Ever worked for a start-up?

December 21, 2005 8:44 AM

Ever worked for a start-up? I'd like to hear about your experience and get your advice.

For the past several months my husband has been looking for a new place to work. An opportunity has come along that really excites him and it seems likely that the company will be making an offer within the next day or two. However, the company is a start-up. They cannot match his current salary and instead are offering stock options.

Although he can afford to take a salary hit, the bigger concern is the stability of the company--I still remember the financial upheaval a few friends went through when the start-ups they worked for folded during the dot-com crash.

Thus far, my husband knows that:

1) There is a strong market for the product the company sells and they have only one competitor at this point.

2) In recent weeks, they have signed a couple big clients and received favorable news coverage in the business pubs.

3) The leadership has been successfully launched products for other companies in the past.

4) Two of my husband’s friends know the head of the company well and speak very highly of her.

What other sort of things should you know before you accept a job working for a newly forming company? What are the red flags?

Your suggestions, experiences?

posted by Sully6 to work & money (24 comments total)

I've worked for a few startups, and the only real red flag, in my view, is offering stock in lieu of a competitive salary.
posted by Jairus at 9:04 AM on December 21, 2005

If they have a product/service that they are already delivering, they have a leg up on the start-up I worked for, and that's a giant positive.

Getting positive info from third parties is also a giant plus -- less chance of getting sunshine where it ought not to be.
posted by o2b at 9:06 AM on December 21, 2005

Has he talked to their major customers? What do they have to say? You can learn a lot about the way a company operates from what their customers think.
posted by TeamBilly at 9:12 AM on December 21, 2005

Having worked for a number of start ups your husband has to ask himself if he's ok working in a kind of scrappy environment. I always enjoyed the part of start up life that had everyone doing "what ever it took". Engineers were salespeople, marketers did HR, the Finance guy also made sure there were office supplies. Everyone was their own assistant. Getting a new company off the ground if a tremendous amount of work - he also has to be prepared for an extended work day/ work week if he's been a 9-5er until now.
A lot of new businesses fail - a shocking per centage actually. All the things you mention are very good signs but you really never know. Sounds like they've made the upside potential pretty sweet - if you can handle the cut in pay - and he's got a good network in his field he could call on if this place tanks - I'd totally go for it. The most fun I've had in my career has been at start ups.
posted by Wolfie at 9:13 AM on December 21, 2005

If your family can afford that risk and your husband thinks he would enjoy working there, I'd take it. Startups are more fun than grown-up companies, IMHO.
posted by justkevin at 9:19 AM on December 21, 2005

If stability is the issue..ask about what round of financing that they are at and what is the burn rate. Start-ups with customers can actually still lose money.

It is not unreasonable to ask that when the company makes money will there be discussion about veering away from stock options (when do they vest?) into more stable salary. Ask all your friends again about how they would do it differently and what questions they should have asked.
posted by jadepearl at 9:20 AM on December 21, 2005

Getting into a startup late can negate any real benefits of options even if the company is bought for a decent sum later. Crunch the numbers and figure out what you make if they are sold in year N for M dollars vs. staying at your real jorb, and what that means to you to trade for fun and experience and all the other intangibles the startup may provide.
posted by kcm at 9:28 AM on December 21, 2005

First, if I may correct you, they only know about one competitor. If there is really a market, there are probably a half dozen business plans and 3 that will become competitors. Judicious googling is always in order. In your place, I would search on the company, the market segment, and all the people whose names you actually know. That might take a good online researcher an hour or two, and it sounds like they need one. (Yeah, that's How I Spent the Dotcom Years).

Also, remember the old trite saying at the end of every mutual fund ad: "Past performance is no guaranty of future returns." It is good that the management has suceeded in the past, but it might also be luck.

If he opts to try and grab the brass ring, best of luck to you! Working in a startup is not easy. He needs to be willing and able to see what needs to be done and just handle it. There's no such thing as "somebody else's job" in a startup. In some ways, everybody is a manager and everybody is a janitor. This means long hours, and maybe years until you find out if it was worthwhile.
posted by ilsa at 9:37 AM on December 21, 2005

It's hard to answer your question in public, as I was involved with one of the big success stories and my stock options both directly translated into earnings an order of magnitude higher than salary and in theory, at one point, another order of magnitude beyond that. What I want to make clear is that even then, in 1999 at the height of the dotcom boom and working for an internet-related company, this was the exception, not the rule. It was very unlikely, even then, and it's extremely unlikely now. So get visions of those kinds of rewards out of your heads because it's almost certainly not going to happen.

