Thinking About Joining a Startup? Questions You Should be Asking

We are often met with hesitation about making the jump from “safe” corporate jobs to smaller, high-growth startups. This is understandable, right? After all, 90% of startups fail – a data point referenced all too often. Risk, however, exists everywhere. This past February, Peloton, an $8B public company, announced it would be laying off 20% of its workforce. Similarly, Zillow ($12B market cap) cut 25% of its workforce at the end of January after its home-buying business failed and shut down.

Whether you are thinking about making the leap or just want to be able to take a more holistic approach when evaluating and interviewing for smaller companies, we’ve attempted to provide a series of questions to allow you to step into the process with a better sense of direction to decide if the “risk” is worth it.

Question Overview:

1. How good is the founding team?
2. Is there a clear and aligned vision?
3. What do the competition and market look like?
4. Is there a path to profitability?
5. What is the exit plan?
6. What’s the investor track record?
7. When was the last funding round?
8. How should you approach compensation?
9. What will your growth and development look like?
10. Are you being honest with yourself?

Vision & Leadership Team

“Chase the vision, not the money. The money will end up following you.” – Tony Hsieh

How good is the founding team?

Have you done your due diligence to research the founder (and founding team, if applicable)? Who are they? Do they have a track record? Previous data show that 60% of new ventures fail due to problems with the team. While experience alone may not be the sole factor that predicts success, it certainly opens the team to a broader pool of resources and experience, which makes them more effective.

Is there a clear and aligned vision?

Vision starts with the founder. However, this should be shared and cascaded down to all parts of the organization no matter how big or small the company. A lack of a clear strategic vision, especially one shared among the leadership team, should be highly scrutinized when evaluating whether to make the leap.

What do the current market share, competition, and market potential look like?

A founding team should be able to clearly articulate the market, competition, and segment of the market they are planning to go after, and ultimately how they plan to differentiate themselves and win. Total addressable market (TAM) is a helpful metric to gauge the growth potential of the startup often referenced among the startup and investor community. For example, if a startup plans to compete in a very crowded $100M market with plans to grow to $50M in annual revenue, you should be skeptical. It’s also helpful to know what segment of the total addressable market is currently being serviced by competitors, and how the brand plans to differentiate itself.   

Business Model

“A business without a path to profit isn’t a business, it’s a hobby.” – Jason Fried

All startups will be on different paths to profitability depending on multiple factors including age, funding state, funding amount, whether they are pre-revenue, what industry, etc. While it is important to evaluate where the startup in question is, it’s even more crucial to consider whether there is a realistic and defined path to profitability in place.  

What is the path to profitability?

Is the goal growth? Profit? It’s likely a combination of the two and will depend on the startup’s stage and how it plans to compete in the market. Here are a few important metrics that should be considered (and are hopefully being measured by the startup):

• Revenue – sales the company is bringing in. Ideally, this is increasing at a rate that meets investor growth expectations. To take this one step further, you can look at “scalable revenue growth,” which considers economies of scale. As a company brings in more revenue, variable costs are ideally going down as well, making the company more profitable as it grows – a healthy sign of a profitable business model.
• EBITDA margin– earnings before interest, taxes, depreciation, and amortization. It’s used to measure profitability. Generally, the higher the EBITDA margin, the less risky a company is likely to be.
• CAC – consumer acquisition cost. How much is spent to bring in a new customer.
• LTV – customer lifetime value. How much revenue a customer is expected to bring in during their “lifetime” of making purchases from the business. When comparing the CAC to LTV, a company can get a clearer picture of its return on investment of marketing spend – an LTV/CAC that is too low brings into question the future profitability of the business.

While you might not be able to gather all this information, startup teams that are able to articulate a plan for their path to profitability are on the right track.

What is the exit plan?

When referring to exits, most think of companies going public – an IPO (initial public offering). However, most successful startup exits are through acquisition: at a rate of 10 to 1. While this is not the case for every startup, a founder who has their sights set on a strategic acquisition and has a plan on how to get there is likely much more realistic than one swinging for the IPO fences.

Funding & Runway

“Raising venture capital is the easiest thing a startup founder is ever going to do.” – Marc Andreesen

So, the startup has received an extensive amount of funding. While this makes them more likely to make headlines, it doesn’t necessarily guarantee success over their less-funded counterparts. Last year in North America alone, venture capital injected roughly $320B across 14,000 startups. Funding activity is still at an all-time high, yet the failure rate (even for venture-backed startups) is estimated to be 75%.

