Having been at a series C+ company that ran out of money. There are a few things to keep in mind if you are working at a non-profitable startup.
1) Investors need to invest in something, not continuing operations. Companies who are about to run out of money will often claim to pivot in a different direction, launch new products, or go on hiring binges. A good sign that something is amiss is when all of this isn't backed by any customer interest, the internal story is meh, and leadership is steadfast that this is the direction.
2) At some point all of the senior leadership needs to focus on getting VC money, or selling the business. You may have high pressure dates one month, and then an erie calm where no one seems to care about anything. Because frankly, leadership has stopped caring about the business and it no longer matters to the company.
3) A debt round shows up, these are usually life support rounds for companies missing their metrics. The company doesn't want to lose valuation, but they don't have any deals lined up yet. The debt is to keep the show going while they figure things out. Caveat: Debt rounds because the company aims to be profitable, aren't that bad.
4) Implosion, if the company has a high burn and no offers - then something has to give. The thing to give is the $NewIdea, not the core product - however if the core product is shrinking/mature the core product team may see layoffs as well.
At this point, if I consider a startup - I look to join just after a funding round has closed. This means that the money to build your product is there, the work will be new, and the company doesn't have to go through hijinks. The worst time to join a company is when they say they are working on a funding round.
I'm an old fart who was around for the dot com days. Huge red flag the minute leadership shifts from growth to profitability. Usually a good time to update your CV.
Are you discussing internal projects because Facebook, Amazon, Apple, and Google have been profitable for a while. Netflix lost growth and was crushed.
Perhaps, but most Series C equity is already paper money for employees. Companies are going to Series D/E/F rounds with regularity - and you may be looking at 5+ years to liquidity. A company that is getting tepid investor interest likely won't see a major upswing in valuation for their next round.
Consider that as you join a company working on its next round, you may have a 50% chance of major company restructuring which can range from the project you were promised vanishing, to you being laid off. A 15% chance that you get a free doubling of your equity comp on the next 409A valuation (which may be insignificant, have a 90 day exercise window, or other hijinks). While having a 35% chance that nothing major happens.
Unlike an investment portfolio, I have a finite productive lifespan where I can do good work and receive a good payoff for it. Getting stuck at a company going nowhere, or worse getting laid off from one is not a good way to spend that time.
Fair points, I'm just saying if you can trust the founders (e.g. you knew them before they started the current company) then it's in your best interest to join before the next round.
If you're joining as employee 400 and don't know the founders, then yes, joining before the round is risky.
This is good advice. However bear in mind that the moment a term sheet arrives, the old 409A is invalid. So if the company is fundraising, make sure you get your options allocated immediately (even if that requires the board to have to sign off outside of their regular meeting cycle). Otherwise, once the term sheet arrives, you will get your options at the new strike price and there's not much the company or you can do about it.
Sure, but the relative risk to you as an employee is much higher if the round is not favorable. As an employee, you likely joined because of.
1. Career opportunity (build a new team/product/service etc.)
2. To make more money
The risk that these don't come together for you are much higher as an employee, compared to some possibility of getting shares at a small discount. If the company thinks that their raise is a sure thing, then they are likely to offer you fewer shares and make vague promises about future valuations anyway.
Even if the company isn't sure about their raise, they are likely to pitch your offer on the post-money valuation of their hypothetical, un-financed funding round.
1) you need people and money for success. you need to spend on marketing or customers won’t know about your product. in my experience investors expect products to find adaption in some free/magic/viral way if they are any good. of course that is a simplification.
1) Investors need to invest in something, not continuing operations. Companies who are about to run out of money will often claim to pivot in a different direction, launch new products, or go on hiring binges. A good sign that something is amiss is when all of this isn't backed by any customer interest, the internal story is meh, and leadership is steadfast that this is the direction.
2) At some point all of the senior leadership needs to focus on getting VC money, or selling the business. You may have high pressure dates one month, and then an erie calm where no one seems to care about anything. Because frankly, leadership has stopped caring about the business and it no longer matters to the company.
3) A debt round shows up, these are usually life support rounds for companies missing their metrics. The company doesn't want to lose valuation, but they don't have any deals lined up yet. The debt is to keep the show going while they figure things out. Caveat: Debt rounds because the company aims to be profitable, aren't that bad.
4) Implosion, if the company has a high burn and no offers - then something has to give. The thing to give is the $NewIdea, not the core product - however if the core product is shrinking/mature the core product team may see layoffs as well.
At this point, if I consider a startup - I look to join just after a funding round has closed. This means that the money to build your product is there, the work will be new, and the company doesn't have to go through hijinks. The worst time to join a company is when they say they are working on a funding round.