2. Startups and Techies
• Approached by someone with idea for startup? Being courted by early
stage startup?
• Ready to take risk but wondering how to minimize risk and maximize your
chance of success?
• Step 0: Being pitched the next great iPhone/Android app? Run!
• Step 1: Set your expectations:
– You are not likely to walk away a mega millionaire with your own island.
– You will be lucky if the startup survives for more than 2 or 3 years.
– Your only gain might be great experience (and a resume to go with it).
– You may make an “okay” amount of cash. People seem to think you can only
make millions or go bust. Not true.
– Expect to work hard, but 80 hour weeks are ridiculous. People with families
can do startups.
– Take responsibility! Expect to do a lot of due diligence. You are responsible for
the decisions you make.
– Be picky! You are interviewing startups as much as they are interviewing you.
3. Startups and Techies
• Step 2: Evaluate the Founder(s)/CEO.
– Read through PPM (Private Placement Memorandum is a document
created for investors that includes resumes of the senior
management, business plan). If PPM does not exist, this may be too
early stage to jump on.
– Done a successful startup before as CEO or senior management?
– Have not been sued by investors etc (Google and casenet are your
friends)
– Use linkedin to find common friends and get a blind reference or two.
– Seem credible and well spoken? Highlights risks as well as
opportunities or seems delusional?
– A CEO has to be 100% committed and passionate. If you see a part
time CEO or someone who does not “believe in their vision”, run.
– When evaluating funding, check to see if CEO and their friends and
family invested. If not, definitely a red flag.
4. Startups and Techies
• Step 3: Evaluate the funding/structure:
– Has the company done a seed round? Bootstrap? Friends & Family? Series A, B
etc?
– Is the company funded/backed/managed by a respected private equity firm or
VC? Does it expect to be? As in, are the founders in talks with professional
money firms and is it going well?
– What’s the current burn rate, expected loss for next 12 months and is it
funded (cash is in the bank)?
– Does the company have a strong independent Board of Directors? Not
dominated by company management? If not, is the company at least
committed to it?
– If there is a BoD that represents large investors, talk to some board members.
Ask them why they invested, are they happy with their investment, are they
happy with the management team?
– What’s the current ownership? What percentage is owned by funding entities,
management and employees?
– Is the company getting ready for an investment round? If so, what is pre and
post money valuation of the company?
5. Startups and Techies
• Step 4: Evaluate business prospects:
– Read the business plan thoroughly.
– What does the company do? If the management cannot articulate this in a
sentence or two, it’s a red flag.
– Are there competitors in this space – too few and too many competitors are
both bad things.
– How are competitors doing? A few biggish ones and a host of small ones
implies this is a healthy space with M&A prospects in the next few years.
– Are you going to be competing with
Google/Facebook/Yahoo/Amazon/Microsoft? Not a good thing.
– Does the business plan include expectations of being purchased by one of the
above? Not a good thing.
– Be wary of pivot happy startups. It can indicate that they are trying all kinds of
things and nothing is working.
– The Gartner Hype Cycle is a great place to start. Your company should
preferably be on the “Slope of Enlightenment” but other places can work also.
7. Startups and Techies
• Great, you made it through all the steps and this opportunity seems
like a good bet and you want to work for them. On to…
• Step 4: Evaluating your worth
– If you are going to be the unproven CTO of an early stage tech startup,
and are not one of the founders, expect to own about 2 to 3%
– If you have been the CTO at a successful startup, it is not unreasonable
to expect 10% with ability to invest and own more.
– If this is your first time, expect a lot less.
– You can get more equity if you accept a lower salary BUT don’t get
carried away. As a rule of thumb I would not discount my market
salary by more than 25% to get more equity. I hear stories of senior
developers working for $40K when their market wages are $80K. That
would make sense ONLY IF you had done all the due diligence and
really felt that a) this business will take off and b) the increase in
equity would be SO TOTALLY WORTH IT!
8. Startups and Techies
• Step 5: Evaluate the Equity
– Equity can be given to you in many forms, for instance:
• Shares/Stocks – best kind of equity! But be aware that stock grants are taxable events!
• Options/warrants – can be very good if strike price is low. You can be issued blocks of
warrants at different times with different strike prices.
• Stock Appreciation Rights – similar to options but without the need to pay the strike
price.
• Phantom Stock – similar to SAR but may possibly pay dividends.
• Verbal promise – usually worthless!
– Equity usually has a vesting period, usually 4 years with blocks vesting
monthly, quarterly or annually. Try to negotiate low vesting periods.
– Understand how to translate your equity to a percentage of ownership. You
might feel good if you got a million shares but you might not feel so good if
there are a billion shares outstanding.
– Expect dilution and understand its impact on your equity.
– Understand company valuation. What is it valued at, how was the value
derived and WHO did it! If money was recently raised from a professional
money firm, ask what pre and post money valuation that was based on.
