Joining a startup — particularly an early-stage one — can be a risky bet.
With news of layoffs still pouring in — from large tech companies like Amazon to financial incumbents like Goldman Sachs — where should candidates be looking for work? And how can they assess which companies are likely not to go under?
We asked founders what candidates should consider before joining a startup in 2023.
Look for companies with a realistic path to profitability
As capital is becoming more scarce, more capital-efficient businesses have higher operating margins — and a realistic path to reaching revenue/breaking even is favoured by investors in current market conditions.
Even more than before, candidates should understand if the startup can demonstrate a realistic path to getting to profitability. This requires you to educate yourself and get information from the company on things like monthly burn rate, how much it costs them to acquire customers versus how much those customers spend with the business (often expressed as the LTV:CAC ratio, or the customer lifetime value to customer acquisition cost) and net revenue growth. Ask them for numbers. If the company isn’t open and transparent about things like cash runway, stay clear.
If the company isn’t open and transparent about things like cash runway, stay clear
In terms of resources, many VC funds have built pretty decent content hubs. These can be a good source of information on things like useful benchmarking tools (what does good look like), how talent is rewarded (am I being compensated well enough?) and how to evaluate earlier-stage startups and understand the key metrics.
Stefan Bader — cofounder of Cello, a user-led growth platform for B2B SaaS
Understand how the company and the sector it operates in is performing
Ask the hiring manager about basic financial details of the company: Is it profitable? What is the funding structure? If it's VC-backed, when is the next round supposed to happen? In some cases, hiring managers may avoid these questions, which could suggest that the startup lacks transparency. It’s up to the candidate to figure out whether they want to take the risk or not.
Then comes the bigger picture. What’s the current situation of the whole vertical the company operates in? Is it booming? Or is it in danger? A decreasing vertical can be an early sign of serious issues for a startup; understanding this in time can prevent you from joining a sinking ship.
But then the factor of risk comes into play. Some of us thrive in risky environments while others look for stability. What’s your risk profile? What kind of professional environment are you looking for? And if risk is what you want, make sure you’ll be properly rewarded (your salary and equity should be appropriate to the risk level) if things work out.
Marek Talarczyk, CEO at Netguru, a digital acceleration company
Ask about equity
People join startups because they believe in the company — as well as their own ability to contribute to its success and be rewarded for it. Equity is still a cloudy issue in Europe, with many candidates still unsure of what having an equity stake actually means.
It’s important to understand from your employer exactly how much equity is being assigned to you and what the terms are. Depending on the company’s performance, your equity might make up a significant proportion of your total earnings. Don’t be afraid to ask questions to assess the level of risk, as well as the value or potential value of the equity offering.
Some questions to ask about equity are:
- What is the current company valuation my equity is based on, and what approximate revenue multiple is associated with it? Where is this from? How has this changed from one year ago to now?
- How much of the fully-diluted share capital will I own?
- What type of equity scheme am I enrolled in?
- And what are the terms of this scheme? Leaver clauses, vesting schedule, strike price and value (both historical and projected) are especially important here.
- If the plan has options or warrants: what does exercising your options look like at the company? How often is it and how does that affect the taxes you may pay on the equity and its payouts (now and in the future)?
Equity is a part of total compensation, so it’s helpful to think about it in conjunction with the rest of your compensation and other benefits.
- How much total compensation do you think is fair for your current role and seniority? Do your research on salary and equity benchmarks if you don’t already know, and remember that companies may be strapped for cash right now, so it might affect the amount of cash they are able to offer. Determine a balance of cash and equity that works for you with this in mind.
— Yoko Spirig, founder and CEO of Ledgy, an equity management platform for startups
Don’t discount early-stage companies
Later stage no longer implies more stability in the world of startups. Many of the current growth-stage companies are no longer investible from an investor point-of-view. There’s a rush to become more capital-efficient and default-alive (when a company is predicted to make a profit with its current resources, without any further investment).
I see pre-seed and seed stages being hot right now and I would argue that now is a great time to start or join an (early-stage) startup. Many funds have pivoted away from Series B+ growth rounds, and are now doing smaller ticket sizes.
There’s a lot of great talent on the market as a result of the layoffs and big tech hiring freeze. Things are also getting more serious. When joining these newly founded companies, you’ll have fewer “startup tourists” in the teams you’ll join. This can be a plus from a career development point-of-view, as you’ll likely be working with teams that are more talented and, like Elon would say, “hardcore”.
Stefan Bader — cofounder of Cello, a user-led growth platform for B2B SaaS
Assess whether you can learn a lot from this company
The chance of success for startups is low and you tend to get paid less, so make sure that you come out of the experience sharper, wiser and more hireable because of the experience. Look for fast-paced environments where you have the opportunity to learn from an amazing direct manager and have lots of different things to get stuck into.
To assess this, ask questions in an interview such as: What are the immediate challenges of the company? What does the team I’m joining look like and how do they interact? To what extent does it interact with other functions? What are my immediate objectives? Is there anything else you think someone with my kind of skill set could contribute towards?
Also, do your research on the founders. Look them up on LinkedIn and see whether they’ve been featured in the press or done a podcast. Figure out what they value and what their purpose is. This isn’t the time to mindlessly work for any organisation; join a company that’s making a difference.
Arosha Brouwer, cofounder and CEO of employee wellbeing software Quan
Compare the compensation offered by a company to market data
When setting your own salary expectations, look at the market data for the role you’re applying for and see whether it matches up to the salary offered by the company. Keep in mind, however, that the room for negotiation on the candidate side is lower, given that there is less of a competitive hiring landscape compared to previous years and budgets are tighter.
Startups that are pre-seed and seed have not really slowed down and still have money to hire and pay people — but note that the high salaries of the past are gone for now.
The good news is that a pre-seed or seed-stage company that has raised, or is raising money now, will most likely have done so at a realistic valuation. This means that employees getting stock options/equity from a company that raised recently will have a higher chance to get a better cash out in the future with the equity upside.
— Virgile Raingeard, cofounder and CEO of compensation benchmarking tool Figures