Right questions to ask before joining a start up?

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JHU ALmuni
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Right questions to ask before joining a start up?

Post by JHU ALmuni » Tue Sep 10, 2019 8:09 am

There is a possibility I will be offered a position at a start up company. The benefit is limited but I will be offered equity in the company. What's are some questions I should be asking? I never worked at a start up, so this is new to me. I know the equity have zero value if the company doesn't succeed. What other things I need to take into consideration?

carolinaman
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Re: Right questions to ask before joining a start up?

Post by carolinaman » Tue Sep 10, 2019 8:30 am

You need to understand their business plan. What is their product or service and why do they think it will be successful? What is their target market and major competitors.? What is the experience of the principals? Have they ever done this before? How and by whom are they being funded? Do they intend to go public and when or do they intend to remain private?

What will be your role with the company? Who are the key employees and their experience?

You basically need to vet their plans to understand how sound they are and do they have all the necessary talent and experience to be successful. I was hired early in the life of a tech startup. There were some obvious flaws in their long term strategy but they were not obvious to me for a while. Nonetheless, it was a great experience for 5 years and I would do the same thing again, even if I knew the flaws up front.

senex
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Re: Right questions to ask before joining a start up?

Post by senex » Tue Sep 10, 2019 8:38 am

1. The character of the founder. You can't "ask" about this -- you need to evaluate it yourself. Honesty, integrity, work ethic, energy, etc.
2. Dilution provisions -- under what conditions can your ownership be diluted, and how much
3. Exit plan -- do they plan to be acquired, go public, etc. With target dates if you can get them.
4. Keep copies of everything you sign.

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dm200
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Re: Right questions to ask before joining a start up?

Post by dm200 » Tue Sep 10, 2019 8:49 am

As I have posted before - I learned some hard lessons from my similar involvement. Many good suggestions so far -

1. Startups have a low "batting average" of being successful.
2. Note that you have very correlated "double risk" ownership and employment
3. Never advance the startup cash for operations - beyond your equity stake
4. One of the biggest cause of startup failure is inadequate cash to keep going.
5. Never obligate yourself or spouse to loans of the startup, personal guarantees of contracts (such as leases) or debt
6. Have full access to the financials of the startup and that you can verify that bills are being paid, etc. The financial person MUST be really "on the ball"
7. Are there any risks of being accused or sued about using information from previous employers or competitors, such as customer lists and business "secrets"


Good Luck!!

Thegame14
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Re: Right questions to ask before joining a start up?

Post by Thegame14 » Tue Sep 10, 2019 9:02 am

I would want a LARGE severance package. I have joined two startups, both failed and was laid off. Id want at least 3 months severance in a contract to work for a startup.

Dudley
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Re: Right questions to ask before joining a start up?

Post by Dudley » Tue Sep 10, 2019 9:19 am

Sense culture which is normally inherited from character of founders/leaders. If you decide on buying/exercising the stock options you are being offered spend only as much cash as you willing to lose. Such companies are usually reluctant to disclose early the number of total shares hence your overall fraction. Expect future dilution of >4x, and all data lacking, assume a future exit price of ~$20 to give a sense of potential remote windfall to see if the risk is worth it. If you join and the company is/becomes unpleasant to work for and future seems poor and you decide not to sink more time into it you could still consider exercising any further vested options to hold 'just in case' as a future bet without having to stay there.

KineticSync
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Re: Right questions to ask before joining a start up?

Post by KineticSync » Tue Sep 10, 2019 12:15 pm

Really check out the dilution paths, esp. if your startup is VC funded. Google "full ratchet" and "down round". You can dedicate 4 years of your life to this thing, get out a successful product, and end up with squat because of a minor technical glitch that you resolved through heroic effort 2 years earlier, but that resulted in some additional required financing and triggered the ratchet. For some reason our life-capital isn't valued as highly as VC money.

Check out the whole leadership team. C-level feuding is pretty destructive. The VCs will usually ram their guy into the leadership team and they don't always fit. If it's a tech startup, ensure the CTO is focused on shipping a product and not on doing neat stuff in the lab--I've seen 2 fail for that reason.

Are they outsourcing HR and benefits? What are those like?

If it's VC funded, check out the prime VC contact. Mostly gone are the days of actual tech guys who hit big and became VCs--now you get Wharton and Stanford guys with some kind of venture management degree. Most don't have the technical guts to pick and ride a great idea...mostly they're just risk averse, love great slideware, and don't particularly understand the details of what you're doing. Or care.

See if your founders, venture angels and prime investors bring more value-add like industry contacts, contacts in regulatory agencies, or contacts with sources of special expertise. This type of synergy is huge. Also, find out where their money is coming from and therefore where the risk is for their money. I was once in a medical startup. We had a working device and were entering FDA testing and preliminary manufacturing, ready for second round. Our prime investors were commercial real estate guys looking to diversify. It was 2008.

