Nine Questions to Ask a Startup

futurelab default header

by: Guy Kawasaki

Most of the information that you can find about recruiting is for the employer, not the employee. (I'm as guilty as this as anyone: for example, The Art of Recruiting, I and II.) Let's turn the tables, switch modes, and balance the scales by discussing what a hot candidate should ask a private, venture-backed startup before making the leap to “infinity and beyond” as Buzz Lightyear would say.

1. How many outstanding shares of stock are there?
Most companies make offers of dazzlingly large amounts of stock options. After all, 100,000 shares sure sounds like a big number–especially if the company goes public at, say, $20/share and then googles on up to $400/share like you're being led to believe. That's $40,000,000–you could buy Larry Ellison's house with that kind of money!

The number of options that you're offered is a meaningless number unless you know the total number of outstanding shares of stock. With these two pieces of information, you can calculate the percentage of the company that your options represent–and that's what counts. For example, 100,000 shares of 1,000,000 total shares is a lot better than 250,000 shares of 10,000,000 total shares.

You could simply ask what percentage you're getting, but that's a little crass, and some people may misinterpret crassness for a lack of good judgment. 🙂 However, just because you know what percentage of the company you're getting, don't make yourself crazy with delusional thoughts of how much you're worth.

Here are some “Guyed”lines for a startup that has already raised its first round of venture capital of $1-3 million with no more than fifteen employees. Don't just latch onto the top end of the range because there are many variables to consider including salary, cash bonuses, geographic location, and most important of all, your perceived value.

  • Senior engineer: .3 – .7%
  • Mid-level engineer: .2 – .4%
  • Product manager: .2 – .3%
  • Architect, i.e., the “main (wo)man,” though an individual contributor: 1 – 1.5%
  • Vice presidents: 1.5 – 3%
  • CEO, i.e., “adult supervision” brought in to replace the founder: 5 – 10%

(I know I'm going to regret providing these guidelines…those of you who read this blog in an RSS feed will be amused by how these numbers will change.) 🙂

2. What is the monthly burn rate?
“Burn rate,” as commonly understood, is net cash flow. (In most cases, “net” isn't even necessary to mention because there are no revenues.) You want the answer to this question in terms of cash–not some bull-shitake, pro-forma paper-profits calculation unless you can pay for your rent with paper profits.

3. How much cash is in the bank?
This is a straightforward question. Now take this answer and divide it by the monthly burn rate. This will tell you how long before the company runs out of money. If the answer is less than six months, be cautious unless the company already has signed term sheets for the next round of financing. If it doesn't, assume it will take at least six months before another round of financing closes.

4. When will the company achieve positive cash flow?
You should ask this question because you'll probably be told that there are months and months of cash or that another round of financing is “looking good.” If the answer is years away, then you're signing up for more risk because venture capitalists aren't the most patient, loyal people. More risk is okay-it takes years to build a great company–but you should know what you're getting into.

5. When will the product ship?

This is just another way of asking about positive cash flow. Obviously, positive cash flow before shipping is improbable, but if the company is saying that positive cash flow will occur shortly after shipping, something is fishy, or the management is clueless. My advice is that you add six months to the “worst case” date that because nobody ever ships on time.

6. May I talk to any of the outside investors on the board of directors?
If the outside investors are as positive about the company as you're being told they are (and assuming you're truly a superstar applicant for a senior-level position), then the company should agree to this. If it doesn't, then either the investors are getting “tired,” or you're not that important. Indeed, if you are a superstar, you won't have to ask because the management will ask a big-name board member to call you.

7. May I talk to several beta sites?
This question is another reality check: the company is probably spinning a tale about how all the beta sites love the product. (In my career, every company has always told me that beta sites “love the product.”) If you're told you can't make contact, then either the company doesn't want to bother future customers (which is reasonable) or you're not important (which is possible). Of course, it could even be that the product sucks, so the company is afraid of you talking to beta sites. It would be nice to know if it's the last reason.

8. How much overhang does the company have?
“Overhang” refers to the amount that investors are first paid back if the company is acquired. For example, suppose the company has raised $25 million and the overhang is only $25 million (it could be multiples of $25 million depending on how the investors negotiated the terms of investment). If the company is acquired for $25 million or less, then the employees get nothing. It's only after the first $25 million is paid back that employees get anything. If there's a massive overhang, your options may never be worth anything.

9. Are there any intellectual property issues or lawsuits pending?
This is a housekeeping question. To put it mildly, it'd be nice to know that the company's intellectual property is free and clear, and that there aren't any lawsuits that could tank the company. If you don't ask, don't expect the company to volunteer such information during the recruitment process.

Finally, a word of caution: the management may interpret these questions as evidence of a lack of “believing” or a failure to understand “the big picture.” Thus, you could reduce the likelihood of getting a job offer. On the other hand, you might impress the management with your knowledge of how startups and finance really works. Welcome to the complex and contradictory world of startups…

Original Post: http://blog.guykawasaki.com/2006/03/nine_questions_.html