Sep 27, 2010
You’ve worked at a big company for a few years, graduated from business school or with a PhD degree and now you’re feeling the entrepreneurial itch. As with most entrepreneurs, you want to position yourself to control the wheel instead of serving as a cog in the wheel. In short, you want to be an integral part of a startup.
The first question that arises at this stage of the game is: “Where do I even start?” MIT and its cohort of spinoff companies, entrepreneurship initiatives, and business plan contests are arguably the most valuable resources to help you chart your startup journey.
But first, you must realize that working at a startup is extremely difficult, filled with highs and lows. A single day can bring you intense difficulty and breathless euphoria. Startups are not for the faint of heart. So you need to make sure that you’re willing to sacrifice time, comfort, and family life for the chance to make a big difference at a company, which you can claim, at least in part, as your own.
Still interested? If you are after this intense introspection, I recommend creating a list of startups that interest you and then using the following framework to filter the startups down to those that will help you grow professionally and bring the most value to your network.
Here are four buckets you should explore when evaluating startup options.
When you talk to entrepreneurs or venture capitalists about startups, the first thing they’ll talk about is the team. A great team can make a mediocre idea successful, but a bad team will ruin any good idea that they lay their hands on. Also, if this is your first foray into startups, you should be extra careful about the team because the first experience may color the way you think about startups in general. A bad experience could convince you that startups are not for you. Moreover, remember that you are going to spend the majority of your life with these people for the next 3-4 years.
There are two key aspects about a team you should evaluate.
1) Immediate group – If the startup is large (15 people or more), you will probably have an immediate group that you work with on a day-to-day basis. Do you like the people? Could you spend a long time with them under intense pressure? Do you believe they are thoughtful and intelligent? Admittedly, these are questions that will be answered after you get the interview, but they’re good to keep in mind when you ask the company preliminary questions. Also, if you have an opportunity to talk to people in your group outside the workplace, you can learn a lot about the startup’s culture.
2) Leadership team – A company’s leadership team is extremely important. When you look at a leadership team, you should pay close attention to how many times they’ve built companies. In fact, David Aronoff of Flybridge Capital had a team conduct research that showed that 50% of the outperformance of top venture capital funds is due to a higher concentration of serial entrepreneurs1. In short, this means that of the companies that provided significant returns to venture funds, half of those returns are attributed to serial entrepreneurs. Experience is crucial in entrepreneurial ventures.
In addition, a well-known CEO can help open doors to the next company you go to. A great leadership team creates a halo effect around the employees of the company that can help you build credibility when you go to your next startup.
Are you passionate about the product? This should be your number one question. Remember that you’re going to go through rough times at a startup and if you’re not passionate about the product, you may not stick it out.
Also, does the team have a clear vision of the evolution of the product? If the team is working to fix major problems every day or doing consulting work for clients, they may not have a long-term vision for the product. Companies that are bogged down with client requests and debugging may have revenue, but the odds of creating a game-changing product may be low.
Salary/Stock Option Package
The compensation package takes different shapes for different individuals, depending on your experience and prior successes, negotiation skills, and contributions (in business-related or technical areas) to the team. Salaries at startups are typically on the low side compared to big company salaries, but the incentive to join a startup comes in the form of equity and company stock. The stage at which you enter a startup (and the number of employees preceding your arrival) dictates how much equity, what kind of equity (restricted versus common stock), and the position you receive in the organization.
The negotiation phase is a critical time when you position yourself long-term within the organization. Thus, knowing how many employees there are, how many outstanding shares of stock there are, and the value of that stock will allow you to make the most informed decision. Startups are often bootstrapped in the early rounds of financing. In these instances, it’s important to consider post-seed round salaries and compensation, if and when the company reaches those milestones.
Finally, the supporting cast an entrepreneur surrounds herself with is key in assessing a startup. The venture capitalists, angel investors, and advisors all signal to you whether the startup has legs. They create credibility and show that 3rd parties have done extensive due diligence on the legitimacy of the company. Also, the feedback and contacts of the backers help the company along the way. If the only angel investor in a web company you’re looking at is the founder’s uncle who made his money in oil, there may be a problem. Ultimately, credible backers show you that the company is more than a science project in a garage; it’s a potential business.
Of course, not everything about picking a startup is quantitative. You may also have a gut feeling about the company and the people running the operation. Along with the above, listen to your gut. It might tell you something that you can’t quite verbalize, but you can feel from your prior experience.