My stock cert for 500,000 shares looks great on my wall now. You bet I multiplied that by $20 in my head a zillion times. The device now sits in a mini-storage facility, the company was liquidated and the patents sold, and I'm now working at megacorp. Everyone executed perfectly and it still failed due to external events. Have a place to land, assets to bridge until the next job, and maintain your skills and contacts. Remember that, if you have a spouse and family, they're on this roller-coaster too, and it takes its toll on everyone.

So there's an example of a downside, but...it was also the best job I've ever had, incredibly fun, challenging, and fulfilling. The niche skills I developed there led me to a very nice job at megacorp and I've been able to replace a lot of that gold mine I didn't get through frugality, saving and, this time, good luck with the market. I'm about 3 years out from retirement and zero regrets. Good luck.

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dm200
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Re: Right questions to ask before joining a start up?

Post by dm200 » Tue Sep 10, 2019 1:42 pm

Thegame14 wrote:
Tue Sep 10, 2019 9:02 am
I would want a LARGE severance package. I have joined two startups, both failed and was laid off. Id want at least 3 months severance in a contract to work for a startup.
"Having" a large (or any) severance package on paper is one thing - collecting is another thing entirely. If the startup fails (as in bankruptcy), there may not be any money to pay any severance.

Another very expensive to me lesson learned: If legal action is taken against you (even as part of legal action against the startup) - DO NOT FULLY RELY ON THE STARTUP'S ATTORNEY(s) TO REPRESENT YOU!! ALWAYS (repeat ALWAYS) HIRE YOUR OWN ATTORNEY..This lesson cost me several hundred thousand dollars - perhaps much more. Always read, understand and question every legal document. One case where an attorney represented the startup and several key individuals (including me) - an agreement to settle a lawsuit initiated by a former employer of several of us contained different maximum limits if the agreement was breached by any or all of us. Since I was a minority investor, the agreement drafted was intended (and so represented by our drafting attorney) to limit my maximum financial liability to something like 50% of judgment and legal costs of the winning party (former employer). After a civil jury trial, where we all were represented by the startup's attorney, the jury found against all of us. The issue, then, became how much we had to pay for the winning side's legal costs. Finally, I smartened up and hired my own attorney. A short time (few days to a week) after we lost the jury trial, it was then up to the judge to rule on the legal costs. They presented a hug stack of documents "justifying" many hundreds of thousands of dollars - senior attorneys billing $400-$600 an hour. My attorney tore into them - noting that many very simple legal work could be handled by the most junior attorney - BUT on so many things - a junior attorney would do the work (billing $X) and then pass it to a senior attorney for review at 2 or 3 or 4 times $X.

Then the issue of my "capped" financial liability came up. My attorney tried to have me testify to the judge as to what I understood about my capped liability. The judge would not allow me to say a word. I certainly thought and was told by the drafting attorney (now long gone from representing us) that the 50% cap also applied to the legal costs. "Not so", said the judge. "The wording of the contract is clear. The 50% cap only applies to the dollar liability and does not apply to the Legal fees." This, very significant difference in "interpretation" was the absence or presence of a comma in the draft. Even after I heard the judge's words and short explanation, I could not and still cannot agree with that interpretation. Sure seems to me that, at worst, the wording was ambiguous - and in that case - "common sense" should apply.

Some startups, though, of all sizes and nature do well - in a few - outstandingly well.

le_sacre
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Re: Right questions to ask before joining a start up?

Post by le_sacre » Tue Sep 10, 2019 2:16 pm

Great advice from everyone. I was super naive when hired as 1st employee and did not learn what fraction of the company my shares represented; like with salary negotiation, social pressure may be applied to discourage you asking tough questions, and you must resist that.

Another thing I'd add is--like with investing--make a plan in advance and try to stick to it. In my case, we ran out of money and stopped making payroll. Multiple times. Each time, it was a surprise to the employees. We were a pretty scrappy team and loved our product so we worked unpaid--some of us longer than others. There can be a lot of pressure to do that when the situation is sprung on you: loyalty, sunk cost fallacy, inertia. Friends outside startup-land would say: "isn't that illegal?" and you say "sure, but what can I do, sue them for money they don't have and drive my employer into bankruptcy?". I would say plan ahead: decide in advance will you be willing to forego any paychecks, if so how many, and what proportion of your time will you devote to side gigs or job-hunting if you stop getting paid. Also good to schedule a time (e.g. 1 year) to step back and reevaluate the company's prospects and consider applying elsewhere.

