances are very good you’ll earn an equity stake worth the money you need at one or more. Is an equity win a sure-fire prospect? No, but nothing in life, is. People who are comfortable living in Silicon Valley embrace risk – not blind risk, but carefully measured risk. Our unique tolerance for failure comes from the fact that we know failure is an inevitable side effect of risk.
Rules of thumb no longer cut it
I didn’t intend for my post to be easy to read. I meant it to encourage you to take the risks you need to meet the goals you’ve established – and I wholeheartedly support the goal of living in Silicon Valley. Nowhere in the world can you find the incredibly innovative people you find here. It’s that incredible talent that makes success so prevalent.
At Wealthfront we aspire to write blog posts that offer data-driven actionable advice to reach your goals. As you have seen from many of our posts, the data we present does not always line up with classic rules of thumb. Rules of thumb don’t cut it in today’s world. Data rules. That’s what sets us apart. We promise to keep on giving you the advice you need rather than the advice you want to hear.
About the author(s)
Andy Rachleff is Wealthfront's co-founder and Chief Executive Officer. He serves as a member of the board of trustees and chairman of the endowment investment committee for University of Pennsylvania and as a member of the faculty at Stanford Graduate School of Business, where he teaches courses on technology entrepreneurship. Prior to Wealthfront, Andy co-founded and was general partner of Benchmark Capital, where he was responsible for investing in a number of successful companies including Equinix, Juniper Networks, and Opsware. He also spent ten years as a general partner with Merrill, Pickard, Anderson & Eyre (MPAE). Andy earned his BS from University of Pennsylvania and his MBA from Stanford Graduate School of Business. View all posts by Andy Rachleff