Roy Cohen, career coach and author of “The Wall Street Professional’s Survival Guide,” says anyone considering a position with a start-up enterprise should verify how much equity they will receive and what that equity represents as a percentage of overall equity.
“Will your share be diluted if additional rounds of funds are raised? Will the equity be restricted or incentive, common or preferred?” he asks, noting that each type of equity is treated differently with respect to taxes. Also remember that your equity “will have zero value if the venture collapses or there are restrictions on when and how you can redeem your shares,” he says.
Other questions he recommends asking include:
–How was the base salary determined? You should be able to determine if it was set based on a logical and thoughtful analysis and is in line with your colleagues’ compensation, Cohen says.
–Has there been any turnover in key staff? How does the team work together? How does it handle conflict? “The goal is to see how people get along to achieve a shared goal. It is also an important question to ask to determine if management is mature enough to lead this important initiative,” he stresses.
–Is the business self-funded, or does it have outside investors? How much has been raised to date and how much is remaining? “Some start-ups, despite the best of intentions, fail to raise enough capital or burn through too much too soon,” Cohen explains. “This question allows you to determine how secure the venture is. Will there be enough to fund at least a year so that if the startup fails you won’t look like you exercised poor judgement by accepting a risky and short-lived proposition?”
–Does the CEO/founder have a successful track record? “If not, then you have no reason to believe that this venture will managed with insight and expertise,” he cautions.
–Is the company’s valuation realistic and how was it determined? “If a company is over-valued, then a competitor could easily come along and achieve momentum in the same space on a far smaller investment,” he notes.
–What is the company’s exit strategy? “Typically, the range is viewed as five to seven years to achieve maximum value,” Cohen says. “If you suspect it is shorter then you have reason to question its strategy and business model.”
(Article written by Kathleen Furore)