Joining an early-stage startup: what you need to know

I was browsing Twitter when I saw this tweet. I couldn’t summarize everything I wanted to say, so I decided to write a blog post about it. I’ve been talking to lots of startups whenever I’ve been looking for a job, and there are always certain things I do to evaluate if it’s a good opportunity.

Joining an early-stage startup means being at the same time an employee and an investor of the same company, so you always need to think from both perspectives.

From an employee’s point of view, you want to check all the things you’d check from any other job: salary, working conditions, holidays, team, plus all the position-specific matters such as tech stack if you’re a developer, etc. Some general questions I usually ask:

• “Why do you have this position open?”. This will tell you more about the background story and what’s their current stage.
• “What’s the biggest challenge the company is facing right now? How do you think I can help to fix that problem?”. This will tell you what are the main struggles they are facing and how strategic is your role inside the company.
• “What do you expect from me?”. It’ll help you understand what they want from you, what are the problems you’re going to be working on, and how they are going to evaluate your performance.

That’s the easy part, but how does one think like an investor?

How to think like an investor

There’s one thing that matters to investors: their money. If you are joining an early-stage startup you should also think about the return on investment of the money that you’re putting in the company. You’ll be offered either stock options, or being a co-founder and owning some shares, or something else. In any case, you’ll end up owning a piece of the company.

Think about how much money you’re putting in. Is it a part of your salary? Are you purchasing some shares? If you’re getting stock options you’ll have to purchase them when they vest. How much is that?

Once you have that number, think about when would you want to have a return on that money and what is the payout you’re expecting to get off those shares. What will be the valuation of the company in 5 or 10 years? What will be your share of the company by then, considering that there’s going to be dilution in the future?

Once you know how much money you’ll put in and how much you’re expecting to get in return, you can go ahead and calculate the ROI of the investment. This is just an estimate, but it will tell you if it’s worth joining the company.

After doing the math, if you consider your investment is going to be profitable and it’s worth taking the risk, it’s time to dive deep into the Due Diligence (DD). The DD process helps you understand better the opportunity and see if the company has the potential to become a good investment.

Due Diligence for early-stage startup employees

Due Diligence is about gathering facts that will help you make a decision. It is about getting information and asking the right questions. When digging out information, ask hard and uncomfortable questions. It’s easy to talk the talk and sell an idealistic world where everything is a success, but it’s only when you ask the tricky and uncomfortable questions and try to corner the founders that you’ll see if they can pull it off. Ask specific questions and demand specific answers. If they avoid giving a specific answer, ask again. Here are some of the things to consider:

• Do a background check of the founders. Bonus points if they’ve sold a company before or if they are well-known in the industry. Do not hesitate to call previous employees or colleagues and ask them a few questions. In some countries contacting these people might require express consent from the founders.
• Check if the company has had any funding rounds. Who are the investors? Are they well-known? Do some research about who they are and what other companies they’ve invested in. If you can’t identify any of the companies they’ve invested, that’s a red flag. Check how much money did they rise, at which valuation and ask if it’s possible to see the CAP table of the company.
• Ask what’s the runway, so how much time can the company survive with the money they currently have in the bank account, the revenue they have, and the current burn rate.
• Hire a lawyer and check that the company is financially healthy. Lawyers can easily see if the company has some pending payments that have been claimed. Pay special attention to pending payments to the tax authorities. This might seem unnecessary, but it can save you a lot of money in case there’s something wrong with the company.
• What problem are they solving? Is it a big problem? How big is the total addressable market (in dollars)? If the problem is very small (not worth paying for it, there’s already good solutions, etc) the total addressable market is going to be small.
• What is the value proposition? How are people currently solving the problem the company is trying to solve? They need to provide a solution that gives an advantage over the current ways people are trying to solve that problem. This solution needs to be validated. The best way to validate an idea is to get money for it, so if people are willing to pay for that solution chances are that the company is on the right path.
  Also, try to dig as much information as you can about the validation process. Sometimes the first customers might be friends or acquaintances that give the impression that the idea is validated, but when they try to sell the product to people they don’t know they hit a wall.
  Another common pattern I usually find is that a company sells some new cool technology to solve a problem that does not exist. Going from a solution to a problem is much harder than going from a problem to a solution. They should tell you what’s the problem they are solving, not the problem that they could be solving.
• Who are the competitors? What makes the product unique and why does it matter? If there’s a lot of competition it’s a good sign and indicates that the market is big. Avoid companies that tell you that they don’t have competition. If someone tells you that they don’t have competitors they are either solving a problem nobody cares about or they have not been able to identify their competitors.
  When asking about why their solution is better than their competitors’, do not accept generic answers such as “they just suck, we are better”. Dive deep into the details. How do they know that customers are preferring their solution? Does the company have an unfair advantage over competitors? It’s a good indicator if there’s a similar company operating in another country. That already tells you that there’s probably a product-market fit.
• What’s the business model? How do they make money?
  If there’s no clear way on how to make money, the company will most likely fail. If you get answers such as “we’ll sell data to partner X”, it most likely isn’t a good business model unless you’re joining the new Facebook.
  Ask questions about pricing. Is it recurring? What kind of contracts do they usually have? How do they determine the right price?
• What’s their go-to-market strategy?
  A good go-to-market plan makes you understand better why the company is promoting their product to a certain market and lays down the details on how they are planning to do it.
• Where is the company going to be in 5 years?
  Going back to the investment part, you want to know what’s the direction of the company and what are their ambitions. Are they planning to conquer other markets? Which ones? Why those markets?
  Ask about their exit strategy: when and how are they planning to sell their company?
• How are they currently doing sales and marketing?
  Where does the company get its customers from, and what’s a typical customer acquisition cost (CAC)? What’s their ideal customer profile? What is their marketing strategy? Try to go deeper and ask concrete questions to see if there’s any red flag or if you find something that sounds weird.
• How do you make sure they talk enough to their customers? How do they incorporate that into the product development process?
  Deeply understanding the customers’ needs should be the main job of any early-stage startup. The founders and first employees should be obsessed with getting feedback from their early adopters and trying to understand their pains.

This covers most of the questions I ask when I evaluate an early-stage startup. Do not expect all the answers to be spot on, but this will help you get a better understanding and have an overall picture of the current situation.

You can follow me on Twitter or check out my website xavimagrinya.com