When you go to work for a startup company, you are taking a risk that is arguably as big or bigger than the investors and founders who fund the company. Know the right questions to ask your potential future employer.
Let’s face it, you are potentially putting not just your finances on the line, but your entire career, your family, your future, and, often times, your happiness and social life, as you work long hours at generally reduced salaries in exchange for empty promises of payback in the form of stock options or other perks. 9 times out of 10, the financial incentives startups award you eventually turn out to be completely worthless, and only 1 in 10 startups actually succeeds or even survives beyond the first year.
If you’re thinking of taking the risk of working for a startup company, you need to make it clear to your future employer that you expect to be rewarded for those risks. Understanding what to ask for in terms of rewards is important, and having been through this a few times now, I’ll share some anecdotes that maybe you will find valuable.
Question 1: How are you funded (if even)?
Private Funding: If the guy tells you that he took out a second mortgage on his house… walk out quickly. If he tells you that his mom took out a second mortgage on her house as well… run very quickly.
But there are other styles of funding that aren’t much better than the aforementioned funding models, yet sound very official and fancy:
Angel Investment: Basically means that they have found one wealthy individual who believes in the company and is basically willing to write a check to cover payroll every month. This is potentially bad because you don’t necessarily know how financially solvent this person is, and this person could decide to pull funding at the slightest sign of weakness from the company. As a rule of thumb, demand that your employer have enough funding in the bank to cover your salary for at least a year.
Every startup it seems dreams of getting the attention of those coveted Venture Capitalists. But increasingly these days, the VCs know all too well how to give you money while assuming virtually no risk for themselves. VCs will often structure deals that give them control over the company, the ability to fire anyone, including the CEO, and the ability to get paid back their investment in the company before any of your peon-level stock options are ever paid out. It is possible, therefore, that the VCs make a boatload of cash and stiff all the founding employees their promised cut in the stock option game. There are a number of different types of financial vehicles that VCs can strategically employ in their favor and therefore against your best interests. VCs will always pick the vehicle that best represents their interests, be-it a bridge loan (sometimes with personal guarantees), bonds, special classifications of stock, and other legal agreements that may affect how the company is run and ultimately sold. The VCs have their financial interests in heart and don’t care about your pitiful little peon-level stock options, and often don’t even care about the company or the company’s products. Your stock probably doesn’t award you the ability to vote on the board, and often times the boards are hostile and full of conflicts of interest.
Public Funding: Publicly funded companies are generally more established than startups, and generally waste a boatload of cash every year simply dealing with lawyers and reporting requirements. To be on one of the big exchanges you have to have a boatload of capital, and therefore if the company is on one of them, there’s likely no chance in hell that you’ll get any of the high-risk, high-rewards deals that you hear about when the unicorns visit you in your sleep. However, there are more types of public funding than just the big exchanges, such as the “pink sheets”, but those stocks are traded by people who are the used-car salesmen of stock brokers. In general, avoid publicly funded start-ups unless they’re offering you a boatload of cash… at which point, they probably aren’t really considered “startups” anymore.
Subsidiary: This is when a larger company owns the startup, awarding it some level of autonomy, typically, (although it could mean that it was recently acquired). If the company you’re joining is a subsidiary, there are all kinds of other questions you should be asking about the parent company’s relationship and involvement in the subsidiary. How involved in day-to-day operations is the parent company? How involved will the parent company be a year from now? Generally speaking, a subsidiary is less likely to offer you lucrative, valuable stock options, and is also less likely to have the perks associated with being a startup. Your salary is likely under the scrutiny of the parent company’s HR department, an entity that is tasked with making sure your salary is low and your title is such that you won’t be seen as valuable to other companies… so ask about how that relationship works.
If the subsidiary was recently acquired (in the last couple of years), it is possible that the most important question to ask is “How many of the original principals are still with the company?” Companies that have lost their original key players virtually never last long. The new guys generally come into a company that has been abandoned, left in shambles by the former employes, and the new stewards generally have lost the vision of the original company. Why did the original key players leave? It could be that they made a boatload of cash when the company was sold and decided to take an extended vacation… it could be that the company was bought on the cheap as it was sinking fast and all the employes jumped ship. Understand the circumstances. You want to join a healthy company, not one that is sinking or floundering. The only time I ever got laid-off in my career, it was when the parent company decided to close the subsidiary after all the original principals left. Lesson learned.
Question 2: How am I going to get compensated, and how is the risk that I am taking in working for the company going to be rewarded?
