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In part 1, we covered some questions you should ask about your offer. In this second part, we’ll cover some things you should ask about the company.

Table of Contents

The Offer (see Part 1)

1. Can you give me the offer in writing?
2. How does my compensation compare to my peers in the company?
3. What are my options worth?
4. What percentage of the company do my options represent on a fully diluted basis?
5. Can I exercise my unvested options early?

The Company (answers below)

6. How much money do you have in the bank right now? How long will it last?
7. What was the company’s post-money valuation in the last round?
8. What are the investor’s preferences?
9. Who is on the board and whom do they represent?
10. Would I hire the CEO and board to increase the value of my options?

6. How much money do you have in the bank right now? How long will it last?

Investors call this runway.

If you’re making an essential contribution to the business, you should have a job as long as the company has runway.

Whether you’re essential depends on what the business needs today; e.g. assistants, recruiters, and salesman might not be essential if the company hasn’t finished building a product yet.

7. What was the company’s post-money valuation in the last round?

Let’s say the company’s post-money valuation in the last round was $10M. If the company is acquired for $100M, the acquisition value of your options should increase roughly 10x, assuming the company didn’t incur any dilution after the last round.

8. What are the investor’s preferences?

If the acquisition price isn’t greater than the investor’s preferences, the common stockholders won’t see a penny when the company is sold.

So don’t join a company with $100M in preferences unless you expect the business to sell for a lot more than $100M.

9. Who is on the board and whom do they represent?

Besides the CEO, the board has the greatest opportunity to increase or destroy the value of the company’s shares.

The answer will also tell you whether the investors dominate the board.

10. Would I hire the CEO and board to increase the value of my options?

The CEO and the board can easily destroy the value of your options through incompetence and/or greed. You need to ask yourself:

1. Would I hire the CEO and board to increase the value of my options? Identifying great people is an aesthetic skill, like seeing the beauty in a painting. Most of us don’t have this skill. And those of us who do still get it wrong a lot. Get help from someone who knows how to identify great people.
2. Do I trust the CEO and board to treat my options like their own? Don’t join the company if you don’t trust the CEO and board to avoid opportunities to treat their stock better than yours.

We’ve been answering this question a lot lately:

“I have a job offer at a startup, am I getting a good deal?”

This isn’t a comprehensive answer—just some questions we would ask if we had an offer.

If you don’t understand your offer, get a lawyer. But—right or wrong—most people don’t hire lawyers to review their offer letter.

Table of Contents

The Offer (answers follow)

1. Can you give me the offer in writing?
2. How does my compensation compare to my peers in the company?
3. What are my options worth?
4. What percentage of the company do my options represent on a fully diluted basis?
5. Can I exercise my unvested options early?

The Company (see Part 2)

6. How much money do you have in the bank right now? How long will it last?
7. What was the company’s post-money valuation in the last round?
8. What are the investor’s preferences?
9. Who is on the board and whom do they represent?
10. Would I hire the CEO and board to increase the value of my options?

1. Can you give me the offer in writing?

The only good answers to this question are,

“Yes, an offer is on the way.”

and

“Let’s work out the major points and we’ll give you a written offer. We don’t want to start things off on the wrong foot with an offer that is way off the mark.”

2. How does my compensation compare to my peers in the company?

Some companies pay more, some companies pay less, but an offer is fair if your compensation is in line with you peers’.

Your total compensation consists of salary, options, vesting, cliff, acceleration, bonuses, and severance. And a peer is someone who (1) joined the company at roughly the same time as you did (e.g. halfway between the Series A and Series B) and (2) has roughly the same title you do.

Most employees have a 4-year vesting schedule with a 1-year cliff, no acceleration, no bonuses, and no severance. The exceptions are for Vice-Presidents and higher (and founders).

By the way, your cliff may be longer than the company’s runway, but c’est la vie.

3. What are my options worth?

First you have to know how many options you have and how they vest. Let’s say you have 1000 options and they vest over 4 years. So you get 250 options a year for 4 years.

Now you have to guess what an acquirer would pay for your shares. Let’s call this the acquisition share price. Setting the acquisition share price to the preferred share price of the last round is a good start—let’s say it was $1/share.

