How to Score a Startup

Before you go to work for a startup, you should be well aware of what you're getting yourself into. How much risk is involved? Will it be worth the risk? Will the stock options ever be worth anything? Is your salary high enough? Should you be getting a premium to compensate for the extra risk you are taking of perhaps being unemployed w/o notice? These are all very serious questions and before you take a job with a startup company, you should use the following formula for helping to evaluate the opportunity.

For each of the following issues, assess your company's position and award, or detract, the associated number of points. The sum at the end is the company's score. If the score is above zero, go forth carefully, but if it's in negative territory, be extremely mindful of the risk you are being asked to take.

"It takes money to make money." Even Hillary Clinton knew enough about this one when she was quoted as saying, "I'm not responsible for the underfunded businesses out there." It takes a lot of money to get a business off the ground successfully. Salaries for employees is usually the single biggest expense, especially in today's software-based businesses. As a rule of thumb, the cost of an employee can easily average $7,000 or $8,000 a month. Given a little simple math, it's easy to see how quickly the money can fly out the window. And if the company doesn't generate income before the money runs out, then either the doors are going to close, or another investor better be found pretty darn quick.
Give your company 1 point for having enough money, but take away 3 if funding is sparse.
"You gotta have a plan." It seems as though obtaining the money would be the first challenge a business would face, but most of the time, the money can't even be obtained until a good, solid business plan is drafted. The more detailed the plan, the better. The plan puts the vision to paper and helps keep everyone properly focused. Without that focus, businesses easily get sidetracked and end up facing unanticipated problems without having any prepared solutions.
Give your company 1 point for having a plan. Companies without plans lose 1 point. Companies that have plans, but don't follow them also lose a point.
Look for 'industry expertise'. Look for at least one high ranking leader in the company (or board of directors) to be a recognized expert in the industry in which the business is embarking. The more experts the better. These people must be able to be relied upon to help solve problems as they arise, and be aware of the common pitfalls to avoid. During the rough startup phase of a business, it's no time to be just learning the ropes.
These experts often have very good contacts within the industry as well and can draw upon these contacts for partnerships and other business synergies that are pure gold for the young company. The lack of such expertise will make it much more difficult to persuade investors to part with millions of dollars. Investors don't like to bet on the unknown horses in a race.
Look throughout the entire company for experience at all levels. Do the people at key positions boast a track record of knowing how to perform their assigned duties? Or are they embarking on on-the-job training?
Give 2 points for expertise but take 1 away for the greenhorns.
Experience counts. It takes skill to successfully run a business. If the executive staff is learning on the job, their mistakes will be more frequent and stymie a business during fragile phases.
1 point for founders with a successful track record and 2 points for a history of failure (there's no better teacher than failure), but be sure to penalize them 1 point for no experience at all.
Experience [still] counts. Generally, one of the most difficult tasks in the operation of the startup is raising funds. Going in front of venture capitalists and asking them to pour millions of dollars of their money into a new company is like trying to sell ice to an Eskimo. Someone who has danced on that stage successfully before will certainly have a much better chance of getting all the right moves down again. Failure in this arena is unforgiven and always results in a bankrupt company with no future.
If your company has experience in this area, give them 1 point for at least knowing what to do. Without the experience, take back 2 points for a rookie performance.
"You get what you pay for." Good and talented people are what make a company strong. Good and talented people are also few and far between. Standard market forces of supply and demand dictate that good people will have to be well compensated for their efforts. In a startup company, everyone will be asked to put in long hours of hard work and life is too short to do that without reward. Good and talented people who aren't well compensated will be very difficult to retain thus raising the costs of doing business even further as the company must now expend energy to deal with high turnover.
Compensation can come in many forms, salary being the most obvious. Corporate equity, generally in the form of stock options, is very common these days as well and this is where this risk assessment comes in very handy. Companies that are not scoring well here are much less likely to succeed thereby leaving these incentive stock options worthless. Given the lengthy vesting period of most options, and the uncertainty of the marketplace, stock options really should be given less importance as an incentive than they are. Other creative compensation packages can be arranged.
Oftentimes the importance of paying premium salaries is overlooked by a management team. This results in greater uncertainty in the company's ability to deliver on it's promises and meet it's objectives. The friction caused by the resulting low employee morale is difficult to overcome and tends to feed on itself with disastrous effects.
If your company isn't willing to put their money where their mouth is, take 2 points away, but award 1 point for those who are willing to properly invest in their employees.

A company can score a maximum of 8 points and a minimum of -10. How does YOUR company measure up?