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October 18, 2005
Seven Questions Employees Should Ask Before Joining a Startup
In continuing what is turning out to be my “list of sevens” series (see also: Seven Reasons To Become a Founding Entrepreneur and Seven Founding Sins), I wanted to list seven questions which prospective employees that should ask before joining a startup. While most of the material I’ve written in this blog about startups has been related to founders/entrepreneurs and venture capitalists, most people involved in startup endeavors fall under neither of those categories. They’re employees.
There are many benefits associated with joining a startup as an employee at any level (energized work atmosphere, little bureaucracy, upside), but there are many significant risks coupled with them as well. Of course, a prospective employee should ask numerous questions of both his/her role and the company before joining any firm, but there is a set of questions specific to joining a startup that people should pose. I’ve tried to outline what I think are some of the most important questions below. Keep in mind that this is by no means an exhaustive list, merely a suggested seven to get a discussion going. I encourage everyone to suggest additional questions in the comments section below.
If you are receiving employee options, what is the number of fully-diluted outstanding shares? Typically, option grants are a key component of compensation in a start-up and are often promoted as such. But the details surrounding stock options are often complex and confusing for non financially-oriented individuals. It is best for employees to understand as much as possible about their option grants (this subject could be the topic for an entire series), but the first place to start is to ask how many outstanding shares there are. From that point, one can calculate the percentage of the company an employee will own and a better gauge of the magnitude of this compensation component. It surprises me how many startup employees I know who are excited to have received a grant of x number of options, but never bothered to ask what relative percentage of the company that translates into.
Has there ever been a down round, a flat round, or a CEO change? Any of these three events are an indicator that the startup has faced some difficulties in the past and may not be on track moving forward. If one of them has occurred, prospective employees should seek out as much information as they can the context of the situation. After all, there are exceptions to blind the assumption that these are a black mark (e.g. a founding CEO stepping aside to make room for professional management could be an indicator of successful growth). However, if any of these issues have arisen, it is a signal to dig deeper into the health of the business.
What is the burn rate and how much cash is in the bank now? Even if a start-up is successfully executing, it could still face a cash crunch if it is not yet profitable. Employees should ask to find out how much longer the company will ride without the infusion of another round capital. While the actual answer to this question won’t necessarily provide a definitive answer about the ability for the company to access both cash and capital, it will open up a discussion about it.
What is the plan for exit strategy and its timeframe? The answer to this question is a soft one with many factors, and can always change depending on circumstances. However, it is best to find out management’s view of a possible exit strategy. Is the company pieced together for a quick flip, building for multi-year significant value creation, or plan on holding for the long term as an eventual cash cow (for founder/investors)? These expectations will affect not only how long employees may be working for the company as it exists today, but more importantly, the resulting surrounding corporate culture.
Could you meet the CEO, the founder(s), and those on the management team? Start-ups are all about the people involved. And there are a small number of people who are largely going to affect the organization. Even if an entry-level employee is going to work in engineering, I think it makes sense for him/her to meet the VP Sales; likewise, a marketing manager should meet the CTO. Yet it might not happen unless the prospective employee requests it. The handful at the top are going to have a profound affect on the future of the company as a whole and the position (regardless of function), and therefore it is best to meet as many people possible in the company possible before joining.
Are there plans in the next six months to hire anyone along the chain-in-command between your position and the CEO? Start-ups often have key vacant positions open as the companies expand and grow quickly. I recommend explicitly asking if there is an anticipated change in the reporting structure in the foreseeable future, as any modifications or additions (even those a few rungs up in the ladder) could significantly affect employees’ roles and responsibilities.
How many employees did/does/will the company have six month ago, now, six months from now, a year from now? Employee count is a strong (but not a perfect) proxy for management’s and investors’ outlook on the business. Start-ups hire ahead of growth (or at least predicted growth), which translate into a viable company, a healthy work environment, and future internal opportunities. Financial figures and projections are helpful indicators, certainly, but are often a distortion of the full picture (especially early on in a company’s cycle). The growth in employee count (or lack thereof) directly signals how much work needs to be accomplished how rosy the expectations are.
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Comments (10)
Great post David! Definitely a keeper.
I would also extend the conversation to seeing how founders can recruit talent without being able to pay salaries.
I think recruitment is easily the most important challenge I've faced as a founder. By far and beyond, it takes precedence over everything I have ever done in a startup.
If I could find the secret to inspire people for working with us without salary, I'd be ready to die and go straight to heaven, for there is nothing else I'd ever want to know about.
Really. It's that important.
Posted by DanielNerezov | October 18, 2005 3:02 PM
Posted on October 18, 2005 15:02
Nice post, David - one of many in your blog.
