Jane stumbled upon a really interesting business opportunity in the ladies room!
It began when she struck up a conversation with another conference attendee at the mirror. In the weeks following, they kept in touch, the conversation deepening. Turns out Jane had the exact experience and network her contact–an early stage founder–needed to jumpstart growth. Now the founder has asked Jane to come on board as CEO. Should she take the plunge?
It’s not uncommon for an executive of a certain age, especially if they are actively looking for new opportunities and networking, to meet a founder who wants to tap into their industry knowledge or their network.
The good news is that there’s opportunity there. The bad news is that not every opportunity is a good one.
While it may feel awesome to be courted (whose ego does not secretly love this?), it’s also possible to get pulled into a disaster–an enterprise that is at best unsuccessful, and at worst, shady.
Here’s how to evaluate a startup to see whether it’s a true opportunity for you.
What is the company’s funding history?
While not an infallible indicator, investors’ interest (or lack of it) will tell you a lot about the company.
If they’ve been self-funded or are in seed stage, you can still learn who’s put their money on the line for the company. Angel investors? Friends? Family? Personal credit card or savings? This won’t be public information, so you’ll need to ask the founder and hope for an honest answer.
For more mature companies, you can find details on funding history from Crunchbase. Here, too, there are no guarantees. While the more funding a company has secured, the better its chances for long-term survival, plenty of well-funded companies have gone belly up. Look, too, at the timing of rounds. It’s a good sign when a company can move quickly up the funding scale (e.g. from Series A to B, for example).
Who do you know who may have insight?
By far the best research tactic is to talk to your network. Who do you know–and who do they know–who has worked at the company or with the founder? Mark was being courted by a founder whose startup sounded amazing. He was given a tour of what was supposedly the company’s new office space and noticed a couple red flags. So when he looked at his network and found a second degree connection who would have direct knowledge of that company, he arranged a brief conversation. It took only a couple minutes to receive the advice he dreaded: Steer clear. That prompted further investigation, which revealed a fraud. Close call!
What is your gut telling you?
You may already know whether you should jump on this opportunity. If you notice you’re talking yourself or others into how great the company is, take note, your gut may be wisely resisting the opportunity. The sexiness of startups (and any opportunity, if you’re out of a job) can create blind enthusiasm. Allow your doubt to rise to the surface for scrutiny. It may be harmless fear. Or wise counsel.
How is compensation structured?
The earlier the startup in its funding life, the higher the financial risk for employees, but the higher the potential payoff. That said, the odds speak loudly: 58% of early stage startups never go on to Series A. As a rule, the farther along in funding, the more lucrative the compensation and perks.
Equity as compensation isn’t liquid until an exit–when the company IPOs or is acquired–which is less common than the headlines may lead you to believe. Again, the farther along the company is, the greater the possibility this could happen and equity pay off. Salary promises are also largely dependent on funding progress. It’s not uncommon for early stage startups to run out of money while trying to raise more. Which means work with no pay. You’ll need to weigh your financial needs against risk.
What do current employees have to say?
A job is more than compensation, and it’s key to assess whether the culture is one in which you’ll thrive. You’ll most likely interview with one or more employees besides the founder, and they’re your source of intel on culture. (Sites like Glassdoor.com and others feature employee reviews of companies, but they’re recently been shown to have fake or coerced reviews.) Clever questions can uncover the health of the culture, as well as shown your interest. If the interview process does not include speaking to others besides the founder, be sure to request to do so (and consider it a red flag if denied).
Who are the company’s competitors and what has been their trajectory?
Competitors’ history will give meaning to your company’s future, should you decide to accept the mission. But perhaps the most important question is how your company’s product differs from the competition’s. And of course, the market size. The founder should have data on this in the company’s pitch deck to VCs.
Working at a startup is an intense experience, no matter your role. So before you take the leap, be sure the company is a great fit for your risk tolerance, workstyle and skills.