What questions to ask when interviewing for a startup offering equity
I'm interviewing for a Lead Developer role in a company that is asking me to take a cut in salary in exchange for a share of equity over 3 year period.
I'm not necessarily opposed to the idea, but I know precious little about the business side of startups, so I'm not sure how to spot if I'm being offered a good deal.
What are the appropriate questions to ask during interviews that can help me understand what the offer is, and the associated risks?
ie., is it appropriate for me to ask detailed questions about the long-term business plan?
Are there some warning signs I should look out for?
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While your question is good, it's not really answerable. You won't be able estimate the risks from those answers because just like you embellish yourself they embellish themselves. Unlike their relationship with investors, the relationship with employees isn't as open when it comes to business risks & dangers because there's no fiduciary duty of full disclosure. – Dnbrv 12 years ago
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Read this and linked articles for an interesting take [Should I invest my savings in a Startup?](http://blog.asmartbear.com/invest-savings-startup.html) Although you're not talking about investing savings you putting in 'sweat equity' (reduced salary) so many of the points about the chance of success apply. – Ryan 12 years ago
2 Answers
Are there some warning signs I should look out for?;) They offering you equity in exchange for a cut in standard rates. Realize most start ups do not work out, and without 5% of equity you do not have a blocking minority. Are you willing to give up the money WITHOUT (!) any return on the shares? Are you willing to make the job with the shares worth 0? That is most likely, and you no way to block any decision they make.
Besides that it is not answerable. Well, it is - a Lead Developer in a startup should be a founder with equal treatment. If they look for a lead as a hire, then they are in tech mess (no technological lead on board) OR realize it is over their head likely (messy codebase, bad practices). If you are lucky they got money and are funded and the investors want better quality. Then I personally would gladly take an equity share - ON TOP of my regular market rate salary.
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How much equity should a startup give to a hired gun? 5% is an executive-level compensation. – Dnbrv 12 years ago
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No, 5% is a blocking minority in most juristisdictions. WIthout tons of shareholders and blocking minority your shares are essentially worthless as you have ZERO say on board decisions. This is why I put up the number. Given the described position - as short as it is - I would likely go for founder status OR full market rate + shares, assuming the shares turnw worthless anyway (60% chance, i think, given stats how often startups totally fail). – Net Tecture 12 years ago
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Otherwise - way more likely - I would walk. The fact that they look for a lead developer now sounds fishy (no technical founder on board?). And personally I got burned with enough startups that I prefer my daily consulting rate to end in my bank account and do my own stuff. – Net Tecture 12 years ago
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please define "blocking majority" how is 5% vote any better than 1% or any worse than 25% (as far as voting on a decision) – Tim J 12 years ago
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Please learn how to use google. Blocking Minority is a legal term for stock based companies in most jrurisdictions, so I do not have to define it. http://lexicon.ft.com/Term?term=blocking-minority, http://dictionary.cambridge.org/dictionary/business-english/blocking-minority - normally that level is 5%. It means for example you can DEMAND a seat on the board of directors and have a say in strategic decisions. 1% is an idiot with shares and no say. – Net Tecture 12 years ago
Find out where the money is coming from currently and in the future. What is the company worth right now?
Once you're made an offer, ask for legal documents to have them reviewed by a lawyer before sigining. Like you said, this is new to you.
Any hesitation, concerns or push-back on their part is a red flag.
