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Interviewing at a Startup? 6 Questions to Ask About Equity Before You Accept

Lindsay Tigar  |  June 12, 2020

Part of interviewing at a startup is finding out if the stock options or equity you’re being offered instead of salary is fair.

Startups, by nature, are high-risk undertakings that come with accelerated levels of business uncertainties, says Jose Laurel, the RPO Director at G&A Partners. The economic risk you take by working one can be scary for some professionals, especially interviewing at a startup that’s an early-stage company dangling equity in lieu of paying a competitive salary. 

On the other hand, sometimes taking the risk pays off big. Just think of early employees of Apple or Facebook who are now experiencing a significant monetary benefit. The chance to hit pay dirt is why some people venture into the startup world. 

It’s essential to fully understand the terms of your equity agreement. In addition to consulting a lawyer you trust who has expertise in employment contracts that include equity, here are six questions to ask about equity when you’re interviewing at a startup. 

Why should I invest in your company?

Though many don’t always think of it from this perspective, Nancy Hancock, business lawyer and partner at Pullman & Comley, LLC, reminds job seekers that accepting equity is choosing to invest in a company. When you’re interviewing at a startup, you’re interviewing them right back.

As you would with anything else you spend cash on, it’s essential to believe in the mission, business practices and goals. That’s why it’s worthwhile to turn the table on your potential employer and ask them to treat you like a prospective investor. “If the employer is willing to share its business plan, its historical financials, and projections with you, the employer is treating you with respect,” she says.

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If you’re asked to sign a non-disclosure agreement, don’t be offended: They’re sharing data that is likely highly sensitive and confidential. “If you like what you see, that is encouraging,” she says. “If, however, the presentation materials are unimpressive, beware. You should be concerned if the materials that should be designed to attract capital are slapdash or misleading.”

At what stage of development is your business, and where is it headed?

When you ask this question, you’re putting your detective hat on, since you’re genuinely seeking validity. Hancock says this will quickly tell you if the company is a true, promising emerging startup … or if it’s mislabeling itself to lure inexperienced employees on the cheap. 

Does that mean it’s a bad idea to join an early-stage startup? Not necessarily. Hancock says it depends on how the company is structured, its goals for the immediate and long-term future and quality of management. If the organization has experienced leaders on staff, a detailed business plan, and a capital-raising discipline that makes them poised for growth, that’s a great sign.

“When you agree to exchange your work for equity, you only win if the company wins and your equity increases in value,” Hancock reminds. “A company worth joining will have a clear understanding of its trajectory. It will have easily understandable documents showing the public what it is selling. It will be willing and able to show you where its funding will come from and when.” If these bullets aren’t checked off, don’t waste your time. 

Why are you offering me equity instead of cash?

This may sound like a rude question, but it’s important for applicants to ask when interviewing at a startup. You want to get a sense of how the company views you and why they are offering you equity, Hancock says. Does the company see your skill set as pivotal to the startup’s success? If so, you should expect to be offered a stake in addition to a market salary. 

“If the startup has no cash to give you, and your bio is going to be part of the offering materials to raise money, then you should be negotiating directly with the founder for a substantial equity position,” she says. 

What type of equity are you offering, and why?

In a perfect world, says Hancock, employees would receive the same class of equity as the founders. If this is not the case, that doesn’t mean it’s a hard no — but it’s worth asking why your equity is different. If the answer doesn’t make sense to you, ask an expert who can help navigate the sometimes confusing terms. “You need to be able to confirm that the value of your equity is going to grow as the company grows and that the company will not be able to take the equity away from you before that happens,” Hancock says.

For example, look at the share repurchase right for the company. This means that if you leave the company, they have the right to buy back your shares. If you leave to go work at a competitor this setup may be justifiable, Hancock says. But it doesn’t excuse an unfair price determination mechanism (aka you losing money). When in doubt, ask the potential employer to get into the nitty-gritty details until you fully understand all of the terms of your equity.

What is the company’s current valuation?

And as a follow-up question, ask how many shares are outstanding. Laurel says these are standard questions when you’re interviewing at a startup and you should expect straightforward answers. “The outstanding shares of a company can be misleading and directly tied to the value of the shares you are being offered. If there is hesitation in disclosing the number, it may be cause for concern,” he warns. “A favorable valuation is a key indicator of management-team strength, the market acceptance of the product or service and can also indicate investor excitement for future rounds of funding.”

Is the stock option grant subject to a vesting schedule?

In many cases employees need to work for a certain number of years to reap the full benefits of their stock options. This is called a vesting schedule. While not a red flag, it’s something to note, says Emily T. Strack, vice-chair of the emerging companies team at Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

“If the vesting period is too long or the milestones are not realistically achievable, the stock option grant may not ultimately vest and be worth anything to the recipient,” she explains. The most common vesting schedule is time-based, with 25 percent of the stock options vesting after one year of continuous service with the company, and the remainder vesting monthly over the following 36 months stock options are fully-vested after four years with the company, she says. 

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