What’s the investor track record?

It’s important to look at the data around the investor(s) contributing to the funding rounds. How active are the investing partners? What other companies have they previously or recently funded? Have they been a part of successful exits recently? While this data doesn’t predict future success, it can be another data point to further guide you. Crunchbase is a great resource to begin your search.

When was the last funding round?

When did the latest funding event occur? This is where “runway”, or how long a startup has before it runs out of cash, comes into play. Typically, 12-18 months is considered a good amount of runway for startups to target. However, with interest rates on the rise, and as venture capital funding activity likely slows, startups might be looking for ways to stretch their runway even further (to 24 months or more).

Future funding is never guaranteed. It’s important to understand where a business stands in its funding journey to get a better idea of how much longer that capital may last, and thus, what additional risk you may be taking on if joining.

Compensation – how should you approach it?

“In the early days of a startup, people’s compensation is whatever you negotiate with a founder, and it’s all over the place.” – Sam Altman

Depending on the stage of the startup, your compensation package may look different. Earlier stage startups may lack cash flow or may be looking to invest cash back in the business, therefore negotiating a lower base pay accompanied by more equity may be more realistic. Well-funded startups in scaleup mode will likely have more cash incentives and benefits to offer, but you may not have the ability to negotiate as much equity in the company at its later stage, compared to its seed stage. Let’s look at a few types of compensation levers you should be aware of and get creative with during negotiations:

Cash Compensation

• Sign-on bonus – cash received as a part of joining the company, typically provided upon start date or first paycheck.
• OTE (on-target earnings) – typically a base salary compensation + a bonus structure. One thing to keep in mind is OTE is not guaranteed. For example, a $250k OTE may sound good, but if 60% of that is bonus dependent on hitting aggressive growth targets, you are only guaranteed $100k. Depending on the amount of stability you are looking for in your base pay and the upside exposure you want with a bonus, it’s possible to get creative with the pay mix within total OTE (i.e. 75% base/25% bonus, 50/50, or 25/75).

Non-Cash or Equity Compensation

Equity compensation is a non-cash payout offered to a firm's employees and provides the employee a portion of ownership in the company. Non-cash compensation may accommodate or even compensate for lower or below-market salaries, especially when considering startups in earlier stages. Providing equity is also a way to incentivize employee performance, retention, and can provide additional tax advantages to cash compensation. Here are the more common types to be aware of:

• Stock Options – provide employees the right to purchase shares of stock at a pre-determined stock price, allowing employees to gain equity of a company over time.
• Restricted Stock Units (RSUs) – restricted stock units are ordinary stock in the company but require a certain period to pass before all, or a portion of the shares vest (or become yours). Typical vesting schedules are four-year timeframes, with 25% of shares vesting each year. This incentivizes employee performance and retention while giving the employee ownership potential in the company.  
• Performance Shares – a similar structure to RSUs, but have a company performance or financial metric (i.e. earnings per share target) tied to the release of shares.
• Non-Qualified Stock Options (NSOs) and Incentive Stock Options (ISOs) – these types of stock options allow employees to buy shares of the company at a pre-determined, discounted price. Depending on the type of option, you may gain additional tax advantages over ordinary income.

Remember, everything is negotiable, so get creative and find a solution that fits your needs.

What will your Growth and Development Look Like?

“Learn early. Learn often.” – Drew Houston

Joining a startup can provide several advantages for career advancement. You might have the opportunity to work closely with the C-suite and executive team, shape business strategy, and be responsible for building out entire teams. Who will you be reporting to? How much input will you have? Is there a clear or defined path for advancement? Joining a fast-growing company with a solid team should put you in place to gain valuable experience quickly – it just depends on what you are looking for next.

Are you Being Honest with Yourself?

Will you work well in a startup environment? Startups, especially in earlier stages, have fewer resources, which might require you to wear multiple hats or work irregular hours. You must be capable and willing to operate at a high level, but also get into the weeds, and shift between the two constantly. This is not for everyone, especially those accustomed to working in larger enterprise-level companies armed with resources and teams to help get the job done.  

Above everything else in this article, you need to be honest with yourself. Are you passionate about the product, the company, and feel energized to do the work? If you are passionate, can afford to take the offer, and can learn and gain valuable experience that can advance your career, it could be well worth the risk of a career move. After all, playing it safe can sometimes be the riskiest choice of all.