With the difficulties faced in the job market, it might be tempting to consider joining a start-up company or organization. After all, the founders are often eager for talented executives willing to work for less — at least initially — when promised a generous compensation package at the end of the first year — or whatever creative scenario they propose.
What is a “start-up,” you ask?
(My mother asked, so I thought it best to add a definition; I do not mean to insult your intelligence). The phrase “start-up company” became popular during the dot com explosion of the 90’s and typically was limited to a high-tech company. That definition is now expanded to refer to any new business venture which has not yet opened its “doors,” whether virtual or physical. At any point between the decision to move forward with one’s conception of the idea and the official launch, a new company falls into the “start-up” category. Nowadays, most start-ups are virtual; they begin on the computer with the launching of a website, regardless of whether there is a physical location commonly referred to as “headquarters.”
Start-ups may also include those businesses in the physical world, those with actual doors, isles, shelves, desks, water fountains, and a cash register: A new mom-and-pop restaurant; yet another retail store; a lawyer who hangs his or her own shingle. In those instances, the “grand opening” of the physical store/office tends to correspond to the launching of a website, and so on.
The 7 Basic Stages Involved in a Start-Up
1. Conception. A start-up starts with an idea. The founder has a light-bulb moment, or the idea evolves slowly over time. Either way, the conception of the idea is the first step. The person who conceives of the idea is known as the “founder” (usually).
2. Decisive Action. Countless folks have ideas, good or bad. In fact, 70% of Americans dream of opening their own business. But few take the idea and run with it. The 2nd step, then, is to decide whether or not to pursue one’s business idea. If the answer is “no,” it’s all over. But, when the decision is “yes,” the process moves forward at whatever pace a founder chooses.
3. Planning. During this critical stage, the founder sets to paper all of his ideas. He creates a written business plan, or hires someone to write it for him. The creation of the business plan requires in-depth consideration, planning, analysis, and research regarding every aspect of the new business, from its name and legal structure to a detailed cost analysis.
4. Funding / Capital. After a business plan is perfected, the founder now needs to find funding for his business (unless, of course, he’s independently wealthy). Without start-up capital, there is no source of fuel for the propulsion needed by a start-up. In most instances, it costs “a lot” to get a new business launched. A new restaurant may cost 1M+, depending on its location, due to the expense of equipment. A service-oriented website, on the other hand, could cost very little, with initial expenses limited to registration fees.
Whether grants are sought or a fundraiser is planned — such as for new nonprofits, aka “501(c)(3)” — or investors solicited, a founder might want to bring in a CFO (or someone with financial expertise, in general) to assist at this stage. Venture capital, angel capital, and grants are not easy to obtain.
Also, funding is often approached in stages, especially for high-growth businesses. Rather than a large investment of all the capital required to get through the first year, for example, a founder can expect to solicit funding multiple times, proving himself along the way. His investors will expect to see consistent and positive growth and development. As this (hopefully) occurs, investors continue their periodic infusion of funding. This process can take years.
5. Recruitment. Having a brilliant business plan and funding, the founder now seeks to find talent to help bring his vision to fruition. Depending on the needs of the company and its legal status, it may be necessary to first and foremost find a President and Secretary/Treasurer to meet legal requirements. And when the business requires a Board of Directors, the founder typically sets out to fill that Board right away.
6. Action. With plans articulated, funding available, and initial personnel / Board Members to assist and advise, the founder and his team now set into action all that is required to launch the new business. Depending on the level of complexity, the launch could take place within days, or it could take up to a year or longer as in the case of complex new technologies or industries which are subject to complex laws and regulations.
[For a dramatically more detailed description of the stages involved in a start-up, you might enjoy this website dedicated to the topic. It's good.]
Now that you know the definition of a start-up, and now that you have an understanding of the basic steps involved, it’s time to consider the good, the bad, and the ugly of joining a business or organization during its start-up phase.
1. COMPETITION FACTOR: With start-ups, there is less competition for the vacancy a founder first needs to fill. Often, there is NO competition. In fact, you may be solicited by the founder via a social network. Seldom is there an HR department to do the recruiting. You may receive a message on LinkedIn, for example, that says something to the effect of, “Great profile! Let’s talk. I may have a position of interest to you.” A quick look at the sender’s profile which likely identifies him as the “CEO” is initially exciting and very enticing.
2. CAREER ADVANCEMENT: A founder often finds himself overwhelmed, confused, and desperate for help, especially during Stages 3-5. As a result, he is not picky (or even recklessly indiscriminate) about who he brings on board — so long as he has help.
