Art of the Start-Up May 29 2012

Before You Fall in Love With a Start-Up

By Saabira Chaudhuri

Working for a start-up comes with some obvious perks. You're making a real contribution towards growing a business, it's an adrenaline filled ride, you're working with friends or like-minded people, and, if you're really lucky, you can wear sweatpants and bring your dog to work.

All this sounds great. But there's a downside too. For one thing, the start-up you're considering working for runs a high risk of failing.

According to Shikhar Ghosh, a senior lecturer in entrepreneurial management at Harvard Business School, 75 % of start-ups don't meet their projected return on investment, while 35% of start-ups end in all company assets being liquidated with investors losing most or all of the money they've funneled into the venture.

"There's a three-in-four chance that a start-up is not going to be a success financially," says Ghosh.

Failure in and itself isn't a bad thing, and indeed in Silicon Valley it's often seen as something of a badge of honor. Before you commit to jumping on board, however, it's wise to evaluate the details of your offer, the viability of the company's business model and how much funding it has, and also to evaluate whether your circumstances and personality make you a good candidate for an entrepreneurial environment.

How Much Cash Does it Have?

The first and most important question anyone considering joining a start-up should ask is how much cash it currently has or can gain access to, according to Ghosh. "If they run out of cash it doesn't matter how good the product is, they're out of business," he says. "If you're an employee, you're going to get fired significantly before that happens since the company will go into cash conservation mode."

Work out the company's 'burn rate'—how much cash they are using up every month, and the 'fume date'—how many months from now they are likely to run out of cash, advises Ghosh. Is the company likely to be turning a profit by this date, or will they have access to venture funding if they don't already? If they are venture-backed, investigate who the funders are and what sort of performance they need to see from the company in order to continuing backing it.

Iker Marcaide, founder and chief executive of Boston-headquartered start-up, peerTransfer, suggests investigating a start-up's employee attrition rate, in particular how many founders are still around several months down the line. "If all the founders are still there, that's a start-up that's very committed and has higher chances to succeed," he says.

What is the Compensation Package?

Something to note about your compensation package: It is likely to be a mixture of equity and cash, which necessarily implies some level of uncertainty, given the value of equity makes assumptions about a company's future stream of earnings. Additionally, keep in mind that your stock is likely to be diluted as the company grows over time.

While this is not necessarily a bad thing, given that the stock price will likely go up as the company attracts additional investment, it is important to be aware that the value of your stock in the company will likely change in the future, says Steve Forte, who has founded several companies and now works as the chief strategy officer for a global software development firm called Telerik.

To counter this, Ghosh suggests negotiating the percentage of the company you will own, rather than the number of shares you will receive. "If you're sophisticated enough you should calculate how much more capital the company will need till it gets to profitability, then estimate the share dilution based on this, and then negotiate the percentage of stock you want," he says.

If you think you could add a great deal of value to the company, set up an advance reassessment of your ownership in the company. "Say 'six months from now, I want us to have another discussion about the number of shares I'm getting,' " says Ghosh. "At that point if you're really valuable to the company, it becomes much harder for them to say no. Otherwise, you get what you got at the beginning, and it's never brought up again."

What if the Company is Sold?

Potential employees would also be prudent to educate themselves about how they could be affected were there to be a change of control, i.e. if the start-up is acquired.

Ghosh suggests employees ask for a "double trigger provision" in a contract, whereby if he or she is fired without cause as the result of an acquisition, options can be vested. This becomes particularly relevant if you are in sales, accounting, human resources or other support roles, as these are often the first to get axed in the event of an acquisition.

What About Health and Retirement Benefits?

Something else to consider: Will the start-up give you health insurance or retirement benefits? If not, how much will you be shelling out every month to create a nest egg – perhaps minus this from your base compensation amount to develop a more complete picture of your likely take home pay.

While the traditional questions you might have at a regular interview about insurance and benefits may not apply, Forte says you shouldn't ignore these altogether.

"Ask if there's a roadmap," he suggests. "For instance when we get to a certain level of revenue, can I expect to get these types of benefits?"

Do You Pay Moving Expenses?

Yet another question to ask at your interview: Will the company pay for your moving expenses?

Greg Schwartz, founder and CEO of Detroit based start-up UpTo which offers a social calendar app, says even if one gets fewer benefits or takes a salary hit in choosing to work for a start-up over a large corporation, one should take the cost of living into account in making a decision. "The East and West coasts have higher costs of living, and depending on location that salary can go a lot further," he says.

Money Isn't the Main Motivator

While it's important to be prudent in considering a job offer, the bottom line is that money cannot be the motivator behind why you choose to join a start-up, says Ghosh. "People look at the employees of the Facebooks and Groupons out there making millions of dollars, but the probability of this happening is the same as a high school football player becoming Tom Brady, which means winning the Super Bowl and dating a supermodel," he says.

"The real reward is that you're living in a very dynamic environment, you're growing tremendously, you're actually part of a team that's doing something significant," he says. "And so you have to make sure that's actually true. The part that you do control is the role you're playing and the team you're working with, so make sure these are people you enjoy spending time with and can learn a lot from."

Jason Merrill, a Yale University graduate who moved to San Francisco last year to join a San Francisco based start-up called Desmos, agrees. "When I joined Desmos, I was definitely aware of the statistical risk that the company would fail," he says. "But I also knew I'd be working with incredibly smart people that I liked spending time with making a product that's fun to work on."

Are You a Risk Taker?

Before you leap at a job offer, it's also important to recognize that working for a start-up isn't for everyone. "The rewards can be high, but there's no such thing as a free lunch," says Marcaide. "When someone wants to join a start-up, they should ask themselves what amount of risk they are willing to assume given their personal circumstances."

Merrill says that more relaxed personal circumstances helped him decide to work for Desmos. "I'm single and in my 20's, so I don't have a lot of outside responsibilities. I could be out of work for a while, and everything would be fine," he says.

"I have some equity in the company, and I view that as a high risk, potentially high reward investment," he says. "I'm certainly not dependent on it being valuable down the road."

That being said, Merrill also points out that big corporations no longer offer the level of job stability they once did, and accepting a job at one comes with its own risks, the biggest of which is that large organizations can end up with divisions or members that are somewhat isolated from incentives for doing great work. "There's no room for that on a team with five people," he says.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com



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