Considering a Position with a Startup

Earlier I discussed valuing stock options for a startup. Your mileage will vary, of course, but how exactly will it vary? Joining a startup may provide you with tremendous opportunities, but it could also leave you out on the street within a year. Hence you need to go in with your eyes open.

An early stage startup may have less than 10 employees and you may very well be one of the first technical people brought on board. You will likely get a pretty good stock option package but only a modest salary. The company at this point is probably running off on seed or angel funding, or possibly financed by the founders themselves -- so there’s not a lot of excess cash floating around. The company needs desperately to make the first version of its product work well enough to attract additional rounds of funding. And of course it goes without saying that you’ll be spending the vast majority of your waking hours chained to your desk.

Joining a startup at this point is undoubtedly a risky proposition, but it also offers the greatest potential reward. As the company grows you will likely benefit from several promotions, and if you have a successful exit you may be able to cash in your options for a healthy profit. On the other hand, it’s just as likely, if not more, that the company will wither on the vine or crash and burn spectacularly.

There are many reasons why an early stage startup can fail. A poor product is certainly one obvious reason, but it’s only one factor of many. Poor management is another common one, along with a lack of clear product vision, or a poor understanding of the market. And of course luck and timing also plays a factor. Woe to you if you launched your Internet startup in early 2001!

Hence when you interview with an early stage startup you should ask hard questions to the top management (whom you’ll definitely meet). Ask about their previous experience managing startups, the funding situation, the investors (both angels and VCs) and their connections, the board of advisors, etc.

With a later stage startup, the organization will likely have gone through a few rounds of financing and should have a product already in the marketplace. This type of company probably has 20-100 employees and is looking to bolster its engineering capacity to ramp up product development. They should also have a marketing and sales organization in place, or the beginnings of one.

With such a company you should be able to get a fairly decent sense of how well they are doing. When you interview the senior managers they should be willing to tell you outright whether the company is profitable. If they hem and haw, or say “that depends on how you define profitability”, that should raise red flags.

Still, a company at this stage has shown that they are capable of raising funding, and they should have a decent revenue stream, even if they are not exactly profitable. Hence just by virtue of the organizational inertia your risk of being laid off six months after starting is low. However, your chances of getting rich off stock options are low as well, since at this point they will most likely start getting stingy with their stock option grants.