Advice when considering an offer from a startup

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…


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