Questions to Ask When Interviewing at a Startup

1. What equity will I get and what form will it take? 2. What are the total outstanding shares in the company (fully diluted)? 3. What is the total dollar value of the investor liquidation preference?

You can get 100,000 options vesting over 4 years, for example, but this could represent potentially 1% of the company (if 10M shares are outstanding) or one-tenth of 1% if 100M shares are outstanding or any other percentage depending on the total capitalization structure. In the one case, on a $100M acquisition (assuming pro rata participation by all parties), you would get $1M and, in the other, $100K. Key point: the absolute number of shares is much less important than the percentage they represent of company ownership.

Same scenario but assuming preferred stock in place holding $50M of liquidation preference and full participation rights beyond the preference amount: in the $100M acquisition scenario, your 100K of options would net you $500K if there are 10M shares outstanding (1% of the $50M that is left after payment of the $50M liquidation preference) and $50K if there are 100M (.01% of the net $50M amount). Key point: outstanding liquidation preferences can (and often do) materially reduce the equity return to common shareholders, particularly if the company is sold in a marginal acquisition (in an extreme case, the preferred investors can force a sale where founders and employees get nothing).

Of course, if you haven't vested in full, and you don't have any accelerated vesting on acquisition, the numbers get shaved even more. Say you worked 2 years at the startup on a 4-year vesting schedule, you would net $500K in the best case under the above examples (1% potential ownership that is 50% vested, no liquidation preference) and $25K in the worst case (.01% potential ownership that is 50% vested with $50M liquidation preference).

These days, many who join startups as employees after the early stages are generally aware of the above issues but it never hurts to remember them if the major reason you are joining is for the hope of a large potential equity payout (if the terms you get are good apart from the equity, and you see it as more of a "tip" if things happen to go well, then these issues are of course much less important to you).

Capitalization questions are awkward to raise in an interview but are important if equity is key to the offer. Interview as is best for you, then, but make sure to consider these points in deciding how to finalize your deal.

No-one ever objected. In fact, most places seemed glad I was interested and thought it was a reasonable request. It was pretty common to be asked to wait until the second interview, though, as most places wouldn't be kitted up to do this without notice.

This is a great question for an engineer to ask. Being able to see if the code is smart (e.g. using shorthand instead of multiline logic), neat and documented is a great way to get a feel for how your potential future coworkers work. They've spent the last two to four hours grilling you and know you, how you code and how you solve problems pretty intimately -- why not get to know them better, too?

These days, equity is for founders (if you're serious) and prospective employees who didn't get the memo about the .com bust (if you're both fools). A fixed salary at a credible professional rate is for prospective employees you respect, possibly with some clearly defined bonus structure.

YMMV, but I haven't seen any exceptions to this from either side of the table in a long time.