But even in the most desperate employment situations, the risks – and potential rewards -- of joining a startup should be carefully considered no matter what your age. Whether you’re presently employed or unemployed, it’s a good idea to check in with an experienced financial planner or tax expert to get their feedback on where you stand financially. It’s not a bad idea to grill them about questions they’d ask if they were in your shoes.
Anytime you look for a job, it’s your responsibility to kick the tires of the organization before you join. With a new company, that’s particularly important because they don’t have a track record, and remember that the U.S. Small Business Administration estimates that half of all new businesses fail in the first five years. So be prepared to ask the following:
Who’s running the show? If you’re fresh out of school, you’re not as likely to have the networking experience of someone who’s been working 5-10 years longer than you have. But that’s no excuse not to do your homework. An enthusiastic founder with an interesting business idea isn’t enough. Consult professors, professional associations, news reports, experienced friends and colleagues in that industry and any other resource you can find to find out about the key people in this venture, their experience, and most important, their funding.
Are they selling something their customers can’t wait to buy? Whether the startup is creating a product or service for consumers or business, don’t go with the founder’s praise of his/her creation. Become a student of that industry – see what companies currently lead the market, understand why they’re ahead now but what their vulnerabilities might become later and where the startup fits in. If you can’t figure out why this new company will blow away the market, maybe lenders and customers can’t either.
What’s the new company’s financial position right now? If you get in for a formal or informal interview, don’t be afraid to ask how well the company is funded and be prepared to confirm it through back channels. The best way to start is to ask the founder about funding. However, expect some generic responses. Most founders want to keep their financing and other matters confidential to all but the most senior or desired hires. Many startups struggle with getting capital which is why you’ll see companies close their doors before they even have a product in the marketplace. If they say they’re waiting for funding from investors, be very wary unless you know this is a team that’s had unusual success securing funding in the current tough economy. And don’t believe just what you’re told. Use whatever resource you can to back up this information.
See where the future money to operate the business is coming from: It’s not unusual to see young firms “bootstrap” their operations in the early days – that means plunging in personal savings or family contributions. Afterward, startup companies may approach angel investors (generally, rich strangers who invest less than $1 million of their own money in young, “early stage” companies that look promising) and afterward, venture capitalists (VCs) that pool even more substantial sums that look for specific industries to support. While some VCs invest in early-stage companies, they tend to look at slightly more mature firms that look like good candidates to go public, which means a big payday for everybody involved. What does this mean for a job seeker? Ask who these investors are, and check to see if they’re known for a good track record in the industries where they focus. Also, learn the language of “rounds” of financing (successive infusions of capital that help the business through all of its pre-profit growth stages). Bottom line, good companies attract smart investors that stick with them.
Who’s on their board? Boards of directors exist for companies as small as a couple of people, and it’s a good idea, even if they’re known only as “advisory” boards. It’s always a good idea to ask about them just to see who’s on the board, what function the board serves and whether it’s a good mix of investors and industry experts. You want to see smart people on a board (not just cheerleading friends and family members) who understand the company’s business and can provide tough advice that helps companies grow.
What will I get out of this besides a paycheck? Startups are risky ventures. You need to understand what personal and professional rewards you’ll get from joining up. And while people dream of getting in on the ground floor of the next Google, you may gain greater value from the chance to hold a more senior leadership position in an organization that’s trying something completely new. You ultimately will have to decide what value this new opportunity has for you and what safety nets exist if it fails.
June 2010 — This column is provided by the Financial Planning Association® (FPA®) of Puget Sound, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Puget Sound if you use this column in whole or in part.
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