Tuesday, November 28, 2006

Seven Questions Employees Should Ask Before Joining a Startup

In continuing what is turning out to be my “list of sevens” series (see also: Seven Reasons To Become a Founding Entrepreneur and Seven Founding Sins), I wanted to list seven questions which prospective employees that should ask before joining a startup. While most of the material I’ve written in this blog about startups has been related to founders/entrepreneurs and venture capitalists, most people involved in startup endeavors fall under neither of those categories. They’re employees.

There are many benefits associated with joining a startup as an employee at any level (energized work atmosphere, little bureaucracy, upside), but there are many significant risks coupled with them as well. Of course, a prospective employee should ask numerous questions of both his/her role and the company before joining any firm, but there is a set of questions specific to joining a startup that people should pose. I’ve tried to outline what I think are some of the most important questions below. Keep in mind that this is by no means an exhaustive list, merely a suggested seven to get a discussion going. I encourage everyone to suggest additional questions in the comments section below.

If you are receiving employee options, what is the number of fully-diluted outstanding shares?
Typically, option grants are a key component of compensation in a start-up and are often promoted as such. But the details surrounding stock options are often complex and confusing for non financially-oriented individuals. It is best for employees to understand as much as possible about their option grants (this subject could be the topic for an entire series), but the first place to start is to ask how many outstanding shares there are. From that point, one can calculate the percentage of the company an employee will own and a better gauge of the magnitude of this compensation component. It surprises me how many startup employees I know who are excited to have received a grant of x number of options, but never bothered to ask what relative percentage of the company that translates into.

Has there ever been a down round, a flat round, or a CEO change?
Any of these three events are an indicator that the startup has faced some difficulties in the past and may not be on track moving forward. If one of them has occurred, prospective employees should seek out as much information as they can the context of the situation. After all, there are exceptions to blind the assumption that these are a black mark (e.g. a founding CEO stepping aside to make room for professional management could be an indicator of successful growth). However, if any of these issues have arisen, it is a signal to dig deeper into the health of the business.

What is the burn rate and how much cash is in the bank now?
Even if a start-up is successfully executing, it could still face a cash crunch if it is not yet profitable. Employees should ask to find out how much longer the company will ride without the infusion of another round capital. While the actual answer to this question won’t necessarily provide a definitive answer about the ability for the company to access both cash and capital, it will open up a discussion about it.

What is the plan for exit strategy and its timeframe?
The answer to this question is a soft one with many factors, and can always change depending on circumstances. However, it is best to find out management’s view of a possible exit strategy. Is the company pieced together for a quick flip, building for multi-year significant value creation, or plan on holding for the long term as an eventual cash cow (for founder/investors)? These expectations will affect not only how long employees may be working for the company as it exists today, but more importantly, the resulting surrounding corporate culture.

Could you meet the CEO, the founder(s), and those on the management team?
Start-ups are all about the people involved. And there are a small number of people who are largely going to affect the organization. Even if an entry-level employee is going to work in engineering, I think it makes sense for him/her to meet the VP Sales; likewise, a marketing manager should meet the CTO. Yet it might not happen unless the prospective employee requests it. The handful at the top are going to have a profound affect on the future of the company as a whole and the position (regardless of function), and therefore it is best to meet as many people possible in the company possible before joining.

Are there plans in the next six months to hire anyone along the chain-in-command between your position and the CEO?
Start-ups often have key vacant positions open as the companies expand and grow quickly. I recommend explicitly asking if there is an anticipated change in the reporting structure in the foreseeable future, as any modifications or additions (even those a few rungs up in the ladder) could significantly affect employees’ roles and responsibilities.

How many employees did/does/will the company have six month ago, now, six months from now, a year from now?
Employee count is a strong (but not a perfect) proxy for management’s and investors’ outlook on the business. Start-ups hire ahead of growth (or at least predicted growth), which translate into a viable company, a healthy work environment, and future internal opportunities. Financial figures and projections are helpful indicators, certainly, but are often a distortion of the full picture (especially early on in a company’s cycle). The growth in employee count (or lack thereof) directly signals how much work needs to be accomplished how rosy the expectations are.

Why employees leave organizations?

Every company normally faces one common problem of high employee turnout ratio. People are leaving the company for better pay, better profile or simply for just one reason 'pak gaya'. This article might just throw some light on the matter...got it as a forward email...

Early this year, Rahul, an old friend who is a senior software designer, got an offer from a prestigious international firm to work in its India operations developing specialized software. He was thrilled by the offer. He had heard a lot about the CEO of this company, charismatic man often quoted in the business press for his visionary attitude.

The salary was great. The company had all the right systems in place employee-friendly human resources (HR) policies, a spanking new office, and the very best technology, even a canteen that served superb food. Twice Rahul was sent abroad for training. "My learning curve is the sharpest it's ever been," he said soon after he joined. "It's a real high working with such cutting edge technology." Last week, less than eight months after he joined, Rahul walked out of the job. He has no other offer in hand but he said he couldn't take it anymore. Nor, apparently, could several other people in his department who have also quit recently. The CEO is distressed about the high employee turnover. He's distressed about the money he's spent in training them. He's distressed because he can't figure out what happened. Why did this talented employee leave despite a top salary? Rahul quit for the same reason that drives many good people away.