Now multiply your options (1000) by the acquisition share price ($1) to calculate the acquisition value of your options: $1000. Since the options vest over 4 years, the annualized acquisition value is $250/year. And while the acquisition value of your options might be $1000 today, you’re naturally hoping that the company’s acquisition share price increases over time.

If the company has gained a lot of value since the last round, you might set the acquisition share price higher than the preferred share price. If the company has not has not done well since the last round, you might set it lower. Either way, you will have to ask the company for the preferred share price in the last round. Or if someone has offered to buy the company for $50M since the last round, I might use $50M to calculate an acquisition share price.

Finally, you will have to pay for your options—they’re not free. Options have a strike price—that’s what you pay for your options. Sometimes it’s much lower than the acquisition share price and can be ignored. Sometimes it’s high and can’t be ignored—high strike prices are becoming more common due to high-valuation rounds (Facebook), founder cash-outs, and high 409A valuations.

4. What percentage of the company do my options represent on a fully diluted basis?

Most people think this number is important—it’s not. You care about the value of your options, not your percentage of the company. Your percentage will decline over time but the value of your options will hopefully increase.

Focus on the how many options you have and the acquisition share price (see question 3 above). Terms like percentage ownership and valuation can fool you.

5. Can I exercise my unvested options early?

This is for advanced Venture Hackers only. Don’t do this without an accountant and/or lawyer.

Exercise your options early if you want to start the clock on capital gains tax eligibility for your stock. Startup pros usually exercise their options early to lower the expected value of the taxes on their stock. In certain cases, you will pay less taxes in an acquisition or IPO if you exercise your options early.

Use an accountant or lawyer. Don’t sue us if this blows up in your face.

This post continues in Part 2.

Related: Other folks who have tackled the topic of “questions to ask before you join a startup”: David Beisel, Dharmesh Shah, and Guy Kawasaki.

This is the first in an ongoing series called Books for Entrepreneurs. We’ll use these posts to recommend books that we’ve found useful as entrepreneurs (duh).

Our first book is Bargaining for Advantage by G. Richard Shell. Richard is a professor at Wharton and this is my favorite negotiation book period. It synthesizes the principled negotiation of Getting to Yes with the psychology of persuasion in Influence.

Jim Pitkow recommended this book while we were raising Songbird’s Series A. Since then, I have referred to it again and again while writing posts for Venture Hacks and answering questions from entrepreneurs.

Make sure you don’t read this book if these questions are irrelevant to you: Should I be the first to open? Should I open optimistically or reasonably? What sort of concession strategy works best?

Here’s a small sample of what you’ll find in Bargaining for Advantage:

What is leverage?

Everybody talks about leverage in negotiations but very few people know what it means. My favorite chapter, “Leverage” defines it (emphasis added):

“A better way to understand leverage is to think about which side, at any given moment, has the most to lose from a failure to agree… the party with the most to lose has the least leverage; the party with the least to lose has the most leverage.

“Leverage often flows to the party that exerts the greatest control over and appears most comfortable with the present situation.

“To gain real leverage, you must eventually persuade the other party that he or she has something concrete to lose in the transaction if the deal falls through.

“Positive leverage: Every time the other party says “I want” in a negotiation, you should hear the pleasant sound of a weight dropping on your side of the leverages scales. [Positive leverage is the ability to provide things your opponent wants.]

“Negative leverage: Threat leverage [that] gets people’s attention because… potential losses loom larger in the human mind than do equivalent gains. But a word of warning is in order: Making even subtle threats is like dealing with explosives. [Negative leverage is the ability to hurt your opponent.]

“Normative leverage: [Normative leverage is the ability to apply general norms or your opponent's standards and norms to advance your position.] You maximize your normative leverage when the standards, norms, and themes you assert are ones the other party views as legitimate and relevant to the resolution of your differences. Attack [your opponent's] standard only as a last resort.

“This way of thinking about leverage also points to more sophisticated ways of enhancing your leverage that go beyond just improving your BATNA. Your goal is to alter the situation (or at least the other party’s perception of the situation) so you have less to lose, the other side has more to lose, or both.”

