Tips on What Matters and What Doesn't When Evaluating an Early-Stage Startup
Joining a startup is both exhilarating and daunting. The potential upside is huge, but the likelihood of a downside is also huge. You cannot evaluate a job offer at a startup like you evaluate a job offer at Amazon or Google.
When I decided to join FlexAI in July 2024, a seed-stage startup with no product and no customers (as of March 2024), I had questions about stock options, company valuation, and the venture's overall viability. I didn’t want to share one anecdotal example without a history of joining a seed-stage startup. Instead, I compiled insights from friends and experts into this blog.
I spent 2 hours 9 minutes writing down my offer evaluation and 1 hour writing this post. You need 4 minutes 30 seconds to read this post.
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Evaluating A Startup Job Offer
I’ll share the criteria I used, the critical questions you should ask, and the pitfalls to avoid.
Although some of these questions might feel daunting, understand that
The startup is an unproven entity at this time, and
The interview is a two-way communication where you evaluate the startup, just as they evaluate you.
Stock Options
Stock options are a key part of startup compensation, allowing you to buy shares at a fixed price after a certain period.
Ask:
What is the strike price?
What is the Fair market value (FMV)?
What percentage of the company do I own? Alternatively, you can calculate this by dividing your shares by the total outstanding shares.
Company Valuation And Funding
Understanding the company's valuation and funding history is crucial. It helps you gauge the startup's financial health and growth potential.
Ask:
What is the company's valuation? This gives you a sense of the company's market value.
What was the valuation in the last funding round?
How will my ownership dilute in future funding rounds?
What is the company's runway and burn rate? This indicates how long the company can operate before needing more funds.
Exercise Period And Exit Strategy
Understand the terms around exercising your options and what happens if you leave the company.
Terminology:
Exercise Period: Typically, you have up to 10 years to exercise your options.
Exit: Know what happens to your options if the company gets acquired or goes public.
Ask:
What is the exercise period?
What happens to my options if I leave the company before a liquidity event?
What buyback rights does the company have?
References On Stock And Venture Valuation
Here are some sources and excerpts from my research:
Ask as an investor (of your time) - Runway, valuation, profitability, “What is the valuation based on?” as per The 10 commandments of salary negotiation
Typical Employee Equity Levels — The Holloway Guide to Equity Compensation
How much equity should you expect from an early-stage startup? | Sifted
Data from Index Ventures OptionPlan
Data from Startup equity: how much to give employees | SeedLegals
Tell the candidate, ‘We have set aside this much in an employee equity pool and you are either getting X percent of the pool or Y percent of the company’ as per Startup Employee Equity: A Guide for Founders
Thanks also to inputs from Tejas Kotecha, Surya Kumar Saripella, Krishna Bang, Bhaveen Kumar, Viktor Muller, Nidhi Gupta, Shubham Saloni, Russell Cooper, Gajanan Chincwadkar, Lenord Melvix, Nikitha Suryadevara, Sanjay Tadepally, and Hemanshu Vernenker on evaluating stock options and a venture.
Seed-funded startups would offer higher equity—sometimes much higher if there is little funding, but base salaries will be lower. Hires in series A startups in Silicon Valley get this percentage ownership of the startup:
Lead engineer 0.5–1%
Senior engineer: 0.33–0.66%
Manager or junior engineer: 0.2–0.33%
For example, for a seed-stage startup valued at $10M, if you are getting 0.2%, your stake is worth $20k now.
Early-stage startup employees should be prepared for their stock options’ equity to be diluted as the company raises more money at subsequent VC rounds. So, the employees own a smaller percentage of the company because more equity has been made available to new investors. However, the value of that stake increases alongside the startup's valuation.
Take your annual salary and multiple it by 50% to 90%. This is the value of the stocks you should expect. For example, for a $100k annual salary, your stock options should be worth $50k to $90k each year. If your initial stocks vest over 4 years, you want $200k to $360k worth of stocks.
I wrote Nikitha’s framework here.
Compensation And Benefits
Understand your total compensation package, including salary, equity, and benefits.
Ask:
What is the total compensation package?
What benefits are included?
What are the travel expectations?
Legal And Regulatory Considerations
Make sure you understand the legal and regulatory aspects of your employment, especially if working remotely. Determine if you'll be an employee or a contractor, as this affects your benefits and tax obligations.
Ask:
Will I be hired as an employee or a contractor? This may not be relevant for you, but I had a consulting LTD business and was open to joining as a contractor.
What are the tax implications?
What local benefits apply?
Joining Date And Working Hours
Understand the logistical aspects of your role, including your start date and working hours.
Terms:
Joining Date: Set a clear start date. For example, I needed a month to present at a conference and wrap up my pending tax paperwork.
Working Hours: Be clear about the working hours, especially if the team is spread across different time zones.
Ask:
What are your joining date expectations?
What are the usual working hours of the team for meetings?
How do you manage work-life balance?
What Doesn’t Matter
I think having answers to these factors are not critical when joining a startup:
To whom will I report? This will change if the startup grows. Growth is a good thing.
Whom will I work with? This will change as the startup grows.
What is the Product Manager role at your company? PM is a vague role. The startup may not know what it needs, and it may need someone to juggle many balls while following the founders’ roadmap.
What is your performance evaluation cycle? If you are considering a startup role, writing performance evaluations isn’t the goal.
What are your thoughts on what matters or doesn’t matter when choosing a startup?
Applying This Framework To My Decision
I decided to join FlexAI after thorough research and consideration. I hope these insights help you evaluate your startup job offer with confidence.
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