I can't wait for the series on option grants you mention in your post... Hope it's coming!
Like Daniel, I'd also love to hear your thoughts on the best ways to get great employees to work for little or no salary. Obviously they need to get inspired and believe in the business, but I'd be very interested to hear any specific thoughts you have on this.
Thanks again - looking forward to reading many more posts!
Posted by Joe Foote | October 18, 2005 5:00 PM
Posted on October 18, 2005 17:00
Wow, thats a very different list then I might put together.
My top two are:
"What is the most exciting problem you're facing/trying to solve?"
"What does the rest of your space look like, who are you competing with?" (presumably you should already know the answer to this question before interviewing, but the answers you get are incredibly revealing)
Lastly (to my previous commenters) if someone is working for little or no pay they aren't employees. Their title is either "intern" or "co-founder" depending on skill level.
Posted by kellan | October 18, 2005 5:34 PM
Posted on October 18, 2005 17:34
Kellen, I agree that the two questions that you pose are extremely relevant. However, I think that they would be just as important to ask when joining any company, regardless of whether it was a startup or not. There are numerous questions I would ask before accepting a position at any firm, including ones that help me gain a full understanding of the company’s (or group’s) vision and the business issues involved with accomplishing it. The above is an attempt to highlight those questions that I felt are specific to joining a startup. I am eager to hear what other questions you would include on your list which you mention.
Also, your assessment of considering someone working for little or no pay as "co-founder" is spot on. Recruiting employees and recruiting co-founders are two different tasks, and should be approached differently. I believe that issue is probably the subject of another separate post.
Posted by David Beisel | October 18, 2005 6:19 PM
Posted on October 18, 2005 18:19
David - very nice post. My 2 cents, being in a start-up and having gone through this list myself. 1) beyond % ownership, ask about liquidation preferences on the company. Ownership stake of common stock means little if there is a huge preference structure above your shares 2) get a sense for valuation - what's the run rate and FCF. then do the math and see how valuable your ownership is. 3) just to emphasize what you said--meet the management team and get a sense for how capable they are. a bad mgmt team can cause a lot of damage. 4) if you are joining the products team, meet all engineers and get a sense for how capable they are 5) meet the board if possible - are they engaged, how do they feel about the prospects, etc.
Kiran
Posted by Kiran Hebbar | October 19, 2005 7:32 AM
Posted on October 19, 2005 07:32
Liked your blog, it's pretty cool and guiding to the aspirants those who are looking for the job.
I liked it as recently I've joined one start-up.
Try this one Moses, hope you would like this.
Bye
Moses
Posted by Moses | October 19, 2005 9:26 AM
Posted on October 19, 2005 09:26
Even though you should know the answer it is always interesting to hear who the company thinks its competitors are. The answer, "We don't have any" should send up a red flag.
Also, I was wondering what type of questions you should ask about the existing investors - VC or otherwise. Would it make sense to understand the investors track record, style, and "brand"?
Posted by Barrett | October 19, 2005 10:00 AM
Posted on October 19, 2005 10:00
This is great! Another way to read this is if you're the founder of a startup and what you should communicate to potential hires (or what you should be expected to answer).
Kevin
Posted by Kevin Burton | October 19, 2005 5:56 PM
Posted on October 19, 2005 17:56
very valuable information, thanks for sharing. Definitely more useful for director level and above roles. Not sure you'd want an inside sales rep or payables manager knowing all of this information, nor would they likely ask these questions.
Posted by Carey | October 25, 2005 4:39 PM
Posted on October 25, 2005 16:39
Hi David,
I know this is a bit late responding to your article but anyway; I would like to say few things. I work in Silicon Valley "another great startup" and we just have closed round of financing before "n" months. Now we formally getting stock options and interesting thing was I listen to your advice and I asked for total number of shares. After the meeting I had conversation with bosses and I got 'last warning', not because of the question, as they say, because of feedback. My question was very rogue thing in their eyes.
I did not like the speech that starts "If we succeed like Google share will be ***$ that means for "*" cents you will get..." millions.
Well, we developers are good with math and according to total number of shares if our share goes up to ***$ we would own half of the California. Stock options, to be realistic, if we succeed, will be something like 1-year salary and that is in most of cases.
I would extend your list to perfect 10. I would add few things like "What would I do in that startup" because experience is something very valuable. "What that startup is daring to do" because there is no use to join to startup that is actually 'company internal' money laundering thing of some big boss in some big company. And "What kind of team is over there and what I can learn from them".
OK that is it.
best
developer #2
Posted by developer #2 | October 26, 2005 6:35 AM
Posted on October 26, 2005 06:35