Bargaining for Advantage includes detailed examples that make the theory of leverage concrete.

Read the book to learn about opening, making concessions, closing, the rogue’s gallery of tactics, …

Related: The Monk and the Riddle, Inside Intuit.

More wisdom from Randy Komisar’s The Monk and the Riddle (emphasis added):

Passion

“So why were they doing this? Why was it worth their time? I am always amazed that venture capitalists don’t ask that question. Perhaps at this point everyone assumes it’s obvious: to get rich.

“Passion and drive are not the same at all. Passion pulls you toward something you cannot resist. Drive pushes you toward something you feel compelled or obligated to do. If you know nothing about yourself, you can’t tell the difference. Once you gain a modicum of self-knowledge, you can express your passion…

“[Passion] is the sense of connection you feel when the work you do expresses who you are. Only passion will get you through the tough times… It’s the romance, not the finance that makes business worth pursuing.

“I can’t get excited by a business whose biggest idea is making money.”

Venture Capital

“Most VCs (even if they insist otherwise) simply don’t have the time to give close management attention to the companies they’ve funded. In addition, in contrast to the original VCs, who often gathered years of operating experience prior to becoming venture capitalists, many partners in today’s firms have no executive management experience. They could be working on Wall Street as easily as on Sand Hill Road.”

“I have never seen a company fail for having too much money. Dilution is nominal, but running out of money is terminal.”

Excellence

“[Mediocrity is] the biggest risk of all in Silicon Valley… Instead of managing business risk to minimize or avoid failure, the focus here is on maximizing success. The Valley recognizes that failure is an unavoidable part of the search for success.

“[Excellence] should be your primary measure of success… not simply the spoils that come with good fortune. You don’t want to entrust your satisfaction and sense of fulfillment to circumstances outside your control. Instead, base them on the quality of what you do and who you are, not the success of your business per se.”

Leadership

“Management is a methodical process; its purpose is to produce the desired results on time and on budget. It complements and supports but cannot do without leadership, in which character and vision combine to empower someone to venture into uncertainty. Leaders must suspend the disbelief of the constituents and move ahead even with very incomplete information.

“Many ideas in this Valley happen against all common sense. It’s good when entrepreneurs are a little bit deaf and blind, but if they’re completely deaf and complete blind—and many are—they’re unlikely to learn enough from the market and their advisors to make their vision a reality.”

I’m reading Randy Komisar’s book, The Monk and the Riddle.

He wrote it before he became a partner at Kleiner Perkins and I like his description of the Rocket Ship model of investing (emphasis added):

“Over the last several years… a new investment model has taken hold. Fill each startup with rocket fuel as fast as possible and blast it into space. The ones that fly, fly, and if the rest of them blow up, c’est la vie.

“In fact, the Rocket Ship Model of startup investment has recently produced many of the most prominent Valley successes. But for every one of them, there are many potentially viable companies that might have eventually prospered if they had been incubated longer.

When too much money is pumped too fast into a startup, there’s no room for mistakes. The initial product and the initial fix on the market have to be right. There’s no way these companies can stop and reconsider what they’re doing with out a great deal of pain.

“You have to be able to survive mistakes in order to learn, and you have to learn in order to create sustainable success. Once the market is understood and the product is fully developed, then move fast and hard.”

Some more snippets from the book:

“[Angels] pay for the privilege of helping the company.”

“If I invest, I am prone to think like an investor, favoring my return over what’s best for the team and often its long-term business.”

“In a privately held startup I don’t favor the investors over the founders. This is probably the crucial way my thinking differs from a VC’s.”

“Business is one of the last remaining social institutions to help us manage and cope with change.”

“The rules of business are like the laws of physics, neither inherently good nor evil, to be applied as you may. You decide whether your business is constructive or destructive.”

There were a lot of good comments on yesterday’s Do you know any idea investors? post. Here’s a few of them.

Michael Staton says:

“I’d say if you can’t bother to build it yourself, get potential customers lined up, build revenue on an easier offshoot, or convince someone else to build it in their spare time, then you should reevaluate whether you are an entrepreneur.”