But what justkevin says is very true: if you're working with the right people, aside from financial rewards the rewards working with a quality startup can be very large and definitely worth both the risk and not making as much money as you might at a more secure job. In other words, you guys should set some minimum you realistically need to be reasonably happy (and not resentful) with regard to actual income, and then beyond that pick the job for the quality of the job, not its pay. Unless pay is by far the most important thing. If it is, you shouldn't be gambling on a start up. There are many far more reliable ways to make a lot of money.

As an aside, I have a very close friend working with a technology related startup for the last two or so years who's been granted options in lieu of a more competitive salary. I've given him the advice I just gave you since he started and he recently decided to ask to convert a good portion of his options to cash and ask for a larger salary. He got both—the salarly increase quite a bit more generous than he expected. He's now notably more happy than he was. Those theoretical gains from the options were not keeping all their shine after a couple of years of very hard work.
posted by Ethereal Bligh at 9:52 AM on December 21, 2005

Life's a gamble. My wife was involved in two startups; there isn't anything quite like them. If they're well-run and have a real product (as opposed to a "good idea" and venture capitalists throwing money at them, as was the case in the late 1990s), they can be a great place to work. So if the pay cut isn't outrageous, and the business plan makes sense (recommendation: he should ask to read it, even if he can't keep a copy), and he's excited by the opportunity, then why not?

It's hard to predict outcomes for startups - both good and bad companies can get bought out and everyone makes a killing; an unexpected competitor or technology can pop up; the expected market can fail to materialize; sometimes, things even go as expected.

Consider, also: even if the company fails to do well, will the experience be valuable for the next job?

(On preview: what elsa and EB said, too.)
posted by WestCoaster at 10:02 AM on December 21, 2005

Tell him to have fun, stay positive, welcome varied experience - and keep his resume up to date.
posted by scheptech at 10:02 AM on December 21, 2005

I'm assuming here this is a technology startup less than 18 months old with a plan to grow aggressively. Startups are so different from bigger companies it's hard to know where to start. So instead let me make some suggestions for questions your husband should ask of the founder who is hiring him. (He is talking directly to the founder, right?)

1. How much investment have you raised?
   
2. When will you run out of money at your current burn rate?
   
3. What is your plan for raising the next investment?
   
4. How long will it be before the business is profitable?
   
5. What is your plan for the company? Be acquired? Go public? Stay private and profitable?
   
6. Why did you start this company?
   
7. What percentage of stock does my option package represent?
   

These questions are obnoxious and many founders will balk at answering them. But if it's a young company and you're one of the first hires, they are reasonable things to ask. Of course these questions should only be asked after the startup really wants you. First your husband has to convince them that he's a good hire, and that he would enjoy working at the company. The questions above are more specific about the risks of being in a startup.

Another resource for similar advice: Seven Questions Employees Should Ask Before Joining a Startup.
posted by Nelson at 10:04 AM on December 21, 2005

Nelson:

• "What percentage of stock does my option package represent?"

!! Yes. This is fairly primary in your benefit/risk analysis. Pair that with an estimate of a selling price down the road (for the company, not the share(s)).
posted by kcm at 10:12 AM on December 21, 2005

In addition to all the good suggestions above, I'd like to add the following thoughts:

Stock is worthless until the company is public or has been bought by a public company. Even then it might still be worthless if the options you are given are not yet vested (or only a small percentage of them are vested.) Furthermore, your stock options can be considered worthless if during the merger negotiations they decide to water down the company's stock value. For example, you might have 1 million shares, and you're company is being bought by a company who's stock trades at $10, but if your company's shares are only worth .01 of the other company's shares, then your options will only be worth $10,000 not the $1 million you hope for. Stock is worthless until it's on the public market and until then you shouldn't expect to EVER see any gain from having it.

Additionally, while this has never happened to me, I have had at least two friends who went months without pay while "employed" by startups. Sometimes, cash is tight and they just cannot write those cheques. I'm glad I never had to make the decision of what I would do if my employer wanted me to keep working with hope of one day being paid for my work in an effort to save the company. I guess however, that's exactly what stock options are for a private company.

If you don't have a job, and need one, than I'd take it. However, I wouldn't let yourself have big dreams of cashing in those options, to pay for your kid's college. If it happens, then you won the lottery; if it doesn't, then you're prepared.
posted by pwb503 at 10:33 AM on December 21, 2005

Yet another thing to be aware of are the people that work there. Be very very afraid when major personnel changes happen. Also worry when blatent nepotism starts going on. Employees shifting around is something to watch out for. And these days, it doesn't matter how hard or how long you work, if the new boss comes in and thinks that his good friend can do a better job, out ya go... especially if he spends the first few days schmoozing up to the HR woman and her 20yr old daughter (that she hired) instead of introducing himself to his own employees.

