Working at a billion-dollar company can come with a lot of benefits: creative colleagues, innovative culture and loads of perks like catered lunches. But there's also a downside, notably in the value of employee compensation from their equity in companies. As Behance Founder and entrepreneur Scott Belsky describes in a recent Medium post, employees can often get burned by late-stage companies who seek further investments--and by extension dilute employees' ownership.
Belsky reflects on a conversation with an HR person at a late-stage startup who confirmed that many employees ask for more shares without knowing the true value of their stock. "To bring this home, it's like negotiating your salary without specifying the currency you're being paid in," Belsky says in his post.
He advises any employee or potential employee of a late-stage, highly-valued company to ask the following seven questions:
1. Have you raised capital with liquidation preferences, and if so, what?
Liquidation preferences state which investors get paid first if a company is acquired or goes public. "It is standard and necessary to have a '1x non-participating liquidation preference' which means that investors will get the amount they invested out first (before employees)," Belsky explains.
2. How many months of cash do you have?
If your company is spending more money than it brings in, chances are your CEO might have to raise money--and the terms might not be ideal.
3. If the company can't raise money at standard terms, will it accept less favorable terms or a lower valuation?
Belsky doesn't advise asking this outright, but suggests looking for signs, one being a CEO who is determined to stay at a billion-dollar valuation.
4. Does the company have debt?
Large amounts of debt is a red flag and can impact the value of your shares.
5. Does the company want to go public?
Belsky doesn't believe a company needs to go public, but he does think knowing the intentions of your leaders is important, especially as the information can help you determine how valuable your shares will be long term.
6. If the company stays private, are there secondary sales opportunities for employees and/or founders?
Again, this is a question you don't want to ask outright, but Belsky advises digging around to find out whether employees or founders are selling their shares.
7. Has the company been financially audited?
Mistakes or misrepresentations can greatly impact how valuable a business is. This simple question can help you determine how reliable your company's finances are.