Luca says:

“The idea is the easy part. If you are a first-time entrepreneur, try scaling down your concept to something whose value you can prove with friends & family money, then go to professional investors. If your idea does not lend itself to such an approach, try your hand first with something you can bootstrap.”

Ben says:

“An idea has a dollar value of $0. If you don’t believe in the idea enough to commit your cash/sweat equity to build it or a version of it to show it can work, why should friends, fools and family?”

A reader asks:

“I’m an entrepreneur looking for seed investment. All I have right now is an idea and a pitch. I’m presently pitching friends and family and it has been very positive. Do you know any other idea investors I should approach?”

Investors want to see products and preferably traction unless you already have a significant track record. But,

If you only have an idea.

If you have no traction, track record, or product—if you have nothing but an idea for a product in a large market, the only people who will meet you are:

1. Family and Relationship Investors: People who already know you and are willing to bet on you, based on your history together. They’re not betting on the company, they’re betting on you. They wouldn’t invest in the company if you were replaced by someone who was equally effective. Todd Vernon calls these people family and relationship investors.
2. Idea Investors: People who believe there’s a big opportunity to serve the customer because they understand the customer as well as you do. Perhaps they’ve noticed the same opportunity as you but they haven’t done anything about it.
   
3. Once Removed Investors: These investors trust or regularly co-invest with one of your family, relationship, or idea investors.

These investors sometimes have little to no experience investing in companies, but that is not an insurmountable hurdle. You will need traction, a track record, or a product to get meetings with other traditional seed stage investors.

In general, the more you need money, the less likely you are to get it. But making something out of nothing is what entrepreneurs do.

Another option: Cold call funds.

There are a few funds like Y Combinator, Seedcamp, and TechStars who will look at applications from anybody doing anything. But you will probably need traction, a track record, or a compelling product to capture their interest—ideas need not apply.

Salesmen are an exception.

Salesmen are good at getting people to comply with their wishes. That’s what it means to be a salesman. Great salesmen can get meetings and raise money with just a large market and an idea (and maybe a sprinkling of track record).

Brad Feld recently proposed good criteria to distinguish true followers from tire-kickers when you’re raising money:

“While you can’t contractually commit the supporting investors [followers], you can usually separate the real ones from the tire-kickers (or—more generously—the call option people). Committed supporting investors are going to let you use their names with potential lead investors, will engage in active networking, and will name a specific amount they are willing to invest.

“These supporting investors are typically called “soft circles”—you’ve got a commitment from them, but it’s not a legally binding one. A soft circle will always have a dollar amount attached to it [emphasis added].”

True followers will also make strong introductions to potential leads.

Learn more about followers and leads in How do I find a lead investor?, Parts 1, 2, and 3.

“As for the advice? Lots to choose from. Think big, or maybe small.”

— John Abell, on Startup School 08

Advice is for learning, not copying. Don’t follow our advice.

Advice can be ignored. One of my favorite advisors once told the founders of YouTube that, “People don’t want to watch video on their computers.”

Advice is useful if it helps you perceive and evaluate the outcomes of today’s actions. That’s what it means to be wise. But advisors can’t be wise for you, especially since they don’t know your values, goals, and environment.

Understanding advice isn’t as useful as understanding why you’re supposed to be following it.

Advice tells you how to play the game. But there’s more than one way to play the game in chess, football, business, and life.

Advice distills the experiences of the past. But what worked yesterday will not work tomorrow. Today is not for copying the past. Today is for testing hypotheses whose outcome is unknown.

Advice asks for mimicry: “This works for me so you should do the same thing I do.” But the essence of strategy is to perform different activities than your rivals do. Strategy requires differentiation—not mimicry.

Once you’ve gathered advice, take the course that you think is best—you’re the only one who will be faced with the consequences.

“You can’t be normal and expect abnormal returns.”

– Jeffrey Pfeffer, The Human Equation

(Video: Write this… or that… or maybe)

John Manoogian sent me this great trailer for The Player, a satire of the movie making system in Hollywood: