How To Evaluate A Startup Offer

[Editorial notes : So you have got a job offer from a startup? And one of those MNCs as well? How do you evaluate a startup offer, when the company itself is fairly unknown and so is the upside (and downside)? The below piece by Gaurav Lochan clears it all. Gaurav is one of the early employees of LittleEyeLabs, which got acquired by Facebook.]Hiring Human Resources
Evaluating a offer at a startup is hard. I’ve done it a few times now (worked at 4 startups) and a bunch of friends have asked me for help with this. This post repeats what i’ve shared with those friends, from the perspective of how I would evaluate an offer.
First, I try to understand what attracts me to the startup in the first place?—?it’s usually a combination of factors like team, product/technology, market, my role, and potential financial upside. This is usually a quick process that helps me decipher how i’m really feeling about the startup, and can also help identify biases.
Then, I try to work to answer some key questions:

  1. How are the people i’m going to work with?
  2. What role(s) will I get to play?
  3. Is this company likely to do well?
  4. What am I going to get out of this, in terms of growth and learning?
  5. What am I going to get out of this, financially?

None of these are easy, but here is how I would try to answer them.

Team

The co-founders are absolutely key in an early stage startup. They have set the direction for the company, define the culture, are responsible for attracting funding, and most importantly, attracting other employees. The team is almost always the most important factor in this decision!
Unless I know the team from having worked with them in the past, i’ll spend considerable time talking to them and understanding how they think/operate, whether I can trust them, respect them, and whether I enjoy interacting with them. It’s useful to brainstorm a problem with them (e.g. a technical design problem or even a product/market one) since that gives a rough sense of how they think and how it was to work with them. If feasible, i’ll work with them for a week or two on a real problem (many startups are open to this because it helps them evaluate me too). And the team goes beyond the founders, I try to speak to a few employees at the company too (especially folks that I expect to work with).
If it makes sense, do reference checks. I once requested to speak to an investor to understand what he thought about the team.

Role

The next thing is trying to figure out what part I will get to play. I want to be in a place where I can leverage my strengths, make lots of impact, and become a valuable member of the team. But it’s also important that I will get to do things that I want to.
This is also where I try to figure out whether the work-life balance will work for me.
Figuring out role also comes from getting to know the team, their structure, their priorities, and their plans for me. Once I have a sense of what role I want to play, it’s key to discuss that with the founders and make sure we all agree.

Do well

What does it even mean for the company to ‘do well’? For me, it usually boils down to:

  1. Build a good product
  2. Grow the team and hire good people
  3. Grow the user base / revenue at a healthy rate
  4. Grow in valuation?—?a function of the above, and validated in subsequent funding rounds or an exit.

It’s great to be in a place that does well on all of these. Keep in mind that any startup will struggle on some of these at any point of time; but a startup that struggles on all of these fronts is not a good place to be (unless I believe I can come in and change that!)
It’s really hard to evaluate this one too. If you know the product, the team and/or the market, you have some ways to evaluate this (and if you don’t, then, why are you joining this startup anyway?). The founders will be happy to talk through this?—?after all, this is how they pitch to investors. Definitely try to talk to other folks who understand the industry and potential customers of the startup, to get their unbiassed perspectives.
If the product exists, use it to see what you think about it. If you have feedback on the product, discuss it with the team. This also helps you understand how they think about product and prioritize things.

Growth & Learning

There is no point joining a startup (or any company for that matter) if you don’t expect to grow there. A startup often presents the following growth/learning opportunities:

  1. Working with a great team that you can learn from.
  2. Working on a product/technology that you want to learn about.
  3. Learning a new set of skills
  4. Becoming a ‘leader’ fast as the company grows
  5. The experience of working at a startup

I ask myself?—?If the startup were to shut down in a year, how would I be placed in the job market. While this isn’t the only way to assess growth, it’s one easy way to think about it.

Financial upside

This is usually the first thing people ask me about. That’s because it’s the least understood and engineers (like me) are attracted to numbers over less tangible things (how much is ‘team’ worth anyway?). It’s last on my list on purpose because it only comes into the picture if the other factors aren’t in doubt.
So, how do you think about an equity percentage?

  1. Use the current valuation of the company. Based on the current valuation, what does your equity translate to dollar terms. (e.g. 1% of a startup valued at $1m amounts = $10,000)
  2. Understand reasonable valuation growth. Use other similar companies to get a sense of what ‘reasonable’ is. Basically imagine the company might be valued 10x or 100x in a year?—?what would it take to get there and what are the chances the company can pull it off. If it can pull off a 100x, your stock could be worth ~$1m!
  3. Factor in dilution?—?Each round of funding will lead to your stock percentage reducing. This is not a bad thing because your stock increases in dollar terms, but you need to be aware of it. If the company raised 3m at 10m valuation, your 1% becomes 0.83%. If it sells at $100m, then your stock is $833,000, not $1m. (Dilution is a bad thing if the valuation is not much higher than the previous round, or worse, lower than the previous round).
  4. What stage is the company in? A pre-funded startup that is building it’s product and has no team, is a lot riskier than one with product/customers and $3m in funding. In the first case, you take on almost as much risk as a founder and wouldn’t expect an order of magnitude difference from them. (Also keep in mind that a series A startup has probably given 15–25% equity to the investors, has an ESOP pool of 10–20%, leaving the founders with 55-75%, so the ‘available’ equity is also more constrained)
  5. What role are you expected to play? (Anecdotally, I’ve heard that a CEO at a Series A company might get ~5%, a VP ~2%, and a sr. engineer ~1%)
  6. How important are you to the company? If you and founders believe you can really make a difference, then that can change things.

Yes, I know that it’s still hard to evaluate that offer. But I hope that this is a useful framework to think about it.
[Reproduced from Gaurav’s blog.]

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