Five Questions to Ask Before Joining that Start-up
This post originally appeared on Harvard Business Review.
Mark Zuckerberg reinvigorated an entire generation when he added nine zeroes to the end of his bank account before he was 30 years old. He made start-ups great again. He showed the world that youth is not a preventative factor of success and that work can actually be fun. This theme of wealth creation while doing something you love is why an increasingly large percentage of graduates are turning to start-ups over more traditional jobs. It might also be why people are quitting their consulting gigs and investment banking positions to pursue a career in start-up land. Just yesterday I ran into a recent Harvard Business School graduate who quit her consulting gig in order to follow her dream at a new start-up.
Unlike big, established corporations or what we might classify as a “steady job,” start-ups present more inherent risk because there are more variables and questions for a prospect to consider. Things like: Does this start-up have the right team? Do they have money? What if I choose the wrong company? Nevertheless, this risk is often overlooked because start-up employee prospects realize that new ventures are more fun, are intellectually rewarding, and could have big paydays down the line.
But there are practical questions that all start-up prospects should consider when looking to join the next could-be big thing.
How many outstanding shares exist? Joining a start-up can have significant upside if you own equity in the business. That upside is determined by two things: the percentage of the company you own and the valuation or price of the company upon a liquidation event (e.g., the sale of the company). When you join a start-up you are often issued stock options. Maybe you are issued 1,000 options; maybe you are issued one million. This number is only as important as the number of outstanding shares in the company. If you are issued 1,000 options and there are 10,000 outstanding shares, then you may own 10% of the business. Make sure you ask your prospective start-up employer how many outstanding shares there are, so you can understand what part of the company you own. If they don’t want to tell you, then you may want to reconsider the job altogether. If they can’t tell you this, what else might they be hiding?
What is your stock option vesting schedule? Time flies in start-up land. When you get an offer from a start-up, make sure you understand how long it will take to actually receive the equity you are entitled to. A typical vesting schedule has a one-year cliff with a subsequent three-year earn out that vests each and every month. So if you think you might leave within four years, make sure you are comfortable with the vesting schedule. Four years is a long time in a start-up.
How restrictive is your noncompete or non-solicit agreement? I once read a noncompetition agreement that said anything I worked on — in- or outside of the office, during working hours and non working hours — was owned by the employer so long as I was employed there. This is a very restrictive agreement and in so many words says you are a slave to the company. Make sure you understand what this part of your contract says. Employees in the start-up world often bounce to and from various companies, so you want to make sure you’re not putting yourself in a compromising situation down the road.
Does the team have a track record? Winners know how to win. It’s why venture capitalists tend to favor entrepreneurs that have a proven track record (PDF). A VC once told me that he “looks to invest in people with an unfair advantage over their competitors.” These entrepreneurs are people who know the ins and outs of a successful path in a specific domain. Before joining a start-up company, make sure you have a very strong understanding of the team, their investors, and their advisers. This will give you a great indication as to whether or not the start-up has the right ingredients for success. If the team members don’t have a track record, that’s alright, but make sure you understand what it is that will put them on a winning path.
Why am I really doing this? The most important thing you need to ask yourself when joining a start-up is why. Some people do it because they hate their jobs. Some people do it because they want the credentials. Others join because they think they will get rich or it’s the cool thing to do. Ultimately, when you are looking to join a start-up you need to understand the real motivational factors behind your search, because if your reasons do not align with the opportunity, it is likely you will be neither happy nor successful.
With advancements like cloud-based hosting, labor marketplaces, online education, and video conferencing, it is now cheaper than ever to start a company. As a result, we will see continued growth from emerging start-ups and their respective employment opportunities. If you are debating whether or not to join an early-stage venture, make sure you are asking the right questions in order to mitigate your risk and maximize your chances of success.