The benefit to the job seeker is the potential for rapid career advancement, such as jumping from a Divisional Manager or other mid-level position with a current or most-recent employer to a COO or other high-level executive with the start-up. It’s an enticing proposition which many find hard to resist.
3. INCOME POTENTIAL: Getting in on the ground floor of a start-up with exciting profit potential, being able to have a significant influence on its direction and growth, is an enticing challenge most ambitious professionals find hard to ignore. The founder may use the following argument:
If you’d been offered a position with Microsoft or Google when it was in its infancy, can you imagine how much you’d regret it if you walked away from the opportunity?
Undeniably, there are start-ups with extraordinary potential — and you are being offered a position in the initial phase! And when that offer includes a percentage of ownership — a frequent recruitment method, especially when initial funding is limited — you recognize the potential value to your bank account. After all, what if this start-up is as successful as Facebook? You quickly calculate a 2% ownership of a current industry leader, and you’re dizzy with dollars. It’s hard to get the “What if…” concept out of your mind as you envision what could be a future Fortune 500 — one which is currently begging for your assistance.
A Real Life Example: Twice this year, I’ve been personally recruited via LinkedIn by the “CEO’s” of their respective start-up companies. One was a for-profit, and the other was a non-profit.
The for-profit offered me partial ownership, the COO and CCO spots, and a seat on the Board. His pitch included the statement that there was “1.5 Billion in the pipeline” from existing contracts and contracts in negotiation. He provided a list of names of people with truly impressive profiles and credentials, identifying them as being “with” his company. A truly seductive job offer, right? How does one walk away from that?
The second start-up, a nonprofit, offered me the President’s seat, a salary of $260,000 for the first 6 months, followed by a salary increase to $520,000, plus a seat on the Board of Directors. Just like the for-profit start-up, his pitch included an impressive list of people who he said were “on the Board of Directors,” and he stated that the foundation would have 11 Million in donations by years’ end. Again, a truly enticing offer from which one would be crazy to walk away, right?
IF, in each real-life example, the CEO had provided true and accurate information, THEN and only then would all of the “positive” parameters have fallen into place. The problem was that neither founder was honest.
Still, a start-up can provide you with the opportunity for a high-level position for which you have few (or no) competitors who seek the same vacancy, and the potential for some serious income — especially if you are offered a slice of the ownership pie. It’s time to look at why it might be best to pass up the seemingly perfect job offer.
1. UNKNOWNS CREATE HIGH RISK: Unlike a job offer from an established business, a start-up has not yet developed a history. There are no historical markers to analyze. There are no employees, or very few employees, with whom you can chat-up and uncover the dirt that may exist. And, unless the founder has a proven track record as an entrepreneur, it’s tough to know how well he can lead the new business into a profitable enterprise. In other words, the risk is high.
2. FAILURE FACTOR: Have you ever considered why so many start-ups fail in spite of brilliant ideas and sufficient funding? A new business is set up for failure when the ego of the founder gets in the way of the achievement of the mission.
When the founder names himself as CEO as well as Chairman of the Board, for example, his title is known as “Executive Chairman.” To be an Executive Chairman takes much, much more than most founding mothers or fathers actually possess. And while there is little room for argument that the founder should maintain the Chairman seat, the role of CEO is altogether different. Particularly with regard to high-growth and/or complex corporations, a CEO absolutely must have the skills and experience needed to lead the company.
Because a founder often does not possess the humility he needs to separate his love and passion for his business from the question of his ability to actually lead the operation, he sets himself up for failure. Rather than being smart enough to say, “I need to hire an experienced CEO who knows how to run this thing,” he gets in his own way and insists, “I have to be the CEO because I have to control the ride. It’s my baby. It’s my vision. No one else can be in the driver’s seat.”
Thus, if you’ve chosen to ride in the passenger seat with an untrained and inexperienced driver, you are now at risk for injury in the inevitable crash.
It takes intelligence, humility, and above all else, a passionate dedication to the mission, to step aside and let an expert do what needs to be done. Far too many founders lack these qualities, sadly, a great ideas turn into nothing but a memory.
