LAST REVIEWED Apr 02 2019 24 MIN READ
By Anisha Sekar
Joining the startup world is an exciting proposition – you can grow a company from the ground up, and if things go well, you may find yourself in possession of some pretty valuable stock and a great job. However, high reward is usually accompanied by high risk, and this is no exception. If you sign on with a blue-chip company or a more established startup, you pretty much know what you’re getting into, and can generally assume that your employer will be solvent three years from now. With startups, especially the early stage ones, the future is far murkier.
Join the right company, and you’ll learn firsthand how to build a business, enjoy substantial autonomy much earlier in your career, and be first in line for leadership positions as the team grows. Choose wrong, though, and you’ll find yourself frustrated by inexperienced managers, dead-end strategies, and ultimately out of a job.
Here are the key questions you should ask a potential startup employer to evaluate its product, business model, finances, and leadership. You should do this research before, during, and after the interview process, but it’s usually after you receive an offer letter that you’ll be ready to critically evaluate whether or not you’d like to accept. We know it’s a lot, so certainly don’t feel like you need do a rapid-fire interrogation to get answers all at once. Use this as a rough guide – we hope you find it helpful!
If you’re looking specifically for questions to ask about the equity portion of your offer, go here instead: Startup Equity Basics: What to Ask About Your Stock Before You Accept
Product: Is the startup building something worthwhile?
Drilling down on the company’s product gives you an idea of how well they understand their market, where they see the company going, and whether they’re truly providing something of value.
Who’s your target customer? Look for employers that have a clear target audience and understanding of that audience’s pain points. They should be able to present compelling evidence not just that people need their product, but that people will pay for it.
How is your product different from [list a few competitors]? Good companies have a clearly articulated, differentiated offering. (Side note: a question like this shows you’ve done your homework, and can endear you to hiring managers if you ask during the interview process.) You can also ask, “What would your current customers do if your company disappeared tomorrow?”
Where do you see the product going in the next 2-3 years? This question helps you evaluate whether the founder has a clear vision for the company’s future, whether the company will expand into new markets, and how the company plans to make its product sticky (that is, make it hard for existing customers to stop using the product).
Business model: Can the startup actually make money?
You’d think that having a business model would be a prerequisite for securing funding, but that’s not always the case. The company’s plan for making money should make intuitive sense.
Can you explain your business model in depth? This one should be a gimme for your employer. If they can’t answer this one quickly, that’s more red flags than an Alabama football game. It should be the jumping-off point for more in-depth questions, like:
What is the customer acquisition cost (CAC)? This cost includes marketing expenses like advertising and affiliate fees, sales expenses, and usually the salaries of the sales and marketing teams.
What’s the lifetime value of a customer (LTV)? LTV is pretty straightforward – it’s how much money you can expect to make from a customer, including recurring payments for subscription products. Here, you’re looking for an LTV that’s higher than the CAC (otherwise the business is just going to lose money). An LTV lower than CAC isn’t necessarily a deal-breaker, though. Some marketing strategies take a long time to pay off, inflating the CAC; some young companies make smaller deals initially before working their way up, depressing the LTV. In that case, though, the company should tell you exactly how and when the CAC is expected to fall or LTV to rise. Otherwise, you’re looking at an unsound business model.
How soon do you recover the CAC? The longer it takes to recoup the CAC, the more vulnerable you are to churn, changing market conditions, and negative cash flow. David Skok of For Entrepreneurs recommends a recovery period of 12 months or sooner.
How large is your addressable market? In general, you should look for companies moving into a large or lucrative market – a product that appeals only to university students in college towns has far less upside than one that taps into the multibillion-dollar healthcare diagnostics industry.
What are the barriers to entry in the market? An easily replicated product or service means that competition will be coming hard and fast, making the business unsustainable long-term.
What percentage of your total revenue is recurring? It’s better to make recurring revenue (e.g. subscriptions and licensing deals) than one-and-done sales – it has higher margins and is more scalable. You should also ask whether the company’s annual recurring revenue (ARR) and its ARR per customer are growing – the former tells you whether they’re getting new customers and keeping existing ones, while the latter tells you whether they’re able to upsell.
[For B2B companies] What’s your annual contract value (ACV)? Many B2B companies start off with a small ACV (think three- or four-digit numbers) before honing their product and marketing and closing larger deals, and companies that target small- to medium-sized businesses (SMB’s) typically have a lower ACV than enterprise ones. There’s no absolute “best” ACV, but you should ask whether the ACV is growing or shrinking, and whether a company that targets SMB’s plans to move upmarket to more lucrative enterprise deals.
Finances: Is the startup solvent?
