Jay Cordaro's Blog

Advice when considering an offer from a startup

jay cordaro — Mon, 19 Dec 2011 10:07:57 +0000

So, a hot startup calls you up. They have cool technology and you like them. You’d consider working for them, and they bring you in for an interview. Let’s say the interview goes well. What do you do? Here’s some advice I’ve learned the hard way when dealing with startups. It’s more than just the technology — they have to have a plan, the right leadership, the right vision, the economy has to be okay, the offer has to be right, and you (and they) have to be lucky.

Find out how much funding they have, how many rounds
Who are the VCs?
Estimate their burn rate
Find out how many common shares are outstanding. Do not take an offer from a company that does not disclose number of common shares.
Find out how many classes of preferred stock there are
Find out the liquidation preference of the preferred shares.
Do not accept any offer that gives you less than .1% of the company when you join
Find out if they have an early share exercise program
Make sure you get an annual pay you can be happy with for the next 3-4 years
Discretely ask around what the word on the street is about this company, including potential customers if at all possible
If you decide to quit your present job, be prepared for counter-offers from your present employer. Have in mind what you are going to say BEFORE you give notice
Does it smell right?
Get it in writing

First, find out how many rounds of funding the company has had and how much money has been put into the company. The more rounds a company has, the less shares they can offer you. In order for an offer to pay off big time, you need a lot of options. A company that has had a lot of funding very well might need a lot more funding, which will further dilute, or even wipe out your options. Venture Beat, Venture Deal, and the company’s own press releases are good places to find out how much money has been put into the company. Companies sometimes play games with the number of rounds of funding. For example, I spoke to one startup that claimed to be series C funded but had 5 classes of preferred stock. That’s why you need to find out how many classes of preferred stock there are. The company should also disclose to you the liquidation preference for the preferred shares. This means that some preferred shares must get 2x (or even more) of the investment, before other investors and common stockholders get anything. Let’s say that a company has $100 million invested in it and that 1/2 of the preferred shares have a 2x liquidation preference. If the Company sells for $150 million, you don’t get anything, no matter how many common stock options you have. If the company is acquired and does not IPO, it can be quite difficult to get anything out of many deals.

Once you know the amount of funding they have, estimate what their burn rate is. For example, engineers in the US cost about $200,000 each (salary + benefits). If the company has 100 employees, they will burn through $20M in a year, just for the payroll. You need to pay for office space, coffee for the coffee machine, etc. For semiconductors, cutting-edge design tools cost about $5M per year (thieves!). Mask costs at 28nm will be around $2.8M and some say will rise to as much as $10M for 20nmsource (that sounds high). So if they’re taping out in the next year dedicated, you’re talking $4M, minimum for SoCs. Obviously if you’re doing some small chip in a trailing process node, it will be cheaper. Even a shuttle at 28nm will cost $200K. So, figure on 1 shuttle, and these guys are good, so figure on only 1 mask and 2 metal fixes. Your’e at $4.5M in 28nm. Throw in some travel and board dinners and you’re @ $30M per year in this example. Do they have the cash? How soon will they need to get financing? This is vitally important for you because if they need to get cash, in the next year, before their sales take off, you are going to get diluted. If the company is getting real sales and momentum, it’s a different story. Sometimes they will need more money at this point because they want to build up their sales network. But once they have firm orders, it looks more like a sure thing to the VC (Vulture Capitalists) and it will likely be an up round (the financing round will have a higher valuation per share than the previous round) so the effect of the dilution is less.

Okay. Let’s say that you’ve done all these numbers and they have a chance of making it. You interview and pass. It comes to the offer. First of all, get it in writing. When you get it, make sure that you will be offered options that total at least .1% of the currently outstanding common shares. Make sure that the salary they offer you is something you are okay with getting for the next 3-4 years. Startups don’t give raises, they give you more stock, which is going to get diluted. If they get acquired for a nice price or IPO, even if you have .05% of the company, or less, you’re still going to do okay. So, just make sure whatever pay the offer you in the beginning is about 110% of what your current base salary is. This way, if you stay at your current job, your base pay would still be about the same after 3-4 years assuming 3-4% raises each year. If the company offers you an early exercise program, this is good, because if the company does IPO, you will be able to [as of this writing] pay capital gains tax at a lower rate than you would otherwise.

