Joining a Start-up - what should i ask?

[Angela Rodbourne]

I have been offered the chance to join a start up, the offer is to work for free for 3 months, then once finding secured start to be paid, in return for equity in the business in the long term. the concept / product is 18 months old, and looks great, and right where my skills lay. What should I be asking before joining? I have no clue!

 

[WaveJumper]

Welcome to the UKBF. The first question would be how much funding are they looking for. Second question, what happens to you if when they don't get funding in 3 months?

 

[Angela Rodbourne]

Good point, you can tell I am a complete novice - thank you!

 

[WaveJumper]

Good point, you can tell I am a complete novice - thank you!

You have to ask yourself if the concept / product has been around for 18 months why have they not secured funding already. Now it may well be they have not been looking, but three months is quite a short time frame

 

[Angela Rodbourne]

There are only 2 people in the business, they have been privately developing the software, and have self funded, so are looking for investment for the first time. they do have 1000 subscribers via their app. I guess I need to understand what exactly they want for me, for how long, and what as you say the investment is they are looking for, the business plan etc.

 

[fisicx]

If they have self funded the development why do they need you and investment?

1000 app subscribers means zilch.

 

[japancool]

You don't get equity unless funding is secured?

 

[Angela Rodbourne]

You don't get equity unless funding is secured?

Ah, thanks,. I think its more of a promise!

 

[Angela Rodbourne]

If they have self funded the development why do they need you and investment?

1000 app subscribers means zilch.

They need my expertise to get more (corporate) buyers on board, for my connections basically. I know I sound naive but I do understand that's what they need me for. I have passed up opportunities in the past for fear of not know what to ask etc, and don't want to feel like I have done it again.

 

[Financial-Modeller]

Two thoughts on being offered equity:

1. Neither you, nor the founding shareholders know what that is worth, or will be worth. Today it is probably zero. In future it may still be zero.
2. If founding shareholders will happily give away significant equity, what does that tell you about their perception of the valuation? Check that the equity you are offered is actually in the company that holds IP or other value.

 

[Angela Rodbourne]

han

Two thoughts on being offered equity:

1. Neither you, nor the founding shareholders know what that is worth, or will be worth. Today it is probably zero. In future it may still be zero.
2. If founding shareholders will happily give away significant equity, what does that tell you about their perception of the valuation? Check that the equity you are offered is actually in the company that holds IP or other value.

Thanks, and agreed, no idea. this is how the put the ad out in the first place 'Significant equity to start with and market standard salary when we raise seed funding in 2021.' I am not working, so in theory have nothing to lose. How would I know if they own the IP?

 

[WaveJumper]

They need my expertise to get more (corporate) buyers on board, for my connections basically. I know I sound naive but I do understand that's what they need me for. I have passed up opportunities in the past for fear of not know what to ask etc, and don't want to feel like I have done it again.

If and supposing you jumped in (as you have nothing to loose) and had the offer all buttoned up in writing what level of the equity are they going to give you

 

[The Byre]

There are three legitimate ways to pay someone. An equity stake, payment by results, or the regular PAYE or trouser money.

When an actor or crew member takes a percentage of an indie film instead of a set fee, that is an equity stake. When a builder builds a wall and you give him money or you pay a sales rep a commission, that is payment by results. If you hire someone by the hour, the day, or for months at a time, that is regular employment.

Clarity in business is everything. If you are to get a cut of the company, i.e. an equity stake (or indeed any other arrangement) then now is the time to formalise that with a contract. The proposed arrangement as you have outlined it is not one I would recommend. It smells too much like pixie dust!

 

[Financial-Modeller]

Is funding dependent on you and your skillset?

If not, The chance to join a start-up is actually an invitation to work for free for a few months.

...I am not working, so in theory have nothing to lose...

What you have to lose is what you could have earned elsewhere during what could become several months.

If you proceed, make sure everything is documented. Get them to pay your legal costs if you don't have legal knowledge. If you don't you could be exploited.

 

[Angela Rodbourne]

There are three legitimate ways to pay someone. An equity stake, payment by results, or the regular PAYE or trouser money.

When an actor or crew member takes a percentage of an indie film instead of a set fee, that is an equity stake. When a builder builds a wall and you give him money or you pay a sales rep a commission, that is payment by results. If you hire someone by the hour, the day, or for months at a time, that is regular employment.

Clarity in business is everything. If you are to get a cut of the company, i.e. an equity stake (or indeed any other arrangement) then now is the time to formalise that with a contract. The proposed arrangement as you have outlined it is not one I would recommend. It smells too much like pixie dust!

Thank you for the clear outline, makes sense and I'll definitely get everything in a contract and checked if I do decide to go ahead.