Real life example: Remember the non-profit I mentioned above? This particular start-up was conceived by a passionate, dedicated, and ambitious Executive Chairman who had a decent idea for helping public schools. In spite of the fact that there are a plethora of similar foundations with the same mission, I was initially intrigued by the founder’s unquestionable passion for the cause (and, his pitch, as set out above). However, as I did my due-diligence to properly investigate all that needed to be explored, I discovered that this “Executive Chairman” dropped out of college in favor of stocking produce for his local grocery store. That, plus a bit of carpentry experience, made up the bulk of his work history.
In spite of his background, I hoped this founder possessed enough sense to hire a CEO to run his nonprofit. I advised him (and the folks he said were his Board of Directors) of several critical issues impeding the future success of the organization: 1) The name of the organization was a trademark violation, and 2) if the foundation did succeed in raising the billions of dollars claimed by its founder, the public would crucify the new organization when it learned of the CEO’s lack of qualifying experience. My acceptance of the Presidency was conditioned, therefore, upon a name change and upon the founder’s agreement to step aside as CEO. Given that I am not employed by this start-up, it’s easy to figure out that my advice was ignored by the produce department.
3. DESPERATE MEASURES: One of the benefits I mentioned was a lack of competition due to the founder’s state of desperation to find a willing body to help with an overwhelming amount of work. However, that same desperation is a negative. It has the potential to lead to desperate measures. In desperate need of help, a founder may feel it’s necessary to paint a picture that is less than accurate so that the target of his solicitation is more easily seduced. In fact, it happens far too often.
For that reason, anyone who is considering joining a start-up must absolutely, positively, unfailingly do his due-diligence to check out everything he is being told. Specifically, pay very close attention to the following:
Lying about Body of Support: Name-dropping is a common tactic, and one of the easier facts to check. If the founder identifies Kathleen Kennedy or Michelle Obama amongst the Board of Directors, you might be impressed — but you must be skeptical. Chances are, it’s a lie. Frankly, most founders won’t go that far in their distortion of the truth (in spite of my recent experience). Most will drop names of lesser known but still highly qualified, impressive people.
Whatever the case, pick up the phone and call those people directly. Simply say, “I’ve been asked to consider joining this company, and the founder indicated that you have agreed to be on the Board of Directors.” You’ll either get a raving recommendation, or the person will reply in the negative, saying something like, “Hmm. That’s odd. I spoke with him 6 months ago, but I never agreed to be on the Board…”
If a negative response happens once, perhaps it is a legitimate misunderstanding. But when you get the same negative response from 2 or more “Board Members,” it’s time to run away. The red-flags couldn’t be more obvious.
Lying about Funding: Until a start-up is funded, it won’t get very far. Chances are, there will be a certain period of time in which it is impossible to receive a paycheck. The founder hopes that you will provide “sweat-equity” — your work, for free, with the promise of future payment. And sweat-equity CAN be a good investment. If you’re sitting on an opportunity akin to the start-up phase of AIG or Hewlett-Packard, a few months of sweat-equity will be rewarded many times over.
However, for some idiotic reason, founders find themselves misrepresenting the true nature of the state of funding when trying to solicit you for a sweat-equity agreement. Perhaps they’ve been turned down by too many other people who won’t even consider a sweat-equity arrangement, and decide that adding a little spice to the reality of the situation might provide better results.
In their pitch, they say things like, “There is $1.5 billion in the pipeline,” or “Your salary will begin in 30 days at a rate of $260,00, and it will then double thereafter.” It would be foolish to walk away from that much funding! But, only if the funding is REAL — and it’s your job to find out before making your decision.
Real Life Example: In the examples I’ve used so far, about the for-profit and the non-profit, both founders blatantly lied to me about their source of funding. In the first instance, I was told that all these big bucks “in the pipeline” were calculated on the basis of existing contracts, and contracts currently being negotiated. I asked to see the contracts. They didn’t exist.
In the second instance, I was asked to provide approximately 1 month’s worth of sweat-equity, to be followed by an exceptional salary for a start-up. It took 2 weeks to pull from the founder the truth about funding: There wasn’t any, and there sure as hell wouldn’t be any within a month’s time!
Thus, having shown their respective true colors and failed the integrity test, further consideration of either of these start-ups was completely out of the question EVEN IF they suddenly found a magical source of funding. To knowingly work for and with someone who lacks integrity is a career killer.
What Do you Have to Lose?
1. TIME: During the process of vetting a start-up, you will have no choice but to invest considerable time, without compensation. It’s unavoidable, unless you hire someone to do the bulk of the work for you. It takes a lot of time to contact the people listed as being “with” the start-up and/or on the Board of Directors. It takes time to do a search with the secretary of state. It takes time to obtain and read contracts. And so on. A LOT of time — perhaps 40 hours or more. And if you are a kind, compassionate human being, you might find yourself providing free work along the way.