With the numbers you got, you should be able to put together some hypothetical situations, modest success, great success and see what the payoff is. One thing to keep in mind is that the number of shares has to allow for a share price of $8-$20 or so. The number of shares may have to be reverse split. So even if they give you .1% of the company, you may have the number of shares outstanding divided by a factor of ten or more. For example, processor startups IPO for about 3-4x sales. If you have 500M shares and estimated revenue of $50M, the number of shares is going to have to get divided by 25.

Finally, look at the intangibles. Who is investing in this company? What is their track record? You should be able to find the tombstones on the VC website (successful deals) Who is on the startup’s board? What is their track record? Discretely ask around the industry what the deal is with this company, especially if you don’t know anyone there.

Let’s say everything checks out. Are you going to accept the offer? If you give notice, will your company counteroffer? They very well might. Practice what you will say to your present employer before you give notice. Are they offering you something that would be hard to get elsewhere? Or is it just more money to do the same job?

Application of R&D to new products is something that is just not done in large companies anymore. Venture Capital is the means by which these R&D ideas get productized. Working at a startup can be fun, rewarding and can make you a lot of money, if you’re lucky. Make sure you take good opportunities. Good luck!

thanks to Mr. Y. and Mr. M. for their candid advice on offers from startups…

Ghettotronics II

jay cordaro — Fri, 09 Dec 2011 19:08:08 +0000

This is an industrial oven which is used to do things like temperature cycle and test equipment. The oven is not big enough for the equipment under test, and the dtemp/dtime the oven provided isn’t fast enough, so the engineer (not me, but he wishes to remain anonymous for obvious reasons) rather than actually rent an oven somewhere that’s big enough and with a fast enough temperature delta, looked through the scrap bin and found a cardboard box that was big enough to fit over the opening, and installed space heaters inside the chamber. He held the box against the chamber using a dumbell he “borrowed” from the weight room. Fortunately he plugged into a 20A outlet…This definitely merits an inclusion in my Ghettotronics category!

Automotive Ethernet makes the NY Times

jay cordaro — Fri, 09 Dec 2011 18:57:16 +0000

at least, an online blog of it.

DeLonghi Electric Radiator

jay cordaro — Sun, 13 Nov 2011 03:34:16 +0000

I had an old, unsafe heater in my house when I bought it last April. I had the contractor rip it out and presumably, dispose of it properly (rather than toss it in an alley somewhere). Anyway, I braved several weeks wearing sweaters and putting 3 comforters on the bed but as it got colder, I broke down and bought a couple of DeLonghi oil-filled electric radiators at Lowes, which are more correctly called oil heaters or column heaters. They appear to work well in the mild Southern California winters. I like the digital thermostat, the two timers that it has. I set the one in my bedroom to run for a few hours before I go to bed and to turn on just before I wake up for a couple of hours. I also like the low, medium and high settings. Since it is convection, it doesn’t get too hot so you don’t have to worry (too much) about it tipping over and starting a fire. Electric use is always a concern with the tiered electric metering in California, so I measured the power consumption with a Kill-a-Watt meter.

High – 1350W (11.78A)
Medium — 727W ( 6.27A)
Low — 667W (5.72A)

Assuming 4kWh average use per day, since I am under my baseline, it should cost me an additional $16-25 per month to heat my house this winter. I recommend these heaters.

