What do I need to know about startups before I apply to a startup? Unfortunately, A LOT. Startups are not simpler but can be immensely rewarding places to work.
Why should you listen to me? I have worked at around five startups and been around the ecosystem for a while. I don’t want to found a startup, but I have enjoyed working at them and I have a lot of experience. The team I work with right now has many years of working at 10 different startups. I know startup founders and people who cashed in on IPOs and those who lost money on IPOs. Not sure what an IPO is, keep reading.
While the economic conditions in 2021 might be putting the stars out in the startup sky for a little bit of time, there are still many around now and likely to be more in the future. Startups tend to hire lots of people in the data professions including data scientists and data engineers, it is good to know what you are getting into before applying. There are a lot of reasons to apply to a startup. You can do awesome things with the best technology, maybe even building the latest technology, and work with some pretty awesome people who have voluntarily opted to do awesome work over the awesome pay of FANNG companies (or is it MANNG now?).
The Upside and Downside of Startups
First thing is the downside. Startups do not tend to pay as well as larger companies. Also, you need to wear a lot of hats. Finally, startups can fail quickly, and you can be out of a job. This sucks and it has happened to people I know. It is not a theoretical possibility but a reality that most startups fail. Working for one with the idea that it will eventually be a public company means that you are betting it is in a tiny minority that will succeed.
Now for the positive side. You will not be working on boring projects (unless you are at the boring company). You will be working with cutting edge systems to accomplish things no one else has done before. At many large companies this is only done by a tiny minority that you are not likely to be part of. You could be in a box doing code reviews day in and day out for years. I met someone who, and this is not an exaggeration, only worked on analytics for a single product for years. That is not how I would like to spend my life. At a startup, you can also be the resident expert on one or a ton of things. Advancement is totally different; you can be moved to a senior position quickly. All this boils down to one thing, there are no established processes at startups, so you need to invent them as you go along. To people who enjoy large companies, this is a big downside to startups.
Types of Startups
Alright, what are the types of startups? Startups tend to have one of two goals. They can have an IPO (initial public offering) or a buyout. That’s it. A few will grow to be large private companies, but these are the standouts. There are also startups inside other companies, but these can be more complex and are outside this discussion (but I have worked for two). The path I will discuss is based on its funding model. The lifeblood of a startup are grants, venture capital, and then very lastly paid customers. Many startups go a long time without being profitable. Many never become profitable. Their value is based on what people will pay for the company, not on their expected income like a public company (a company on a stock market). It is a little more complicated than this view but let’s pretend it is not.
What are the types of funding? The first is grant based. Several government grants that fit into this role are SBIR/STTR grants (Small Business Innovation Research/Small Business Technology Transfer). They tend to be rather small (less than $1 million) and come with a lot of strings attached. These are not fun according to a friend whose company is majority funded by a SBIR. These are part of a larger group of companies called pre-seed funded.
A pre-seed funded startup has an idea and maybe not much more. They are funded by grants or what is known as angel capital (friends and family or select investors, who invest without a large expectation of return). At this point the founders build the company and try to get customers. When they are slightly further, they have a Seed Round which is more angel capital than maybe some other investors. These are very high-risk investments, everyone who invests is aware of this fact. However, investors usually get part ownership of the company. It can be a very inexpensive way to own part of a company and in rare cases a large return on investment.
Once the product is built and they are trying to get customers they will have a Series A financing round. This is led by investors, usually named VC (venture capitalists). They get a portion of the company for a cash infusion; it varies but they are usually in the range of ~$10 million for a Series A. They also might get seats on the company board. At this point the company wants to hire and scale to attract more customers, have the best talent, and improve earnings or maybe have earnings for some companies. This is an interesting place to join in data because you can work on data and not other things like designing web hooks or writing JavaScript (things I have seen Data Scientists who joined Seed startups do).
Eventually, a startup hits a point where they need to increase development in the product. At this point they are ready for a Series B financing round, in the range of $50-100 million. Oftentimes, these are the same investors who increase their stake in the company. The work involves more complex development and more scaling. Maybe adding new products. It is a continued growth stage. Not all successful companies have Series B, some IPO or get a buyout but most either have a Series B or fail.
After a Series B is usually the last round of VC led financing, Series C. At this point the company is trying to finalize product development, gain market traction, and generally expand what they have been doing that is successful. Rounds after Series C are not unheard of but are solely for the purpose of improving their eventual share price or trying to save a company who is failing to adapt to a changing market. After a Series C, companies usually have an IPO or buyout, and things change.
Understand Startup Equity Offers and other Questions
Often job offers come with equity attached Sometimes you can get this information publicly from CrunchBase but it never hurts to ask. The most important is how much Runway does the company has. Runway is a term for how long until the capital runs out. I have had companies dodge this question or give poor explanations during interviews. I stopped talking to them because if they have something to hide, they are not worth my time. Another is what is the goal of the company. Should it be private, or are they trying for a buyout, or an IPO. It puts the company in context.
Equity is a very misunderstood concept. These are usually in the form of stock options but there are other forms. Investors get Preferred Shares but employees get Stock Options. What’s the difference? Preferred Shares are ownership of the company and they have preference in things like buyout payments or event dividends. Stock Options are options to buy shares in the company at a predetermined price, called the Strike price. The usual method these are given has been the same at every company I have been at. They are given with a cliff followed by a vesting period. You get a time when, if you leave, they can be taken away (usually a year), this is called the cliff. The vesting schedule is usually three to four years for the rest of the shares. Once vested, the shares can be exercised and they become stock, just not preferred stock.
Now you own part of the company and there is an IPOs, and your strike price is $1 but it IPOs for $501 per share, then you get to keep the difference. If you have 1000 shares. You just made ~$500,000. Which is not bad. Not all of it but pretty much. There are complicated tax rules but let’s ignore them now except to say options are not taxed except when they are exercised. It is possible that the IPO price is for less than your strike price, it sucks but it happens. The strike price is determined by when you get the grant for the options. The earlier you join, the lower the strike price. It is lower at an early Series A than a Series C who might be IPOing in the next year. Think of it as a risk premium for working at the company.
This is the kicker. When a company does a funding round it adds more preferred stock and dilutes your eventual shares, so if they don’t offer you more and more options, then you own less and less of the company over time. Just something to know and be aware of when assessing the company's offer. This can get way more complex with a digression into fully diluted shares but let’s stick to just understanding startups for now.
How to Decide what is Important
There is a lot to digest here and everyone has different values that they use to assess a startup. They are personal and none are wrong. This is my take only. Series A is the most fun and mature internal startups are the least fun. But internal startups can give you great experience with low risk but unless they are at an early stage, they just are not fun for me. You can get stuck doing uninteresting things and not really growing. I consider a two-years runway acceptable. I have a family and graduated grad school during the great recession, so this informs my view. In two years, I feel that I will be able to advance fast enough, show my worth, or have enough time to find a new position. Essentially, I am acknowledging the risk over a two-year period. Your risk level is very personal. As is your appetite for the benefits of a startup vs. the salary. At a big company, you might need to wait in line for 10 years for advancement. This is almost never true at a startup, especially one that is in its early stage. Therefore, one needs to assess their appetite for risk vs benefits and what is acceptable runway for the company.