Startups can be cool, but stuff can go south pretty fast.
posted by drstein at 10:40 AM on December 21, 2005

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity..."
posted by shoepal at 12:01 PM on December 21, 2005

A lot of start-ups will do whatever it takes to survive. Anyone looking to join one should consider how they feel about that. Personally, I didn't enjoy seeing my employer stiff my vendors -- one company simply changed vendors every time payment was due. Since I'd brought a bunch of vendors with me, I felt especially awful about this. The same employer also witheld government & medical premiums but turned out to be pocketing them, so no one was submitting their taxes, medical premiums or Canada Pension. I quit this company after a few months.

It's also important to consider whether you want to have to buy things for a company that may or may not reimburse you. When I did marketing campaigns for one company, I had to go to the Post Office, buy all the stamps and supplies, then do the mail out. Then I had to wait to be paid. This worked out okay, but I was nervous about owing $1,000 for stamps.

At the same company, I also found that it was difficult to do without any tech support whatsoever. Also, start-ups sometimes have weird workarounds -- one company expected me to refill all the paint jars (!) it had jerry-rigged to the colour printer. The same company had RFI machines and did not have proper radiation protection, according to the engineer with whom I worked. We were all being exposed to radiation. The same employer had also set us all up as employees of various companies. He was only insuring one company (with two employees) for workers compensation for the RFI machine, even though we were all in the same room. He was also running medical trials on a device he was testing, but he wasn't properly informing the test subjects of the risks. The engineer with whom I worked told me this was dangerous, since the subjects risked nerve damage. I quit this company after about 2 months.

Just some stuff to consider. My husband says I seem to have a knack for finding the most unethical companies in town. I'm sure some start-ups are fine.
posted by acoutu at 12:17 PM on December 21, 2005

1) Assume the stock options will never be worth any money.

2) Assume you will be asked to work more hours for no extra pay.

3) Assume that you will have an ever-loving blast of a time.

If you can afford it, I recommend working for a start-up at least once. Just be sure to have plenty of savings so you can quit if necessary.
posted by kindall at 12:27 PM on December 21, 2005

Thanks, everyone. These are all great answers and it's impossible to pick a best one. Keep them coming.

To clarify a few things: I'm not counting on the stock options to come to anything. I'm just more interested in how you suss out the company's chance of thriving in the marketplace.

Yes, Nelson, you are absolutely right. It is a tech firm less than two years old. They started selling their product earlier this year.

As for the only one competitor comment, this came from the business reporting I read on the company, not from anything they passed along to my husband. I work in a field related to the customers they are marketing to and the product is really a new thing, but you're right, ilsa, that there will be more competitors in the market soon enough.

I didn't mention it since I didn't want to get into too much personal detail, but my husband is pretty unhappy with his current job. Most of the people in his department act like they can't tie their shoes without assistance. So he's called on to do everything from fix computers to take and transcribe notes at meetings. The end result is that he works a lot of hours and is often frustrated.

He's been weighing going into business for himself versus finding another job. What really got him going about this place, I think, is seeing how smart, creative and motivated the people who work there are. After spending a couple years with uninterested and unmotivated coworkers, he would really love to be in an environment that values creativity and a good work ethic.
posted by Sully6 at 12:47 PM on December 21, 2005

Okay, Sully6, your last comment has given me a bit more to work with. About your chief concern: "I'm just more interested in how you suss out the company's chance of thriving in the marketplace."...

The primary thing I would look for, this being a tech company, is actual business and marketing savvy and experience in the founder(s) and senior managment. Technologists have a very bad habit of coming up with cool (to them) technology for which there is no real market and have poor management skills for bringing a small company to profit.

I worked in IT at a variety of different companies, from platinum marquee technology multinationals like Schlumberger, to contracting for IBM, to managing support at a moderately successful regional ISP that was a small company. I learned to distrust the business instincts of people who were primarily technologists.

The story of the succesful startup I worked for is that it was founded by a pair of men who were veterans of a previous successful startup, one of them with very good technology credentials and the other with very good business (marketing) credentials, and where they were very careful to smartly craft a product very specifically for a market they first carefully researched. They spent a year doing research from their (metaphoric) garage, asking decision makers in their broadly defined target market (basically, "enterprise-class Internet software") what they needed that they can't find. Then they built a product to meet that need partly using the techologist's side of the team's expertise and partly not bothering to reinvent the wheel and aquire someone else's tech as a working base, all along with the help of top-level engineering talent they had recruited.

