Venture Capitalists, and Working in a Startup for Stock
January 22, 2010 5:22 PM Subscribe
Have you had any experience working for stock options in a startup or being a VC or dealing with a VC? Some questions inside about evaluating the promise of a startup company, and working for stock options...
I've recently started working for a tiny startup (in enthusiest/industrial robotics) that offered to pay me in stock options. The founder has been spending *full time on this for a couple years*, and he's very enthusiastic about the marketability of the product. But there's no management team, and he seems to think that it's best to not worry about applications of the product, and "let users figure that out." So I'm eminently planning to jump ship.
0. Any advice for what to say/not to say in order to stop working for them and get the message across about what I think they're missing, but keep the door open for the future IF they get more organized?
1. Would you absolutely require a typical business plan?
2. Would you demand a combo of stock+cash even if nobody else in the company gets paid?
3. What kinds of market/company data would you absolutely need to know before deciding to invest significant time in a startup-for-stock?
4. What kinds Legalese would you require in your consulting contract to keep your options open down the road and limit theirs?
5. Bonus: If you've been a VC or dealt with one: What are your last-ditch criteria to decide if the company has any promise?
I've recently started working for a tiny startup (in enthusiest/industrial robotics) that offered to pay me in stock options. The founder has been spending *full time on this for a couple years*, and he's very enthusiastic about the marketability of the product. But there's no management team, and he seems to think that it's best to not worry about applications of the product, and "let users figure that out." So I'm eminently planning to jump ship.
0. Any advice for what to say/not to say in order to stop working for them and get the message across about what I think they're missing, but keep the door open for the future IF they get more organized?
1. Would you absolutely require a typical business plan?
2. Would you demand a combo of stock+cash even if nobody else in the company gets paid?
3. What kinds of market/company data would you absolutely need to know before deciding to invest significant time in a startup-for-stock?
4. What kinds Legalese would you require in your consulting contract to keep your options open down the road and limit theirs?
5. Bonus: If you've been a VC or dealt with one: What are your last-ditch criteria to decide if the company has any promise?
What's the question, whether you should quit a job that is paying you in (unspecified?) options? If that's the case, then the answer to question 0 is, "I gotta make some money, man."
1. Business plans are not necessary. Selling something for money is.
2. I would never work for only options.
3. Is someone already trying to sell their widgets? Who? How many "users" are figuring out what to use their stuff for?
No management team is not a problem, but no sales is.
posted by rhizome at 5:46 PM on January 22, 2010
1. Business plans are not necessary. Selling something for money is.
2. I would never work for only options.
3. Is someone already trying to sell their widgets? Who? How many "users" are figuring out what to use their stuff for?
No management team is not a problem, but no sales is.
posted by rhizome at 5:46 PM on January 22, 2010
0. If you want to delay working for them until they can pay cash rather than stock, an easy way to transition would be to just say that explicitly. Explain that you need money in your pocket now, to pay the bills/take care of grandma/whatever. Further explain that you are still excited about the idea, and would love to start working for them when they are hiring paid employees.
2. If you were the only one getting cash, you should be getting a minuscule fraction of the stock they do, else it wouldn't be fair.
posted by mrgoldenbrown at 5:50 PM on January 22, 2010
2. If you were the only one getting cash, you should be getting a minuscule fraction of the stock they do, else it wouldn't be fair.
posted by mrgoldenbrown at 5:50 PM on January 22, 2010
Getting only options, no salary? In that case I'd want a piece of the company, not just options.
posted by phliar at 5:53 PM on January 22, 2010
posted by phliar at 5:53 PM on January 22, 2010
No management team is not a problem, but no sales is.
Not in the VC world. If they're looking to get funded, there are exactly two things that VCs will base their decision on: the team and the market size. Revenue is nice, but it sounds like this is nowhere near close to commercial launch.
Also, options are pretty common in these situations, stock grants are uncommon except among founders.
