Seattle 2.0 Blog

July 3, 2007

    So, you’ve decided to join a Startup and live the life of high risk, high reward. The biggest problem of leaving a large and established company to a small, starting, still being defined company is the lack of understanding the basic differences. Yes, a salary of $100,000 is more than a salary of $90,000, but numbers are very misleading when a lot of other things are taken into consideration.

    This is a list of 10 things you need to know before you join a Startup.

1) Do you love the product?
    A startup is almost like a cult. You have to believe in it. There are many things to believe in, but four are the most important: The problem exists, the problem matters to people, the product/service is a good solution for that problem, and, last but not least, this startup is uniquely positioning to create the product/service (either because it’s early to market or because it has lots of good people with industry expertise)

2) Do you understand the history of the company?
    Who founded? Why? When? What happen between then and now? This is very important. The vast majority of businesses are legit and done by good people, but some are business built by con man or woman. Make sure the founder or the CEO doesn’t have a problem with the law, he isn’t being sued by his former employer or by a federal prosecutor on some SEC fraud case. Something like this would be the kiss of death for a startup.

3) Do you add value to the company?
    Desperate recruiters/managers eager to fill in open positions will tell you whatever you want to hear about how valuable you’ll be to the company. Are you really? Understand how much of your knowledge and skills can be used on the company. Be careful with “learning on the job” because that only works on large companies that can afford to have you learn how things work for months on. On a startup you have to be productive on week 2, otherwise you’ll be a short term liability and startups cannot afford that.

4) Industry experience or technical experience?
    Same topic as #3, you need to know why they are hiring you. Is it because you have experience on the market/segment they are on, or is it because you have technical experience that can be applied across segments? In the rare case it is because of both, you have a strong negotiation power with the hiring company. If it’s neither…

5) Why are you going to a startup?
    The differences between working on a large company and a startup are tremendous. I could create a table comparing 20+ criteria, but it boils down to one thing: Your personality. Some people like the stability, the internal support, the predictability of a large company. Some people like the surprises, the struggle and the impact they have on the product on a startup. If you don’t know which one you like best, you should try both. And, in both cases, each one (the startup and the big company) really value your experience on the other side.

6) What are the benefits?
    Don’t expect BigCo benefits at your startup. No matter how you look at it, the cash and non-cash benefits will be less. You don’t join a startup to have a higher salary, better health plan and more options on your 401(k). The benefit is the equity (a.k.a. stocks). The risk-reward is much higher a startup. Nobody expects Microsoft stocks to quadruple in price over the next 3 years, but your startup can be worth 25 times more in 3 years than it is now.

7) How much cash in the bank?
    It is a bit awkward asking how much cash a startup has on the bank, but is a fair question. A fairer question would be to ask how much runaway (or how much time left) the startup has before need to raise another round of money or becoming cash-flow positive. You probably don’t want to join a startup that has only 8 months of cash in the bank, even if they say they are just about to sign a new round of investment. It’s also unreasonable to expect a startup to have 3 years of runaway.

8) What is my equity stake?
    Now you’ve got this offer to a startup and everything looks great and they tell you’ll get 200,000 stock options. Holy s**t! Two-hundred thousand! Can you believe it? But wait… What 200,000 means? Does it mean 1% or 0.001% of the company? That is the answer you should know. How many outstanding shares and granted options there are, and how many you have? From that you’ll know if you got a great deal or a lame deal. Just notice that the higher the number of people and further along a startup is smaller your equity stake will be. Don’t expect to get 1% on a 100-person startup (too high) or 0.1% on a 3-person startup (too low).

9) What is the most likely exit?
    What is an “exit” you might ask? Thank you for asking. An “exit” is startup-speak to when you convert your equity (stock) into cash. There are basically two exits: IPO or acquisition. You probably know what both mean so I won’t explain. The key is to know the value of the exit -- the market cap of the company at a time that you can convert your stock into cash. If anyone figures out how to compute that he would be a millionaire since there is more art than science on the case of startups. But think like this: if you are working on a gadget manufacturing startup, you should look at similar companies that had exits on the last few years. If the range was between $20 and $100 million, there is no reason to think your startup will be $1 billion. Now, if you think the exit will be $100 million, and you’ve got 0.5% of stocks, you know the maximum you’ll make is $500,000 (if you were fully vested).

10) What are the escape routes?
    One of the biggest excuses my friends tell me about why they don’t join a startup is because it could be out of business in a year or so and they would be unemployed, to which I scientifically reply: Whaaat? If you work at Microsoft there is zero chance you wouldn’t be hired back. At a higher level and higher salary! Unless you are about to be fired from Microsoft, then you’re right, you’ll be unemployed and probably you are the one that sunk the startup. The fact is that unless you are working without pay, you’re getting a salary and benefits, and you are learning a significant amount about things you’d never learn at a big company. So, the only thing you are really risking is the equity, to which you either get nothing or quite a bit of dollars. BTW, how’s that Microsoft stock option you’ve got over the last 7 years treating you?

    Got any questions about joining a startup? Send it to me I'll augment the list.

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