 

[Angela Rodbourne]

Is funding dependent on you and your skillset?

If not, The chance to join a start-up is actually an invitation to work for free for a few months.



What you have to lose is what you could have earned elsewhere during what could become several months.

If you proceed, make sure everything is documented. Get them to pay your legal costs if you don't have legal knowledge. If you don't you could be exploited.

Very good point - thank you

 

[fisicx]

They need my expertise to get more (corporate) buyers on board

In other words, they don’t have a clue. Until the app is launched, market tested, reviewed, refined and marketing properly funded they have nothing. They don’t need you until they have investors. And investors will want a big slice of the pie leaving less for you and less for the developers. And it still might not make any money.

 

[Paul Norman]

I admit that the offer to work for free for 3 months is kind of where I would focus my questions.

There is nothing certain for you at the end of it. Should the funding take, say, another 7 months all you are going to get is the 'opportunity' to work free for a further 4 months.

This sounds financially precarious. You have a BIG question to answer yourself. It is this. Are you happy to risk never receiving a penny for this 3 months work, despite working your hardest to be successful?

 

[Angela Rodbourne]

I admit that the offer to work for free for 3 months is kind of where I would focus my questions.

There is nothing certain for you at the end of it. Should the funding take, say, another 7 months all you are going to get is the 'opportunity' to work free for a further 4 months.

This sounds financially precarious. You have a BIG question to answer yourself. It is this. Are you happy to risk never receiving a penny for this 3 months work, despite working your hardest to be successful?

Good question, and I suppose it depends what else I 'could' be doing in that time. if I don't get a role elsewhere, then nothing lost. They did offer part time / for me to suggest what I would be willing to do, maybe that's the answer, gives me time to scope out the real opportunity, whilst still keep my eye on the market for any other roles of interest...

 

[Mark T Jones]

As has been said, the value of shares in a private business is zilch - there are any number of threads on here testifying to that, when the shareholder wants to sell

Raising equity is in itself a tough job - most fail.

In your position the least I would be looking for us

1. Basic salary sufficient to cover living costs (or market minimum)

2. Commission / bonus on set outcomes to be deferred until funding us raised.

3. Option to buy transfer that commission to shares at the same price as investors.

And, of course, the above to be in writing - plus sight of shareholder agreement

 

[Andrew Marsden]

Fundamentally, if you are going to participate, you need to enshrine the basis of your participation in writing. You need a clear, unambiguous written record of the agreement reached between all participants as to the terms of their respective participation (eg. As to shareholding’s, directorships, employment, salaries, dividends, exit rights, etc)

 

[yyovvo]

One of the top 5 reasons startup fail is co-founder conflict/feud. Yes, it’s easy to say “that won’t happen to us” at the moment when there is nothing to lose. Once the stakes get high things change, so have everything in clear legal documents from the get go.

Clarity in business is everything. If you are to get a cut of the company, i.e. an equity stake (or indeed any other arrangement) then now is the time to formalise that with a contract.

Couldn’t agree more.

 

[Andrew Marsden]

As has been said, the value of shares in a private business is zilch - there are any number of threads on here testifying to that, when the shareholder wants to sell

Raising equity is in itself a tough job - most fail.

In your position the least I would be looking for us

1. Basic salary sufficient to cover living costs (or market minimum)

2. Commission / bonus on set outcomes to be deferred until funding us raised.

3. Option to buy transfer that commission to shares at the same price as investors.

And, of course, the above to be in writing - plus sight of shareholder agreement

I disagree. I act for many minority shareholders whose shareholding has a very substantial value. Indeed, often it is their most valuable asset. A shareholding in a private limited company, even a minority shareholding, can be or become a very valuable asset indeed but you should protect it by ensuring suitable articles of association and a sensible shareholders agreement are in place to protect your interest. Salary, bonus and other benefits are important but do not forsake an equity interest too if you believe in the fortunes of the business or enterprise.

 

[Paul MH]

I suppose it depends what else I 'could' be doing in that time. if I don't get a role elsewhere, then nothing lost.

If you are unable to find a role elsewhere in 3 months why are they seeking your skills so desperately as to give away equity in their company in exchange for the work? You either have valuable skills or you don't, and if this start up is valuing them then you should be able to find work somewhere else.

Also remember that getting funding is not as common as it sounds and there are thousands of companies all trying to get funding. You mention they have 1000 subscribers to their app - is this a free app or a paid subscription? because there is a significant difference in getting someone to use an app for free and getting them to pay for it. I would ask how they are planning to monetise their app because that is one of the first things an investor will ask.

 

[fisicx]

I act for many minority shareholders whose shareholding has a very substantial value.

But in this case there is no value. They have nothing to offer.

 

[Peter Morris]

How big is the market opportunity for the company?