I once owned 8% of a company I worked for. I worked hard to get that 8%, reducing my salary by $20k a year to help with cash flow. My final day on the job, I met with the president of the company, and he signed over my latest round of equity in the company… and I felt a little tingle of pride come over me, as-if I had done something good for myself and the company, but really, I owned 8% of nothing. The company was bankrupt, and our angel investor was having cash flow problems with some of his other companies and was pulling out of our funding.
In hindsight, I should have gotten out earlier. I should have had the wisdom (and heartlessness) to wash my hands of the deal within the first year, maybe even the first few months.
Question 3: What are the company’s sales goals and how will the sales goals translate to funding the company (and my department)?
This was the the first red flags I should have picked up when the founder presented me his business plan. Without going into too much detail, for fear of sounding like I’m talking trash, the business plan was not totally solid. The sales goals were lofty. To my credit I had the foresight to call them out when he presented them to me, but I didn’t have the foresight to walk away from the deal. The founder told me that he was going to sell 600 units in the first year, and from the revenue generated from that 600 unit sale, I’d have a development budget of roughly $1.6Million. Having worked for tiny companies with similar business/client relationships in the past, I knew it would be difficult for our tiny bootstrapping company to acquire 600 clients in our first year, and that a company our size would be able to sell and maintain 150 at best.
“What happens if we only sell 150?” I asked wisely.
“We’re sunk.” He replied flatly.
In our first year, we sold roughly 150 units. He had sold our distributor on the idea that we’d be so successful that the distributor pre-ordered another 150, but the distributor failed to sell the vast majority of them during the 2 additional years I stayed on with the company.
Having sold only 150 units, my “development budget” was in a world of hell. We closed our office and I began working from home…. 18. hours. a. day… trying to come up with some miracle solution that would save us. The founder would bring me new ideas, new sales strategies to implement, new twists on our existing products that would essentially reuse our existing inventory of electronics and parts. But our additional efforts were mostly in vain. The technology, in many ways, wasn’t ready for the market and the market wasn’t ready for the technology. In many ways, we were too far ahead of our time, and without a budget to scrap the broken hardware and replace it with new fresh hardware, we were basically hanging on by a thread, painted into a corner. I felt, not only overworked, but useless and ineffective at it.
Question 4: What are the company’s timelines, goals, and road maps?
Some companies operate on a trade-show-to-trade-show basis. This is unfortunately arbitrary… but ordinary. There is generally no relationship between the amount of time it takes you to develop a product and when your next trade show is… but it happens. Make sure that the timelines are appropriate. A startup is often looking to you to be an expert in your field, and if your goal is to make a certain trade-show date, make sure that you communicate effectively whether it can be made (possibly you only have to demonstrate an incomplete prototype). The founders of the company should have realistic expectations and respond to and respect your advice regarding what you’re capable of.
Back to that other company I was talking about though… The second set of red flags started coming in when my development timeline for our 1.0 product was arbitrarily cut from 6-months to 3-months. I was told when I signed up that I had x about of time to complete my project, and they were pulling the rug out from under me. I had the foresight to warn them about the danger of releasing a product that wasn’t ready, but I didn’t have the foresight to stick to my guns on the issue and demand, flat-out, that I be given the time they promised me. Instead, I told them I’d “try” to do it, but I’d not only have to cut features, but we’d have to take a huge gamble that these embedded modules built (by a 3rd party) prior to my arrival into the company worked flawlessly. If they didn’t work, not only would we not be able to meet this arbitrary deadline, the whole company would likely sink. (Spoiler alert: Ultimately, those bunk modules sunk the company, “Thanks Lantronix”).
Question 5: Who works for the company currently and how did they meet?
This is a crucial question. You’ll often find the following types of people in startups and you should consider it a red flag if you do:
Family: If the CEO makes his 22-year old son the Vice President, you should fake an urgent need to find the bathroom and slip out the nearest window. Nepotism just doesn’t work in business, especially in startups. Even if you go to work in a bigger company, ask the HR director about their nepotism policy. Companies plagued with nepotism fall apart. Startups need to be filled with “doers”. They need to be filled with the the best people for the jobs they need to accomplish. You lead by example in a startup, or you get cut. Now, when a startup has a no-show vice-president who gets special treatment because of his family relationship to the CEO and employees work their butts off day and night under fear of getting cut every day, your whole office gets demoralized. They either stop working hard for you or they quit altogether.
“Former executives”: It may not seem like it on the surface, but you should avoid startups that tout their executives’ past lives. I’m not the first person to acknowledge or warn of this phenomenon, and it seems counter intuitive, but it is a big red flag when you come to a startup and one of the VPs is a former executive for [insert big reputable company name here].
Why would you want to ban reputable executives from reputable companies from working in your startup?
