August 2012

Five Questions to Ask Before Joining that Start-up

This post originally appeared on Harvard Business Review.

Mark Zuckerberg reinvigorated an entire generation when he added nine zeroes to the end of his bank account before he was 30 years old. He made start-ups great again. He showed the world that youth is not a preventative factor of success and that work can actually be fun. This theme of wealth creation while doing something you love is why an increasingly large percentage of graduates are turning to start-ups over more traditional jobs. It might also be why people are quitting their consulting gigs and investment banking positions to pursue a career in start-up land. Just yesterday I ran into a recent Harvard Business School graduate who quit her consulting gig in order to follow her dream at a new start-up.

Unlike big, established corporations or what we might classify as a “steady job,” start-ups present more inherent risk because there are more variables and questions for a prospect to consider. Things like: Does this start-up have the right team? Do they have money? What if I choose the wrong company? Nevertheless, this risk is often overlooked because start-up employee prospects realize that new ventures are more fun, are intellectually rewarding, and could have big paydays down the line.

But there are practical questions that all start-up prospects should consider when looking to join the next could-be big thing.

How many outstanding shares exist? Joining a start-up can have significant upside if you own equity in the business. That upside is determined by two things: the percentage of the company you own and the valuation or price of the company upon a liquidation event (e.g., the sale of the company). When you join a start-up you are often issued stock options. Maybe you are issued 1,000 options; maybe you are issued one million. This number is only as important as the number of outstanding shares in the company. If you are issued 1,000 options and there are 10,000 outstanding shares, then you may own 10% of the business. Make sure you ask your prospective start-up employer how many outstanding shares there are, so you can understand what part of the company you own. If they don’t want to tell you, then you may want to reconsider the job altogether. If they can’t tell you this, what else might they be hiding?

What is your stock option vesting schedule? Time flies in start-up land. When you get an offer from a start-up, make sure you understand how long it will take to actually receive the equity you are entitled to. A typical vesting schedule has a one-year cliff with a subsequent three-year earn out that vests each and every month. So if you think you might leave within four years, make sure you are comfortable with the vesting schedule. Four years is a long time in a start-up.

How restrictive is your noncompete or non-solicit agreement? I once read a noncompetition agreement that said anything I worked on — in- or outside of the office, during working hours and non working hours — was owned by the employer so long as I was employed there. This is a very restrictive agreement and in so many words says you are a slave to the company. Make sure you understand what this part of your contract says. Employees in the start-up world often bounce to and from various companies, so you want to make sure you’re not putting yourself in a compromising situation down the road.

Does the team have a track record? Winners know how to win. It’s why venture capitalists tend to favor entrepreneurs that have a proven track record (PDF). A VC once told me that he “looks to invest in people with an unfair advantage over their competitors.” These entrepreneurs are people who know the ins and outs of a successful path in a specific domain. Before joining a start-up company, make sure you have a very strong understanding of the team, their investors, and their advisers. This will give you a great indication as to whether or not the start-up has the right ingredients for success. If the team members don’t have a track record, that’s alright, but make sure you understand what it is that will put them on a winning path.

Why am I really doing this? The most important thing you need to ask yourself when joining a start-up is why. Some people do it because they hate their jobs. Some people do it because they want the credentials. Others join because they think they will get rich or it’s the cool thing to do. Ultimately, when you are looking to join a start-up you need to understand the real motivational factors behind your search, because if your reasons do not align with the opportunity, it is likely you will be neither happy nor successful.

With advancements like cloud-based hosting, labor marketplaces, online education, and video conferencing, it is now cheaper than ever to start a company. As a result, we will see continued growth from emerging start-ups and their respective employment opportunities. If you are debating whether or not to join an early-stage venture, make sure you are asking the right questions in order to mitigate your risk and maximize your chances of success.

America’s Top Colleges List is Broken

This post originally appeared on

Let me guess. You looked at the recent Top Colleges List published by Michael Noer and suspiciously thought, “this doesn’t seem right.” I know that’s what went through my mind when I first looked at the list and found that my school, the University of Wisconsin – Madison, was number 147 on the list.

Since the list was published, I’ve had over 50 different conversations with people to ask them what they thought about the rankings. Overwhelming, the response was something along the lines of “the list is broken.” That was my feeling too.

As someone with a background in math and engineering, I can say that building out a model like this is not an easy task and I applaud Michael and his team for procuring such a comprehensive and transparent list. However, after reviewing the methodology behind these rankings, it seems to me like we should be measuring the schools on different factors.

If we want to look at “things that matter the most to students,” here are some components we should consider in next year’s list:

College Brand Equity. If you had to do college over again, how many of you would apply to Penn State? Or what would you do if you could attend Harvard? Like everything in life, perception is reality. Associations, prestige, and brand names all matter. For better or worse, people are persuaded by these accolades and if they will help advance your career in the real world, then they should also help advance the rankings of a particular school in this list.

Strength of Alumni Network. I once had a 3 hour meeting where I was pitching a client for new business.  By the end of the meeting I was only 50% certain that I would win the business, until I said, “I’m going to Madison this weekend for a visit.” That one remark sparked another 30 minute conversation because the prospective client also went to Wisconsin for school. That week I won the business and the deal was closed. Connections matter in business and in life. They should also matter in this list.

Number of CEOs or Executives at Companies. How many of you have read the biography of Steve Jobs, Thomas Edison, Warren Buffet, Mark Cuban, Richard Branson or other great business leaders? You’ve probably done this because you want to know what it takes to be successful. There are other great business leaders and captains of industry that are lesser known. These are CEOs and Executives at Fortune 500 companies and promising start ups. If some colleges produce more leaders than others, it’s probably a good indication that other great leaders will emerge from those schools and therefore, this metric should be part of the ranking methodology.

Number of Students Participating in Entrepreneurship Centers. To succeed in today’s global economy you must be innovative, adaptive and independent. Entrepreneurs understand this better than anyone, but the schools that understand this are the ones encouraging and operating those entrepreneurship centers. These schools are the ones that accept and embrace change and they are also the ones that will most likely survive the looming academic bubble.

Student Load Default Rates. Although this is included in the methodology, this component should be weighted much higher than 5%. The concept of school is simple. You go to school to learn and then you use that education to get a job and earn a living. If your student loans exceed your earnings then by definition, your career is less valuable than what you paid for it. Easy math. Easy metric. It should be weighted higher.

What other metrics do you think are missing from the list?

Connect with Dan Reich on Twitter – @danreich.

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