Also, at every step of the way of the growth of the company to the point of IPO, the business side of the team had a strong sense of the phase the company was in and what kind of management the company needed at that point. Significantly, he was smart enough to realize when he and the other founder did not have that expertise themselves and smart and savvy enough to find the kind of people who did have those skills without relying upon (or, implicitly, being too controlled by) the "recommendations" of the venture capitalists who were at that point providing large amounts of funding.

I absolutely believe that what you want to find in this woman you mention is a very strong and intuitive business sense coupled with a truly technologically strong product. And that she has a strong grasp of why the product is technologically strong. One danger sign to watch out for is a company and top management seduced by the promise of what looks to them like an impressively technologically superior product. Superior technology is good, of course, but it's only a piece of the puzzle and it is unfortunately the piece that often focuses attention to the detriment of others.

This is, I think, the inverse of the common wisdom among the tech-crowd, with its Dilbert-esque adulation of the practical and undervalued engineers and ridicule of the crazy marketers and HR folks. Lord knows there's a huge amount of truth in that caricature, but the problem here is that both extremes are very counterproductive and one's ability to reliably detect one or the other extreme has everything to do with which side of the divide you yourself fall upon. Technologists are very good at identifying mediocre to poor technology (think the ridicule of most of MS's products) but are, in my opinion, notoriously blind to the importance of, and failures of, things non-technological and things that seem to me to be an innate business sense. I think you can, if you yourself aren't afflicted with this technological blindspot, suss out in an extended conversation the presence of this weakness in top management.

There is inevitably, and necessarily, a lot of rah-rah idealism in the leadership of a start-up—but I would look for a strong element of deep pragmatism there. You win the prize because you avoided any number of near disasters of various kinds and through simple dumb luck. The trick is building your product and company in ways that minimize the likliehood and risks of those countless disasters and that makes it easier for the Goddess of Luck to smile upon you. There's a certain kind of leader who can do this, and if you know what to look for, you can recognize this kind of leader. I truly believes it requires a kind of wise pragmatism that moderates the public persona of idealism.
posted by Ethereal Bligh at 1:45 PM on December 21, 2005

I worked for a startup for almost 6 years. The work was often exciting. However, every time they embarked on a new round of financing, heads rolled as a "good faith" display to the investors. The did away with matching on the employee's 401k accounts. Insurance benefits were whittled down to bare bones. Employee pay was frozen for 5 years. And, being a startup, the CEO ran everything. In his mind, no one could do their jobs better than he could.
YMMV
posted by Thorzdad at 2:31 PM on December 21, 2005

Yeah, that's another good thing to know -- where does their money come from? I work for a startup now, in fact, but it's funded privately, there's plenty of money, and the executive team spends basically no time lining up additional funding.

My previous job was also at a startup and toward the end, most of us were at least one paycheck behind, half of us were laid off, those who stayed had to take 20% salary cuts (executives, to their credit, took no salary during this time) and then we were all let go. The leadership was unable to run the company because they were so desperate to find money to solve this immediate crisis, which didn't help. Very stressful.

So know where the money's coming from, and have, as I recommended earlier, a bit of a financial cushion in savings.
posted by kindall at 3:54 PM on December 21, 2005

(from my wife): Having lived thru 2 startups and 1 major division startup, (all hi-tech)
here is what I'd say:

First, there is nothing more fun! The adrenaline is incredible and you
don't even mind working 70 hours a week and traveling 40 weeks a year!
It is wonderful to have such a feeling of true vesting in what you do for a
living.
Many of the standard rules of business go out the window, and you find
yourself making decisions that would be absolutely wrong in a mature
business.
For instance, during the first phase run-up you'll do anything to make
revenue/market share, at the total expense of the bottom line.
This changes radically during phase 2 and often the operations expenses have
gotten out of hand and are very hard to reverse - becomes a BIG problem.
Also, you find yourself paying new hires way more than market to get the top
talent: although this has reversed a bit since the .com crash.
Management will give away options like candy until you get close to true
success - i.e.: either IPO or selling out. Then suddenly stock gets very
tight!
So, get your stock commitment up front and big!
And, last, in this brief summary, fun, yes, but very high risk! I'd say
about 20% survival, about 2% giant success, and - duh - 80% a long walk off
a short pier!

Good luck!
posted by madstop1 at 7:03 PM on December 21, 2005

Ethereal Bligh and WestCoaster nailed it, but having helped get a startup on its feet that's now grown to a pretty solid (but still small/growing) company, I'd be glad to talk about what does and doesn't make a good team member in a startup environment. It's a good way to evaluate if it's the right choice. You can find my email in my profile.
posted by anildash at 10:47 PM on December 21, 2005