1) They’re likely not not “doers”. They’re used to having a budget that they spend on hiring “doers” and that likely doesn’t translate to actually “doing” things and getting your hands dirty. Start-ups need to be frugal and big-corporate executives generally blow tons of cash simply because they can while stiffing the common employees. It is a completely different way of operating that is virtually guaranteed to be the complete opposite of what a small startup needs.
2) They’re likely used to getting paid more money than they’re making at the startup and that is likely to make them apathetic.
3) He/she likely comes from a company that is not at all structured like your startup.
4) Just because this other company was successful, who is to say that Mr. Bigwig had anything to do with it? Ask to see his/her resume and hope that it has a list of personal accomplishments so you fully understand what it actually is that this overpriced trophy executive actually does when he comes to work every day.
5) If they’re too “flashy”, it can alienate your team. Most of your team is going to show up in beat-up cars, worry about health insurance premiums, and buy their clothes in discount stores or even thrift stores. If you bring a guy in who shows up to work in a Porsche and talks about his 3rd lake house… who is going to respect this guy? Startups are run by merits, not hierarchy, and it is your current performance that wins you a spot at the round-table, not your past luck.
Unfortunately, those former executives are often investors in the startup and you can’t escape their influence.
Question 6: What is the company’s revenue model?
It may come as a shock to some people, but some companies are not designed to be profitable. Some companies are simply designed to sell/be sold/acquired. In fact, it can be a smart executive decision to remain “pre-revenue” for an extended period of time because if you make an attempt at acquiring revenue and fail, then you’ll be seen by potential investors as a bad investment. But a company that is to- be-acquired doesn’t necessarily have to have customers or be generating profits, but rather be creating something that is of potential value down the road. This is how companies like Facebook, Google, Twitter, and YouTube all became valuable (eventually subscribing to the “98% free” business model).
These models work, but one thing that you should make clear to your future employer is that, if your company is working on this revenue model, then your personal salary better not be tied to company profits, because the company will not see profits for a long time. If the CEO comes up before the employees and hangs his head low and says “sorry, we can’t give Christmas bonuses this year because the company lost $1,000,000” and your company operates on a pre-revenue model, then high-step it out of that company before new years because “duh”, pre-revenue companies are supposed to lose money. Rich people are generally only rich when they are tight fisted, so they are often looking for any excuse to not give bonuses and raises. Recognize when negative profits are due to hard-times and when they are planned by understanding your company’s revenue model.
In a startup, however, it is likely that the company doesn’t even understand its own revenue model. CEOs are young guys under lots of pressure to cash in and often times can be bullied into setting inappropriate revenue goals by investors demanding returns on their investments. You want a CEO who understands finance and the big picture. Look critically at their product offerings and ask the hard questions of what their revenue expectations are and how soon they are expecting revenue and profits to arrive. Sprinting directly towards revenue can hurt companies in the long run. Is the future of the company even dependent on devising a plan to turn a profit?
My experience is that pre-revenue companies are the most pleasurable to work with. Not having your day-to-day work tied to chasing pots of gold takes a lot of the stress out of coming into the office every day, and a pre-revenue company is generally only able to be pre-revenue because it is well funded by people who understand that it will grow into something in the future, regardless of whether there’s cash-flow now. Those people have realistic expectations and aren’t stressed out by the bottom line. But when the company is working under these conditions, make sure you can see a burn-down chart, and ask that it be maintained regularly. A burn down chart projects when a pre-revenue company is out of cash… and if that time is soon, ask where they are in finding additional funding. Time is always ticking.
Question 7: What is the company’s growth model?
How will the company grow? Who are the next 5 people the company may need to hire? If the company is or becomes profitable, what will happen to the profits — Will be they be reinvested to grow the company, or will they be paid as dividends to investors/owners? What is the ultimate vision for what the company will eventually become? How will the company scale?
Above are all related questions that I won’t elaborate too much about, but I’ll share this one last anecdote. A friend of mine recently got offered a stock-for-labor deal where he’d end up owning part of a company that did things similar to wedding events and I stopped him in his tracks by asking him the hard question: “Why would you want a stake in a company that has no plan to scale?” Think about it. How do you scale a wedding planning business? You have to send out these people to set up the events, put up the lights and tables and chairs, and tend to the night. The only way to scale that business is to add more employees or set up a franchise model… and I just didn’t really ever see that happening with this little company, regardless of how cool and unique their events are, there was still a 1-to-1 relationship between events and revenue… whereas a company that sells software digitally might be able to sell 100,000 copies of a piece of software with essentially $0.00 distribution cost… a highly more effective revenue/scaling model. I’d want stock in the company that has a plan to scale.
Ask yourself, as you’re getting in on the ground floor of this company, how will the company grow and where will you be as it does?
That’s all for now.