9 Questions You Need to Ask Your New Boss

Original Address: Nine Questions to Ask a Startup

by Guy Kawasaki

Most of the information you can find about asking questions during recruitment is geared towards employers, not employees. (I feel somewhat guilty about this imbalance too, having written "The Art of Recruiting" parts 1 and 2.)

Let's switch perspectives. Before leaping into the "infinity and beyond" that Buzz Lightyear speaks of, let's discuss what an excellent candidate should ask a venture-backed private startup before committing. Note: There is a specific order here—first secure the job offer, then ask these questions!

1. How many shares have been issued?

Most companies will offer an impressive number of employee stock options. After all, 100,000 shares sounds like a big deal—especially if you've been convinced that the company might go public at $20 per share and then soar to $400 per share. That would be $40 million—enough to buy Larry Ellison's house!

However, the number of stock options offered to you is meaningless unless you know the total number of shares issued. With both pieces of information, you can calculate the percentage of the company your shares represent—which is the key. For example, 100,000 shares out of 1 million total shares is better than 250,000 shares out of 10 million.

You could simply ask for the percentage you'll receive, but this might come across as too aggressive, and many people might misinterpret it due to a lack of context. Remember, you need to know what percentage of the company you're getting, and don't get carried away with how much money you might make.

Here are some “rule of thumb” percentages for a startup that has raised between $1-3 million in venture capital and has fewer than 15 employees. Don't aim for the top end of these ranges without considering variables such as salary, bonuses, and geographic location—and most importantly, the value you bring to the table.

· Senior Engineer: 0.3%-0.7%

· Mid-level Engineer: 0.2%-0.4%

· Product Manager: 0.2%-0.3%

· Designer, e.g., "the lead guy/gal," even though just an individual contributor: 1%-1.5%

· Vice President: 1.5%-3%

· CEO, e.g., the "adult supervision" brought in to replace the founder: 5%-10%

(I know I'll regret providing these guidelines... Those of you who read this blog via RSS will be amused to see how these numbers influence your expectations.)

One more thing about these percentages: As the company becomes successful and grows—possibly raising more funds to fuel that growth—your percentage will likely decrease. However, it's always better to own a small piece of a large company than a large piece of a small one.

2. What is the burn rate?

"Burn rate," as generally understood, refers to net cash flow. (In most cases, "net" doesn't even need to be mentioned because there's no tax.) What you want from this question is a straightforward answer regarding cash—not some fictional accounting profit unless you can pay your rent with it.

3. How much cash is in the bank?

This is a straightforward question. Find out the answer now and divide it by the "burn rate." This will tell you how many months the company can operate before running out of money. If the answer is less than six months, be cautious unless the company has already signed contracts for the next round of funding. If not, assume it will take at least six months to close another round.

4. When will the company achieve positive cash flow?

You must ask this question because you may be told there’s enough cash to last several months or that the next round of funding is "going well." If the answer is that it will take several years, then your employment contract may carry higher risk since venture capitalists aren’t known for their patience and loyalty. Higher risk isn’t necessarily bad—building a great company takes time—but you should know what you’re signing up for.

5. When will the product ship?

This is another way of asking about positive cash flow. Clearly, achieving positive cash flow before shipping is impossible, but if the company claims it will quickly achieve positive cash flow after shipping, that’s either suspicious or indicative of poor management. My advice is to add six months to the "worst-case scenario" timeline because products never ship on time.

6. Can I talk to any external investors on the board?

If external investors are as enthusiastic about the company as you’ve been told (and assuming you're a superstar candidate for a mid-level position), the company should agree. If they refuse, it could mean the investors are "tired" or that you're not that important. In fact, if you're truly a superstar, you won’t need to request this conversation because the management team will naturally introduce you to a prominent board member.

7. Can I talk to some product testers?

This is another reality check: The company may be exaggerating how much product testers love the product. (In my experience, every company tells me that testers "love the product.") If you're told you can't contact them, it could mean the company doesn't want to bother future customers (which makes sense) or that you're not important enough (which is also possible). Alternatively, the product might be terrible, and the company fears what you might hear from testers. If this is the case, it’s better to know sooner rather than later.

8. What is the investor's "liquidation preference" before common shareholders get anything?

If the company has raised $25 million, the liquidation preference is simply $25 million (though it could be several times $25 million depending on how the investors negotiated their terms). This means that investors get their $25 million back before employees receive any benefits. If the company is valued at less than or equal to $25 million, employees get nothing. If there's a high liquidation preference, your stock options might never be worth much.

9. Are there any intellectual property disputes or pending lawsuits?

This is a standard question. To put it lightly, it's always good to know that the company's intellectual property is clear and free of any legal issues that could destroy the company. If you don't ask, don't expect the company to volunteer this information during the hiring process.

Finally, a word of caution: Management may view these questions as evidence of a lack of "trust" or failure to understand the "big picture." (It bears repeating: Get the job first, then ask these questions.) On the other hand, you’ll give management the impression that you're familiar with how startups and fundraising really work. Welcome to the complex and contradictory world of startups…

(Translated by Exstasis Jo. Visit exstasis and the Global Entrepreneur website for more.)