Do you know anything about their potential market size? Are they pursuing venture capital currently? How far away from having a salable product are they?
posted by signalnine at 6:10 PM on January 22, 2010
Not in the VC world. If they're looking to get funded, there are exactly two things that VCs will base their decision on: the team and the market size. Revenue is nice, but it sounds like this is nowhere near close to commercial launch.
Also, options are pretty common in these situations, stock grants are uncommon except among founders.
Do you know anything about their potential market size? Are they pursuing venture capital currently? How far away from having a salable product are they?
posted by signalnine at 6:10 PM on January 22, 2010
A start-up that's not paying its employees is not a real business. Real businesses pay wages. It's just an interesting project that might turn into a business sometime. If someone wanted me to help them with their project then I would insist in being a co-founder with a reasonable share of the company based on the value of my input.
FWIT, In many places in the USA its illegal to pay employees in stock, you have to pay at least minimum wage. Another reason to make someone an owner, not an employee.
Answers:
0: "I gotta pay the rent", "I'll work part-time (for founder shares)", "I'll consult (for founder shares)"
1: Call me traditional, but I don't think something is a business if it can't explain how its going to make money (at some point in time). You should listen to that explanation and if your gut says it's reasonable move onto other questions like do you trust the rest of the team. Most start-ups (at least those looking for VC funds) don't produce traditional business plans. They have a powerpoint slide deck. You should ask to see it, if an entrepreneur doesn't have one then ask how they expect to fund the development of the business (and get a believably answer, e.g. I have a trust fund).
2: If nobody's getting paid, then see my opening comment, you're all founders and should get a share of the business. BTW, my definition of a founder is: a member of the team that builds the business to the point where somebody else will invest cash.
3: A company at this stage of its life usually has no data or the data it does have is built on wildly optimistic assumptions and shouldn't be trusted very far. My advice is asses the entrepreneur, are they competent?, do they have a compelling plan that you believe can succeed?, does their target market pass a sanity check? Mostly just apply common sense as much as possible.
4: You need to be able to trust your co-founders, if you don't then go find another team to work with. At this stage don't expect a legal document to protect you (or the company) that much as neither of you can afford to go to court to fight it out. Its real value is in forcing you to write down the conditions of the deal and so remove the "but I meant this..." or "I didn't agree to that..." problems later. Just make sure any agreement clearly states what your going to deliver and how you get paid for it.
5: Its about Team, Market & Idea at least two out of the three are needed. A great (proven) team - CEO + technologist; A huge market with a compelling need for the product; A great idea - original, market changing, huge value.
Above all ENJOY, start-ups are fun. Good luck!
posted by Long Way To Go at 7:16 PM on January 22, 2010
FWIT, In many places in the USA its illegal to pay employees in stock, you have to pay at least minimum wage. Another reason to make someone an owner, not an employee.
Answers:
0: "I gotta pay the rent", "I'll work part-time (for founder shares)", "I'll consult (for founder shares)"
1: Call me traditional, but I don't think something is a business if it can't explain how its going to make money (at some point in time). You should listen to that explanation and if your gut says it's reasonable move onto other questions like do you trust the rest of the team. Most start-ups (at least those looking for VC funds) don't produce traditional business plans. They have a powerpoint slide deck. You should ask to see it, if an entrepreneur doesn't have one then ask how they expect to fund the development of the business (and get a believably answer, e.g. I have a trust fund).
2: If nobody's getting paid, then see my opening comment, you're all founders and should get a share of the business. BTW, my definition of a founder is: a member of the team that builds the business to the point where somebody else will invest cash.
3: A company at this stage of its life usually has no data or the data it does have is built on wildly optimistic assumptions and shouldn't be trusted very far. My advice is asses the entrepreneur, are they competent?, do they have a compelling plan that you believe can succeed?, does their target market pass a sanity check? Mostly just apply common sense as much as possible.