I have a friend who went unpaid a long time at his startup and in the end it worked out great for him; I eventually quit, am stilled owed a lot of backpay, and expect my equity will never be worth anything. But my lesson was that based on the info I had at the time, staying that long was poor judgement and I did it because I had no plan.

I'd also second asking about benefits. It's easier now for tiny startups to offer benefits than it used to be (because of platforms like Gusto). For example, I think it's worth agitating for a 401k since it helps de-risk your financial situation somewhat.

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Re: Right questions to ask before joining a start up?

Post by Pudge » Tue Sep 10, 2019 6:36 pm

Great feedback from all the posters. I would really hammer away on the character of the founders.

My best advice: Be a quiet, silent, stealth detective on the founders of the company. Study their LinkedIn profiles, and look for any information on Google such as lawsuits, arrests, etc. Check out their social media, such as Facebook and the like. Be a little nosy. Pay the $30 or so dollars and get a background check on the principal owner or owners. Do some digging, and some homework. You want to make sure that the folks running the show are legitimate and don't have some skeletons in their closet. Check credentials. If they say they are an attorney, Medical Doctor, or a CPA, then check to see if their licenses are in good standing. Do they have a track record of failure or success? Is this all new to them, or do they really have their act together?

You will be amazed at the volume of publicly available information for you to digest. You may elect to pass on the opportunity from the comfort of your own home based on what you discover. Better safe than sorry. An ounce of prevention is truly worth a pound of cure in these cases.

At the end of the day, the character and competency of the founders can make or break your future with the company. If it's a fly-by-night, the deep research on the front end will give you the warning signs to stay away. You don't want to work with some criminal lightweights that will waste your time and tarnish your reputation. If you do the heavy research and homework on the front end, you will save yourself a lot of time, money, and aggravation.

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dm200
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Re: Right questions to ask before joining a start up?

Post by dm200 » Wed Sep 11, 2019 9:18 am

Remember also that your Umbrella Policy (if you have one) does not apply to liability from a business.

Others here might know if there are ways of protecting yourself from liability lawsuits related to this startup.

MotoTrojan
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Re: Right questions to ask before joining a start up?

Post by MotoTrojan » Wed Sep 11, 2019 9:25 am

Thegame14 wrote:
Tue Sep 10, 2019 9:02 am
I would want a LARGE severance package. I have joined two startups, both failed and was laid off. Id want at least 3 months severance in a contract to work for a startup.
I'm young so perhaps I am just naive but I cannot imagine my start-up providing that and definitely wouldn't have asked; that is what an emergency fund is for.

OP there are all kinds of ways you can receive equity but usually a start-up will give you options rather than shares, so they don't have to offer to pay the income tax on shares (and reduce the amount they give you).

There are Incentive Stock Options and Non-qualified Stock Options (ISO vs. NSO). ISO has preferential tax treatment but also is more complicated because exercising them can result in AMT tax burden. A great book on this is Consider Your Options. I would be happy to answer any questions once you get more info though.

I'd want to know what the current valuation from fundraising is as well as the 409A valuation; the 409A will determine your fair-market value (FMV) and thus your strike price (price you pay to exercise your options and own the share). Usually early on the 409A is less than the true value from fundraising, which is a good thing as your options are cheaper and then in the future tax burden is lower. As things grow these will eventually converge. As noted you should expect dilution of 10-60% per round of fund-raising depending on industry/success.

No matter what numbers they give I would ask for 5-15% more salary and a good deal more equity; they may also allow you to pick which is more important to you.

MotoTrojan
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Re: Right questions to ask before joining a start up?

Post by MotoTrojan » Wed Sep 11, 2019 9:39 am

Dudley wrote:
Tue Sep 10, 2019 9:19 am
Sense culture which is normally inherited from character of founders/leaders. If you decide on buying/exercising the stock options you are being offered spend only as much cash as you willing to lose. Such companies are usually reluctant to disclose early the number of total shares hence your overall fraction. Expect future dilution of >4x, and all data lacking, assume a future exit price of ~$20 to give a sense of potential remote windfall to see if the risk is worth it. If you join and the company is/becomes unpleasant to work for and future seems poor and you decide not to sink more time into it you could still consider exercising any further vested options to hold 'just in case' as a future bet without having to stay there.
Where did this magic $20 come from? Share price is meaningless, exit value for the company and percent ownership is all that matters. Shares could go from $0.01 to $1.00 and make a bunch of money. They also could go from $19.85 to $20 and make nothing.

le_sacre
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Re: Right questions to ask before joining a start up?

Post by le_sacre » Wed Sep 11, 2019 12:15 pm

MotoTrojan wrote:
Wed Sep 11, 2019 9:25 am
...usually a start-up will give you options rather than shares, so they don't have to offer to pay the income tax on shares (and reduce the amount they give you).
FYI, both startups I've been involved in have granted shares (on a vesting schedule) using an 83b election to basically pre-pay the income tax on the value of all the shares (including unvested) at the current valuation. This is probably only appropriate when it's very early so the current valuation is minimal. If you do this it's very important to follow all the instructions and filing deadlines diligently.

phxjcc
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Re: Right questions to ask before joining a start up?

