How to assess the risk and rewards of joining a start-up

By Neil Patrick

In my career, I have been a member of three start-up teams. Two were highly successful. One was not. How can you tell which is which before you join?

Last week I had an interesting meeting. I had a coffee with a new Linkedin friend. It was one of those getting to know you type of conversations.

It turned out that he’d been a casualty of a failed business start-up. He’d invested a lot of his time, energy, skills and money into a business which the management team had convinced themselves would make them all millionaires.

But due to a variety of reasons outside his control, the business foundered. He ended up with no job. Nothing. Not even a redundancy cheque.

His story got me thinking about how we decide to join a start-up. I’ve done it three times in my own career. And I learned something different each time.

Often we don’t take the necessary steps to actively control our careers. We just react to the opportunities as they come along and they flow over us in a somewhat unplanned fashion. And if we are not totally happy in our present role, the prospects of a start-up can be highly attractive. You’ll get out of an organisation you don’t like very much and have the opportunity to shape a new one that’s much more to your liking.

But when we leave a ‘safe’ job for a shiny new start-up, many people do it because it offers the prospect of a big pay-off in the future.

That’s a problem; we get dazzled by the prospect of that big payoff, rather than being focused on what has to be achieved hit the jackpot.

And realistically what are the prospects of surviving a start-up, let alone making the big time? That’s the really important thing you must understand before you jump ship. 

But to get back to my new connection’s story. I could see several aspects of it which have relevance to almost everyone:

If a start-up offer materializes when we are job hunting, it’s tempting to just grab it.

The events which led up to the eventual meltdown in this story were not the result a great business plan gone wrong, but rather a series of events which created the illusion of an opportunity. He had lost his job recently so was on the hunt for his next paycheck.

Then the opportunity with the start-up came along. My friend had seized it with enthusiasm, but did he do the necessary due diligence? I don’t know, but if he did, it was clearly insufficiently rigorous. I think it just happened to come along when he needed a job and it was the most accessible offer around.

We can get blinded by the temptations of massive payoffs so easily

The excitement of the prospect of a huge pay-off is an extra tempting proposition for most of us. But the job offer isn't the same thing at all. You should view it as the offer of a job which may evaporate faster than any you've had before. And leave you with nothing.

So you must be clear you are comfortable with this reality. Ask yourself questions, like ‘Will this improve my job satisfaction and my skills?’ Will it get me closer to where I really want to be five years from now? I say five years because that’s the typical horizon at which you should anticipate an exit from a start-up.

Start-up plans are always full of faulty assumptions

One thing I have learned is that unless the business plan is based on completely known assumptions from an identical business elsewhere, they will be wrong. Sometimes a little bit wrong, sometimes a million miles from anything even remotely accurate.

And the more innovative i.e. untried the business model is, the less reliable the business plan assumptions will be. So whilst I love start-ups, if you are joining one, my advice would be to make sure that you know how reliable the planning assumptions are.

It’s your future that is in jeopardy if someone else got these even a little bit wrong. One thing is for sure, no business plan survives its first real world contact without alteration.

Without the right people, a start-off is seriously disadvantaged from the off

You must pay close attention to the start-up team. If they have done it before, you can take some confidence that they know what they are doing. If not, you need to really decide whether they can be relied upon to achieve what’s required.

Often start-ups struggle to attract the best talent. They are forced to settle for who they can get. This is simply because since they have no track record, they are obliged to pick from the minority who are willing to take the risk. And unless the leadership team has a stellar record of success, these are rarely the best possible candidates.

If we are not true to ourselves, we can never do our best work

I know, I know. It’s that ‘p’ word again. Passion.

It’s become a cliché. We get asked it at interviews. What’s your passion? And we feel obliged to say something ridiculous, like, ‘My real passion is building SQL databases’. Really? 

Our true passion is what we feel compelled to do. It’s what we’d do even if no-one paid us to do it…ever.

In hindsight, only one of the three start-ups I took on really matched my passion at the time. The other two I took on because they appeared to be the best option available at the time. In hindsight therefore, two were a bad choice for me.

In the case of my friend, I am pretty certain that he wasn’t truly following his passion either.

Joining a start-up isn’t a guaranteed ticket to fabulous riches

There’s a difference to being a founder (and therefore owning a large slice of the equity) and an early joiner, in which case you will possibly be offered stock if you stick around long enough AND if the business flourishes. This isn’t to be sniffed at, but it probably won't get you into the millionaires club either.

Plus you should expect that the next five years of your life will be consumed by the business. Its needs will take precedence over you own. This is fine if it’s a commitment you are willing to make and you believe totally in the company mission and business plan and playing your part fully in ensuring it becomes a reality.

If not, you really shouldn't be there.

So how should you decide whether you should join a start-up?

This depends on you. What do you find most important? If you are looking to strike it really rich, you probably have a better shot at doing so by being a moderately successful co-founder (eg 30% of a £10m exit is £3m). As an early joiner, even with a bigger exit value, your payout will be much less (eg 0.5% of a £25m exit is £125k).

On the other hand, if you are merely looking to accelerate your career, then there’s much to be gained by finding a superstar team and joining it at the earliest possible opportunity. Whatever happens to the business in the coming years, you’ll learn lessons of huge value to your future career.

At the end of the day, the key is to know what is most important to you, have a clear appraisal of the business plan and team and be completely clear about why you are joining.

Now can I try that again please?