4: You need to be able to trust your co-founders, if you don't then go find another team to work with. At this stage don't expect a legal document to protect you (or the company) that much as neither of you can afford to go to court to fight it out. Its real value is in forcing you to write down the conditions of the deal and so remove the "but I meant this..." or "I didn't agree to that..." problems later. Just make sure any agreement clearly states what your going to deliver and how you get paid for it.
5: Its about Team, Market & Idea at least two out of the three are needed. A great (proven) team - CEO + technologist; A huge market with a compelling need for the product; A great idea - original, market changing, huge value.
Above all ENJOY, start-ups are fun. Good luck!
posted by Long Way To Go at 7:16 PM on January 22, 2010
Bonus: If you've been a VC or dealt with one: What are your last-ditch criteria to decide if the company has any promise?
Is there a market, and does the company understand it. Is there capable management: someone with business sense and someone with technical experience (could be one person, could be two). Does the company have what it takes to compete? Does the company know who the competition is? Do they know what they want to make (subject to change of course) and do the know how they will make money?
And is their story easy to understand? Does it address some universal unfilled need?
Finally, have the founders done startups successfully before, or failed but done so in interesting ways and learned from that?
The big red flag in your story is that the founder is not worried about applications. I would only expect that, maybe, if the company was already breakeven and growing. If it's not then the founder had best take an interest in what the applications are, lest there be a great deal of technical and business thrashing while building random things.
posted by zippy at 8:33 PM on January 22, 2010
Is there a market, and does the company understand it. Is there capable management: someone with business sense and someone with technical experience (could be one person, could be two). Does the company have what it takes to compete? Does the company know who the competition is? Do they know what they want to make (subject to change of course) and do the know how they will make money?
And is their story easy to understand? Does it address some universal unfilled need?
Finally, have the founders done startups successfully before, or failed but done so in interesting ways and learned from that?
The big red flag in your story is that the founder is not worried about applications. I would only expect that, maybe, if the company was already breakeven and growing. If it's not then the founder had best take an interest in what the applications are, lest there be a great deal of technical and business thrashing while building random things.
posted by zippy at 8:33 PM on January 22, 2010
I've done this (actually paid in shares of stock, not options), but that was 1985. I wouldn't do it now. These days people get a salary and stock options. The only people who work for options only are founders. The risk is simply too high. If the company never has a liquidity event, your options are worth zero. Even if the company does have a liquidity event, the value of your options will be determined by the event (IPO, acquisition, whatever) and not by what has been promised to you. In my case I was being paid in shares of stock "valued" at $2.00/share. When our company was acquired by Microsoft, they paid $0.10/share. Surprise! I spent nine months of my life working seventy hours a week at less than minimum wage.
posted by zanni at 1:46 AM on January 23, 2010 [2 favorites]
posted by zanni at 1:46 AM on January 23, 2010 [2 favorites]
Most startups fail. How much investment does this company have? How many VCs are involved? If there are many independent investors, what are they being shown to convince them to invest without a business plan? Why don't the VCs want more management? How do you live on no salary? Are there plans for the company to ramp up at some point? How will your options be diluted when this occurs?
posted by Obscure Reference at 6:35 AM on January 23, 2010
posted by Obscure Reference at 6:35 AM on January 23, 2010
...he seems to think that it's best to not worry about applications of the product, and "let users figure that out."
So he's done no market research, and has no applications focus.
This isn't a business; it's a hobby.
posted by ZenMasterThis at 2:46 PM on January 23, 2010
So he's done no market research, and has no applications focus.
This isn't a business; it's a hobby.
posted by ZenMasterThis at 2:46 PM on January 23, 2010
It depends... are you independently wealthy?
If so, this might make for a fun break. If not, this seems like a waste of your time.
posted by rr at 7:30 PM on January 23, 2010
If so, this might make for a fun break. If not, this seems like a waste of your time.
posted by rr at 7:30 PM on January 23, 2010
This thread is closed to new comments.
3. I'd need to be one of the owners.
posted by rodgerd at 5:36 PM on January 22, 2010 [3 favorites]