A good business model won’t save a startup that can’t secure enough cash to grow. These questions will help you evaluate whether your employer is financially secure, and whether it’s trending up or down.
Are you cash-flow positive? Cash flow is a snapshot of how much money a company takes in each month, compared to how much it spends. It’s distinct from profit, which is a broad picture of the company’s revenue minus its expenses. Cash flow is best understood as the net change of money in the bank – fundraising increases cash flow but doesn’t impact profitability, while revenue that’s tied up in accounts receivable increases profit but doesn’t change the amount of money the company has to work with. (Here’s a more detailed discussion of cash flow versus profit). This question doesn’t mean much in itself, but if the answer’s no, it leads to important follow-ups:
What’s the burn rate? Burn rate (i.e. negative cash flow) describes how much money the company is taking out of the bank each month to finance growth before it becomes cash-flow positive. A company that takes in $10,000 a month and spends $30,000 in payroll, marketing, operating and other expenses has a burn rate of $20,000. If you asked about the company’s ACV before, you can compare that figure to its burn rate. If the ACV is high relative to the burn rate, that’s a yellow flag: losing a couple of deals could drastically impact the company’s performance.
How much runway do you have? Runway is the amount of money the company has on hand divided by its run rate – it tells you how long the company can continue its current trajectory without emptying the bank account. For example, a company with a $10,000 burn rate and $80,000 in the bank has eight months of runway. This is a really important figure, because companies faced with dwindling balances because of fundraising difficulties or higher-than-anticipated burn rates, their first move is usually to lay people off. Less than six months of runway is troubling.
How do you balance prioritizing profitability versus growth? Being cash-flow positive isn’t always a good thing, especially for early-stage startups. Typically, to invest in growth (customer acquisition, product improvements, etc.) you have to spend money, so a company that’s cash-flow negative because they’re spending strategically can have better long-term prospects than one that focuses too soon on profitability. Like many of these questions, there’s no one right answer, but you want to know that the company is thinking critically about its long-term growth prospects and finances.
Are you looking to fundraise soon? If so, how will you use your new funds? An imminent round of funding means any stock options you receive will likely be diluted, but it also means the company probably won’t fold soon. However, you want to make sure they’ll spend their new capital strategically – for example, hire specific positions, fund marketing strategies they’ve already validated, or move aggressively to claim territory in a new market. Avoid companies that give vague answers like “growing our team” or “market our product” without going into detail.
This is only a partial list of questions you can use to evaluate a company’s finances; to learn more, check out this article on startup metrics.
For companies that have raised funding
(Note: You can find out the answers to most of these by researching online rather than asking your potential employer. Whenever possible, it’s better to do your homework first rather than asking let-me-Google-that-for-you questions.)
At what stage is the company? Startups are often referred to by their funding stages. The earliest is pre-Series A, meaning the company has raised a small amount of money to get itself off the ground. Subsequent funding rounds tend to be more formal, with greater investments. The first major round is called a Series A, the second a Series B, and so on through C, D, E, and simply “late-stage.” Early-stage startups (pre-Series A) present higher risk and higher reward, while later-stage ones function more like large companies. Your own preferences, desire for autonomy or structure, and risk tolerance will determine your ideal stage.
What’s your valuation? The terms of a company’s last funding round give you a rough gauge of its value. For example, if an investor receives 25% of the company’s shares in return for $1 million in funding, the company’s valuation is (about) $4 million, excluding the money the investor chips in. Typically, industry publications like TechCrunch will include valuation when they cover funding announcements. A high valuation relative to others in the industry is a good sign, but definitely not a guarantee of success (Pets.com and LivingSocial are cautionary tales). And there’s one important caveat:
Is that figure pre- or post-money? A pre-money valuation is how much the company is worth before factoring in the new funds ($4 million, in the above example). Post-money is how much it’s worth after including raised funds ($5 million: $4 million pre-money plus $1 million raised from investors). This is an important metric – two companies may have the same valuation after raising funds, but the one with the higher pre-money valuation is more attractive.
Who are the investors? Investments by top-tier firms like Andreessen Horowitz and Sequoia Capital carry a lot of weight, and are a pretty positive indicator of the company’s quality.
[For companies that raised multiple rounds] Was your last round an up or down round? An up round means that the company’s pre-money valuation increased with its most recent funding round. It’s a sign that the company is using its money wisely and has solid growth prospects. A flat or down round, on the other hand, means that its valuation has remained constant or fallen respectively. Not only is a down round an indictment of the company’s overall prospects, it tends to drain employees’ morale.
Leadership: Will you be learning from the best?