Post by phxjcc » Wed Sep 11, 2019 1:30 pm

carolinaman wrote:
Tue Sep 10, 2019 8:30 am
You need to understand their business plan. What is their product or service and why do they think it will be successful? What is their target market and major competitors.? What is the experience of the principals? Have they ever done this before? How and by whom are they being funded? Do they intend to go public and when or do they intend to remain private?

What will be your role with the company? Who are the key employees and their experience?

You basically need to vet their plans to understand how sound they are and do they have all the necessary talent and experience to be successful. I was hired early in the life of a tech startup. There were some obvious flaws in their long term strategy but they were not obvious to me for a while. Nonetheless, it was a great experience for 5 years and I would do the same thing again, even if I knew the flaws up front.
^this.

Plus, you need to ask...
1. What is the current run rate in terms of expenses?
2. What is the number of months they can last with the current run rate without revenue or additional funding?
3. What are the potential large expenses foreseen within the next 12 months?

They may not tell you and/or their attitude about answering your questions will tell you more than the answers themselves.

MotoTrojan
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Re: Right questions to ask before joining a start up?

Post by MotoTrojan » Wed Sep 11, 2019 1:50 pm

le_sacre wrote:
Wed Sep 11, 2019 12:15 pm
MotoTrojan wrote:
Wed Sep 11, 2019 9:25 am
...usually a start-up will give you options rather than shares, so they don't have to offer to pay the income tax on shares (and reduce the amount they give you).
FYI, both startups I've been involved in have granted shares (on a vesting schedule) using an 83b election to basically pre-pay the income tax on the value of all the shares (including unvested) at the current valuation. This is probably only appropriate when it's very early so the current valuation is minimal. If you do this it's very important to follow all the instructions and filing deadlines diligently.
I should've mentioned this too. I actually did this for 50% of my 2nd grant from my current company. While this grant was on a shifted vesting schedule (from when I received it) I wanted to backload my early-exercise so I could continue to exercise my original (hiring) grant before our valuation got too high and AMT came in to play. Options get quite complicated with some of these strategies but so far it is working well and enabling me to get as many shares in with AMT as possible; my strategy is to exercise end of tax year or before I expect a valuation increase, so long as I don't have to pay any AMT.

Definitely the way to go if you are super early. Founders may get $100M's of potential worth (and thus $10M's of potential taxes avoided) for just a few $'s right after founding, while still having a vesting schedule so they aren't unfairly getting their shares upfront unlike a regular employee.

carolinaman
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Re: Right questions to ask before joining a start up?

Post by carolinaman » Thu Sep 12, 2019 8:28 am

Pudge wrote:
Tue Sep 10, 2019 6:36 pm
Great feedback from all the posters. I would really hammer away on the character of the founders.

My best advice: Be a quiet, silent, stealth detective on the founders of the company. Study their LinkedIn profiles, and look for any information on Google such as lawsuits, arrests, etc. Check out their social media, such as Facebook and the like. Be a little nosy. Pay the $30 or so dollars and get a background check on the principal owner or owners. Do some digging, and some homework. You want to make sure that the folks running the show are legitimate and don't have some skeletons in their closet. Check credentials. If they say they are an attorney, Medical Doctor, or a CPA, then check to see if their licenses are in good standing. Do they have a track record of failure or success? Is this all new to them, or do they really have their act together?

You will be amazed at the volume of publicly available information for you to digest. You may elect to pass on the opportunity from the comfort of your own home based on what you discover. Better safe than sorry. An ounce of prevention is truly worth a pound of cure in these cases.

At the end of the day, the character and competency of the founders can make or break your future with the company. If it's a fly-by-night, the deep research on the front end will give you the warning signs to stay away. You don't want to work with some criminal lightweights that will waste your time and tarnish your reputation. If you do the heavy research and homework on the front end, you will save yourself a lot of time, money, and aggravation.
This is really good advice and should be done. My experience is that many high level executives are very good at crafting a public image and reputation. I would not rely too heavily on this approach in vetting the startup's principles. In addition to the poster's suggestions, I recommend that you try to find people who know them, have done business with then and have worked for them in the past. Have face to face conversations with them if possible and ask questions about these people. I relied heavily upon this approach when hiring senior staff/managers or doing major projects with vendors. You will often get a different perspective on the people this way. This is where having a good professional network pays off. People will not be candid with you if you are a stranger. But if they know you or you are referred to them by a friend, they are more likely to share information.

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