Is there red flags to determine whether you'll get screwed if you work for a startup? investor contract terms. founder traits. etc.
- Who are the founders?
- Who is the CEO?
- Who runs the company?
- Do the founders have any experience running a startup?
- Who are the key investors?
- Do the investors have any experience mentoring founders running a startup?
- How much money did the company raise? Is that a reasonable runway?
- Did they actually form a company?
- Did they actually file the paperwork with the SEC (if US) documenting the fundraising?
- What employment terms are they offering?
- Are they especially onerous on the employee?
- Are they offering a ridiculous or a reasonable amount of equity in return for a reduced salary?
- Who is their payroll provider?
- Who is their bank?
- How are they tracking expenses and accounting in general?
- How are they measuring success (for whatever stage the company is in)?
You are not going to get a lot of detail about capital structure or investment terms unless you’re coming in as the CEO or a C level executive. But I have found that checking and verifying to learn that the company and executives are practicing just the basic mechanical business skills of setting up the business is a good “smell” test for how they are operating the company. You may personally decide that you’re ok with paychecks being written against a personal bank account, or that an LLC vs C Corp (again, US specific, apologies) is reasonable at this stage of the company. There's no single thing I look for, it’s a balance of questions and how the company / founders /CEO responds.
Just this week a colleague was negotiating final terms to join a startup. They asked to clarify a specific employment term that was verbally made as part of the offer, but not included in the employment contract they were asked to sign. The CEO reacted extremely inappropriately and, well, my colleague isn't joining the startup. My first few startups I was far too naive in assuming that if investors had invested what was claimed then they must have done some due diligence. Learning after the fact at one company that the Series A was actually not closed and the founders were financing the company off credit cards and home equity lines of credit lead me to leave after only six months.
what would fair terms look like? obviously it depends on role and experience etc.
but why not come up with early employee friendly startups.
- How many shares outstanding?
- Preferred stack total?
- Cash in bank
- Revenue and change in last 3-6 months
- Usage
- founders having low ethical stands → background check them
- founders having poor management skills → evaluate their managerial skills
- founders using their information asymmetry to screw you over → check the contracts
Let's dive into all three.
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# Background check the founders
Few do it yet it's highest impact as all problems come down to people problems. Find their last company or co-founder and email them to get on a 15' call. This saved me from almost partnering with a guy who had abruptly cut ties with every single company and founder he ever worked with.
Here's a good starting checklist:
1. Understand the context - Can you verify the person's employment, job title, pay, and responsibilities? - Why did they leave that job? - How do you know the person?
2. Evaluate the candidate - Tell me what it’s like to work with the person. - What are the person's biggest strengths and weaknesses? - If you learn they got fired, what’s the 1st reason that would come to mind? - Would you build a company with said person? Why not?
3. Opening - What else do I need to know about the person that I didn’t already ask? - Who else should I speak to about the person that can provide different insight?
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# Evaluate their management skills
Many founders make employee's life hell not out of malice but out of incompetence in managing themselves and others.
Best but highest effort is to run a ref check with someone they managed before.
Lower effort is to question your boss during your interviews: what's their management style? With what kind of people does it tend to not go well? Evasive and imprecise answers are a red flag.
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# Check the contracts
You can easily spot red flags by sanity checking a) salary and equity amounts and b) contract terms.
On amounts, founders will often say they're giving you an offer above market because you're special. The red flag is them not having answers when you say "how do I know it's above market?".
Good founders will be very transparent, and share exact examples from their own experience, and point you to equity and salary benchmark research articles or softwares like Pave.com.
On the terms, founders will always tell you they're giving you a "standard contract" when it's not the case, a sin they're learned from VCs! The best is get your hand on the YC standard docs and run a diff, but googling your way should do.
There's a lot of good articles online, so I'm only highlighting the two most important - Does your equity differ from the standard 4y vesting with 1y cliff without a good reason? - How long is the exercise window? 3 months is common but bad, 5 years is great. Personally I always negotiate this one to 10 years.
Overall, the YC has good resources, starting iwht https://www.ycombinator.com/library/F5-startup-compensation
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Hope this helps, let me know if I'm missing anything.