Real Life Example: While vetting an organization, I received dozens of emails from the founder who intended to engage in name-dropping. It was laborious trying to keep track of all of these people and their contact information. Thus, I created a “Member Directory,” primarily to make it more convenient for me to follow-up with each person. When the hyper-linked, professional, very useful document was complete, I provided it to the founder for free. Market value? About $700.00. Of course, I did not yet know that he’d been lying to me. If I had, my natural tendency to be generous would never have kicked in gear.
2. MONEY: Obviously, if you hire someone to do the vetting, you are out-of-pocket for whatever those expenses might be. But there is also the amount of money you are not otherwise earning because of the time you must invest to check things out thoroughly. And don’t overlook international phone bills which you might also incur, as in the case of contacting Board Members from the U.K., Australia, or (God-forbid) Nigeria.
3. OPPORTUNITY: If you spend two weeks vetting a start-up, there’s no telling how many opportunities you are losing by turning your attention away from either your current job, or your job search.
4. REPUTATION: To me, there is nothing more important (in business) than my reputation. To put that reputation at risk is something which is exceedingly difficult for me to do, personally. In fact, I avoid it at all costs. This means that my vetting process is extensive. During the process, I am typically on good terms with whomever it is that I am vetting. I give them the benefit of the doubt until proven otherwise. But if and when I do learn that this person lacks integrity, that I have been lied to, and that others are likewise being lied to, I do not hesitate to step up and say, in a way that is more diplomatic, “Hey, this is uncool.”
And, guaranteed, the moment a person is called out for his lack of integrity, he will immediately set out to save face. That means he will actively engage in defamation of your character.
Real Life Example: When I pulled out of the non-profit after discovering the layers of lies that were used to entice me to waste my time, money, and an unknown number of opportunities, I submitted a letter expressing to the Executive Chairman and the Board of Directors my final decision and the reason for that decision. Within less than 2 minutes, the founder began circulating an email that referred to me as a money-hungry, undermining liar who did not have the best interest of the organization in mind.
When an email like that is circulated to approximately 30 business professionals with impressive credentials, one of two things will happen: They will either believe it, or they won’t. Luckily, in my case, most saw the true colors of the founder and my reputation was spared. Unfortunately, though, at least one person jumped on the defaming band-wagon. As it was limited to email, I stopped short of filing defamation charges — but now I must periodically check the world-wide web to make sure that the libelous comments are not made public. Frankly, it’s a burden I’d rather not have.
5. RISK / LIABILITY: In some situations, you might be setting yourself up for personal liability or the assumption of certain risks you don’t intend to undertake. For example, if you begin to provide sweat-equity during the time period needed for the vetting process, or if the founder adds your name amongst those who he repeatedly uses to solicit others such that it appears to others that you are “with” the corporation, you might find yourself liable if you don’t make it otherwise clear to all involved.
The problem, of course, is that you likely will not know all who are involved or to whom your name is being submitted.
The Bottom Line
Does all of this mean that you should avoid start-ups altogether? Not necessarily.
There ARE some good start-ups out there, with talented, smart, and savvy founders. All businesses have to start somewhere, right? Especially in this economy, where people are looking at 2 years of unemployment before getting an acceptable job offer, it’s hard to ignore the “What if…” scenario, as in “What if this turns out to be like getting in on the ground floor with Google or Microsoft when they were still working from laptops at home?”
Sorting between the losers and the leaders can be a lengthy, costly, and risky endeavor — but as with most things that are worthwhile, you can’t be afraid to take the risk. Taking a risk, however, does not mean that you should jump in blindly; you must do your due diligence! Letting fear of failure stand in your way will result in nothing but lost opportunities. And, it’s not YOUR failure if a start-up doesn’t pan out, if it is not at all like the picture painted for you during the seduction stage.
Just as taking a risk in a romantic relationship might lead to a life-long, beautiful and rewarding marriage, it might also lead to disaster. But if you never go on that first date, you’ll never discover the potential. So, if you are considering a start-up, approach it much like you would a romantic relationship: Don’t get married at the end of a first date. Take time to discover the truth and to learn whether you’ve found a good match!
NOTE: In a follow-up article resulting from the discussion below, learn more details about the actual situation involved between myself and the two start-ups which caused me grief. Click here.
~ Lynda C. Watts