The answer lies in one of the largest studies undertaken by the Gallup Organization. The study surveyed over a million employees and 80,000 managers and was published in a book called “First Break All The Rules”. It came up with this surprising finding:

If you're losing good people, look to their immediate supervisor. More than any other single reason, he is the reason people stay and thrive in an organization. And he's the reason why they quit, taking their knowledge, experience and contacts with them. Often, straight to the competition.

"People leave managers not companies," write the authors Marcus Buckingham and Curt Coffman. "So much money has been thrown at the challenge of keeping good people - in the form of better pay, better perks and better training - when, in the end, turnover is mostly manager issue." If you have a turnover problem, look first to your managers. Are they driving people away? Beyond a point, an employee's primary need has less to do with money, and more to do with how he's treated and how valued he feels. Much of this depends directly on the immediate manager. And yet, bad bosses seem to happen to good people everywhere. A Fortune magazine survey some years ago found that nearly 75 per cent of employees have suffered at the hands of difficult superiors. You can leave one job to find - you guessed it, another wolf in a pin-stripe suit in the next one. Of all the workplace stressors, a bad boss is possibly the worst, directly impacting the emotional health and productivity of employees.

HR experts say that of all the abuses, employees find public humiliation the most intolerable. The first time, an employee may not leave, but a thought has been planted. The second time, which thought gets strengthened. The third time, he starts looking for another job.
When people cannot retort openly in anger, they do so by passive aggression. By digging their heels in and slowing down. By doing only what they are told to do and no more. By omitting to give the boss crucial information. Dev says: "If you work for a jerk, you basically want to get him into trouble. You don't have your heart and soul in the job." Different managers can stress out employees in different ways - by being too controlling, too suspicious, too pushy, too critical, but they forget that workers are not fixed assets, they are free agents. When this goes on too long, an employee will quit – often over seemingly trivial issue.

It isn't the 100th blow that knocks a good man down. It's the 99 that went before. And while it's true that people leave jobs for all kinds of reasons- for better opportunities or for circumstantial reasons, many who leave would have stayed - had it not been for one man constantly telling them, as Rahul's boss did: "You are dispensable. I can find dozens like you." While it seems like there are plenty of other fish especially in today's waters, consider for a moment the cost of losing a talented employee. There's the cost of finding a replacement. The cost of training the replacement. The cost of not having someone to do the job in the meantime. The loss of clients and contacts the person had with the industry. The loss of morale in co-workers. The loss of trade secrets this person may now share with others. Plus, of course, the loss of the company's reputation. Every person who leaves a corporation then becomes its ambassador, for better or for worse.

We all know of large IT companies that people would love to join and large television companies few want to go near. In both cases, former employees have left to tell their tales.

"Any company trying to compete must figure out a way to engage the mind of every employee," Jack Welch of GE once said. Much of a company's value lies "between the ears of its employees". If it's bleeding talent, it's bleeding value. Unfortunately, many senior executives busy traveling the world, signing new deals and developing a vision for the company, have little idea of what may be going on at home. That deep within an organization that otherwise does all the right things, one man could be driving its best people away.

Monday, November 06, 2006

Insolvencies reach record levels

A record number of people in England and Wales went insolvent between July and September, official figures show.

The government's Insolvency Service said 27,644 people went bankrupt or entered into Individual Voluntary Arrangements (IVAs) to manage debts.

Overall, insolvencies are 55% higher than during the same three-month period in 2005 and are widely expected to top 100,000 for the entire year.

Experts have blamed greater personal debt for the rise in insolvencies.


Significantly, the insolvency figures show that the proportion of people taking out IVAs has risen relative to those going bankrupt.

In total, 15,416 people went bankrupt between July and September. At the same time, 12,228 people entered into IVAs.

A year ago, just over 12,000 went bankrupt and fewer than 6,000 entered into an IVA.
The sharp rise in IVAs has been controversial.

IVAs are heavily marketed by providers, who make money from acting as go-betweens for lenders and borrowers.

Some debt charities have criticised IVA providers for marketing them to people who would be better off either going bankrupt or coming to an informal arrangement with creditors.

"If the current trend continues, the number of IVAs will overtake the number of bankruptcy next year and that is an indication that the IVA solution is becoming more popular than is good for people," said Malcolm Hurlston, chairman of the Consumer Credit Counselling Service (CCCS), a debt charity.

Lenders, too, are concerned at the rise in IVAs.

"Several lending institutions have raised concerns at these record levels and have commented on the limited extent to which the advice sector is regulated," Stephen Treharne, head of personal insolvency at accountancy firm KPMG, told BBC News.

In response, a leading IVA provider, Thomas Charles, told BBC News that they were reacting to a real consumer need and not pushing the IVA concept inappropriately.

"If somebody in debt talks to a debt advisory firm, they should be given a full understanding of all the options - including bankruptcy, IVAs and informal arrangement plans," said James Falla, managing director of Thomas Charles.

"The key is, advice has to be measured, correct and well-targeted. Nobody can enter an IVA without the acceptance of the creditors and that ultimately is the backstop," he added.

Rate rise

Problems for debtors may just be about to get worse.

Next week, the Bank of England will decide whether UK interest rates should rise, thereby pushing mortgage repayments higher.

Most analysts predict that an interest rate rise from 4.75% to 5% is on the cards.