Quality leadership determines not only the company’s eventual success, but how much you’ll gain from and enjoy your experience.
Questions for the company
We’ll start with the questions best answered by current employees – the hiring manager, your potential manager, the founder, etc.
What’s the typical background of someone on my team? What do people want to do afterwards? This will help you determine whether you’re a good fit for the team, and whether you’ll be growing in ways that suit your long-term goals.
What are the next five roles you plan to hire? This will give you a sense of whether the company is growing for the sake of growth, whether they prioritize hiring fast or finding a great fit, and what their priorities are within the company.
What are some of the cultural challenges you anticipate in the next 6-12 months? Asking about future cultural concerns is less confrontational than asking about current difficulties. It also tells you whether the company proactively addresses typical growing pains.
Questions for outsiders
Now, we’ll move onto questions that may not get straight answers from current employees. Ask your personal network if you have connections to the company, check Glassdoor for reviews, or ask to speak one-on-one with an employee to get candid answers.
Is the leadership team experienced? First-time founders make first-time mistakes, so if the company has a fairly inexperienced team, ask yourself whether you’re willing to deal with startup growing pains.
Why do people not like working there? Let’s be honest: Some Glassdoor reviews come from the recruiting team leaning on employees to write glowing praise. Rather than looking at positive reviews, it’s often more helpful to look at negative ones. Are there pervasive complaints? If so, do they signal something you’d find positive or negative? Reviews that consistently mention a lack of structure may be catnip to someone who hates doing the same thing day after day, while concerns about moving too slowly may signal a decent work-life balance.
These are tough questions to ask, so if you don’t feel comfortable asking about all of these directly, be sure to keep them in mind and see if the answers come up in other discussions or in the “gut feeling” you get about the team.
How do you give and receive positive and negative feedback, as a company and as a manager? Startups are often building processes from the ground up, and feedback from employees is crucial to keeping things on track. Good companies will provide clear and safe ways for team members to give constructive criticism. You’ll also want to make sure that your manager will give you the feedback you need to grow as an employee.
What are some disagreements that have happened recently? How were they resolved? Whether it’s within a small team or across departments, what do people disagree about? If the answer is “we never disagree!” they’re either not being 100% honest with you, people at the company don’t feel comfortable speaking up, or everyone has the same opinion about everything. If they explain the disagreement and the eventual solution, make sure that the conflict resolution approach at the company is one you can see yourself working with comfortably.
How many people have left the company or been let go in the past year? Basically, what you’re trying to suss out here is whether there’s an alarming frequency in people leaving (for whatever reason) and/or if there are any other red flags about the performance evaluation and communication process. (You can also roughly figure this out on your own by using the “Past Company” filter on LinkedIn.) If the company is being forthright with you, they may say something like, ”We let [name] go because he/she wasn’t working well with the rest of the team”. Was this person given feedback regularly? Were there clear attempts to reconcile expectations and coach them on their weaknesses? What is the line between a lost cause and a fixer upper?
What’s a major success the company has recently celebrated? This will help give you a sense of the company’s momentum and how they react to good news as a team. Were there some ambitious revenue or production goals hit recently? What’s your interviewer’s tone when speak about this experience? Look for engagement and genuine pride, not detachment.
What is the compensation strategy? What is the general attitude and approach to compensating employees? Are they aiming to be extremely competitive salary-wise but weaker on equity? Are they not as competitive on salary but offer great benefits and a flexible work from home/vacation policy? The approach should be intentional, not one-off, and one that suits your personal beliefs about the employer-employee relationship.
What makes your culture different from other startups’? Most startups describe their teams as driven, get-things-done, smart, and empowered. A question like this will help you cut through the platitudes and suss out what it’s really like to work there.
How are major business decisions made and communicated? If the company decided to pivot its product offering, delay a planned funding round, or start an engineering or customer service team remotely, how do those decisions get made? Depending on what kind of company you want to work for, you may prefer a company where decisions are made by the executive team/board, teamwide consensus, or highly independently functioning departments.
Bonus: Questions not to ask. Questions about free lunches and what people on the team do for fun are 1. ones the interviewer has heard a hundred times before, and 2. not going to give you a real sense of what the company’s like. Given limited time, make sure to ask questions about the aspects of the company that will have the biggest impact on your work and happiness.
What other questions should you ask a potential startup employer? Leave a note in the comments below!
Related article: When is the Best Time to Join a Startup?
Anisha Sekar has written for U.S. News and Marketwatch, and her work has been cited in Time, Marketplace, CNN and more. A personal finance enthusiast, she led NerdWallet's credit and debit card business, and currently writes about everything from getting out of debt to choosing the best health insurance plan.