Start-Ups are in the House
How Steep is the Climb?
What you need to know
I’ve been getting a lot of questions recently about start-up compensation at pretty much every stage of start-up development. From angel funding to series B to pre-sale or IPO. Although there’s at least one site offering compensation advice specifically for start-ups - Angel List - the decision to join a start-up requires not simply benchmarked compensation advice (how much cash; how much equity) it also involves an analysis of the start-ups potential. You need to know, for example, what percentage of your compensation you want to take in equity and how much in cash. And that’s before you get to issues like options vs. RSUs, vesting, the existence of a market for your pre-IPO or pre-sale equity, the company’s capitalization at the time of your hiring and its “burn rate.”
And these issues are just off the top of my head.
Like most lawyers who litigate and try business disputes, I learn what I need to know at a relatively superficial level (enough to ask the right questions) and then I hire an expert to advise me. At least that’s what I did when I practiced law. Unfortunately, I’ve been unable to find consultants who specialize in advising employees and potential employees about the wisdom of joining the particular start-up they’re interviewing with or have been offered a job in.
I’ve written two articles about red flags to look for when deciding to join a start up - here and here - because I knew what questions to ask and with the magic of google was able to find answers.
This morning, I searched the internet for more questions potential start-up employees should ask and want to share them with you.
Below, for example, are just a few of the questions recommended by Angel List here. For explanations of terms of art, see the article itself.
Start-up Viability
What is your current growth rate?”
What is your runway?
What’s your product-market fit?
THE VALUE OF YOUR EQUITY
What percent of the company do these shares represent?
What is your total liquidation preference stack?
What's the minimum price you would exit for?
Will the value of my shares be diluted by the next round of funding?
Although this article from Harvard Business Review is meant to guide founders - Compensation and Benefits for Startup Companies - it raises more questions you should be asking before deciding to take that job.
MORE ON EQUITY
Is there a formula for trading cash for stock during the first three years?
Is there a market for my shares before the company sells or goes public?
Does the equity come in restricted shares, incentive stock options, non-qualified options, stock appreciation rights (SARs), phantom stock or in any other form?
Can you explain the tax implications of your equity grants?
Similar questions are recommended by this article titled 10 Questions to Ask an Employer Prior to Joining a Startup
What is your unique selling proposition?
Who are your current shareholders?
At your current burn rate, how many months of operation can you finance before our next round of funding?
What is your growth strategy?
What are your long-term goals?
What is your exit strategy?
I’ve helped clients understand the viability of start-ups they’ve been asked to join, the value of equity offered to them, and their competitive market value in both cash and equity by crafting open-ended questions to raise in interviews and compensation negotiations. Unlike my prior experience as a litigator who could not ask the “other side” for accurate information on subjects I was not an expert in, my current clients can ask the experts in the business they’re thinking of joining - the founders and managers themselves - for the information critical to their decision.
You just need to know the right questions to ask.
Are you joining a startup? Book a Hundred Dollar Hour with me to discover whether it’s dollar smart to hire an advisor before making the leap into one of the greatest opportunities or most perilous risks of your career