EW7507EBL DeLonghi electric radiator

steak in Frankfurt

jay cordaro — Mon, 19 Sep 2011 02:21:22 +0000

An appreciation of Borders

jay cordaro — Sat, 23 Jul 2011 07:29:10 +0000

I went to the Borders liquidation sale. It was busy, but not as busy as I expected. I will miss the chain. Five things made the chain better than Barnes & Noble: they had better locations, the store look was consistent and high quality, their book selection was better, they had good author signings, and they had good stores in Detroit. Believe me, Detroit is a pretty bleak place. Being able to walk a quarter mile in the snow from my hotel in Novi in the freezing cold to a warm Borders with an excellent history selection made weeks spent there slightly more tolerable without having to drink heavily. Borders had really good locations– K St. and at Pentagon City, in DC, Union Square in San Francisco. The store at Preston and Royal in Dallas was for over 10 years the biggest bookstore in Texas. Borders had well-labeled sections inside the brightly-lit stores, distinctive lettering, and the carpet was lighter — whereas Barnes & Noble always has dark green and blue carpet, Borders carpets were white and black. The bookshelves were an inviting natural wood color. Perhaps most importantly, Borders stores had good selections tailored to the local market: History, MATLAB and mechanical engineering books in Novi; digital design books in San Jose; Politics and American History in DC. Their science sections were far superior to Barnes & Noble and just about any other local bookstore except perhaps Book People in Austin.

Unfortunately, Borders also had truly terrible management. What idiot outsourced their online sales to Amazon until 2008? Why, when every genre except country music had year on year CD sales declines of more than 20%, would you not phase out the music part of the store? Why no response to the Kindle until years later? How could a board tolerate a CEO letting company loose money every year for 3 years?

What really struck me as odd was at the liquidation sale, people sat on the floor and read books? Why not just buy them? Maybe they wanted to spend time browsing at Borders one last time?

6-Month check on stocks

jay cordaro — Mon, 11 Jul 2011 00:58:48 +0000

Similar to how Barron’s gave themselves a report card on their 1st half of 2011 stock picks, I tabulated the return of the stocks that I am invested in from Jan 3rd to Jun 30th of this year.

Stock Price change

XOM +10.36%
PFE +18.87%
WTR -1.79%
JNJ +7.78%
ADP +13.78%
LLTC -3.45%
INTC +8.04%

Assuming equal weight in investments this gives an overall return of 7.7%, exclusive of dividend reinvestment. The S&P 500 returned 3.83% for the first half. So I exceeded the benchmark by 200%. I continue to believe that the discounted earnings and dividend flow model* gives an investor a powerful tool to value stocks, which can be used to create a portfolio that can meet or exceed the return of an index over the long term.

*someone (N.Y.) pointed out that in my forecasting, I am not actually estimating cash flows, but rather flows of earnings and dividends, and discounting those items.

Trojan Mouse

jay cordaro — Wed, 29 Jun 2011 05:36:59 +0000

This was a clever hack, they call it a prion, but it is really one of the oldest tricks in the book: Netragard used a trojan horse, or, more correctly, a trojan mouse to get access to a security client’s machine from a supposedly secure firewall. I bet many people would think twice before plugging a random flash drive into your own computer but wouldn’t think twice about a mouse, especially if sent with slick promotional materials. Think about that when you buy ‘Happy Brand’ components at Fry’s…

Berkshire And Snap-on Revisited

jay cordaro — Wed, 29 Jun 2011 05:21:40 +0000

A few months ago, I estimated Berkshire Hataway’s DCF stock price at the improbably precise figure of $113,046.04 when the stock was at $127,850. Since February 14th, the stock has fallen about 10.5%, to around $114k and change. I think it’s now a buy, especially with low oil prices. Snap-On hit my price target a couple of weeks ago, and already gained 9%!

US Public Debt 1797-2010

jay cordaro — Thu, 16 Jun 2011 05:27:55 +0000

This GAO page shows US public debt as a percentage of GNP/GDP. It’s interesting how the ratio of immigrants as a percentage of the population roughly correlates with the increases and decreases in US public debt, with about a 10 year lag.