A Newbie’s Guide to Startup Benchmarking
Or, advice to my tech friends who want to work at a startup.
A close friend recently asked me if I had any “general questions to help gauge how well a start up is doing.”
Below are my free-flowing thoughts and back-of-the-napkin math to help answer this question. What makes me qualified to know this answer? Frankly, nothing… but read for yourself and then decide.
[side note: this is not legal advice nor should be interpreted as such.]
Cash Flow, Burn rates, and Growth
Get ready for some math. We are in the business of startups… cash flow, burn rates, and growth rate are important metrics you should try to familiarize yourself with. Let’s start with the basics — do your best to genuinely answer each of these questions:
- How much money has the startup raised and when was their last round?
- How much revenues does the company make each month?
- What is their growth rate?
- How many employees do they have and how fast are they hiring?
With those four answers — even if you have to guess — you can estimate how much money the startup has in the bank and how quickly it will run out of money (which is a very valid concern with early-stage startups). For your math, you can assume each FTE (full-time employee) costs between $10k to $12k per month (that includes all costs, including benefits, rent, ops, etc). From there, take a guess at how many customers they have and what they charge each customer on average. On burn rates:
be leery of the startups that spend too much money, too quickly.
Of course we all love those cool startup benefits — free meals, “unlimited” vacation, full healthcare coverage — but it’s also a red flag when a startup is spending recklessly.
With these numbers, you can guess something like, ‘this startup will need to raise another round of financing in 12 months.’ For example, if the startup raised $1 million three months ago, has 10 employees, and no paying customers, you can guesstimate that the startup has 7 months to live ($1M — 10 heads * $10k/month equals 10 months… but they raised it three months ago).
In addition to the basic compensation — salary, benefits, etc — you want to find out about equity. For this part, let’s assume you received an offer that includes a chunk of equity. I think it’s safe to assume each round of financing will dilute your shares by 15% to 25%. Think about that for a second: if the company needs to raise money 12 months after you join, you will get diluted by 20% before you even vested! Not good.
Keep in mind, it’s not good enough to know the number of shares you get. You want to know what percentage of the startup you will own. And make sure you get the “fully-diluted” percentage.
Equity and vesting
The usual vesting routine for startup employees is four year vesting with a one year cliff. What this means is that after four years at the company, your equity will be fully vested. You will own it. But that “one year cliff” states that none of your equity will be vested until you work there for at least 12 months. For example, if you are granted 1% equity, you will receive 0.25% of your equity on your one year anniversary and 1/48th percent of your equity each month that you belong to your startup thereafter.
There are a handful of other questions worth knowing but realistically, you’ll likely never get an answer. For example, what type of liquidation preference do the startup’s VCs have. This is essentially asking how much money do the VCs get before any of the common shareholders (i.e. you!) get paid out.
Product & Growth: the most important factor in my hiring decision
You should spend an enormous amount of time examining the startup’s product. Has this startup found product/market fit? Do people love what it’s building? Are users inviting their friends? Is there continual chatter about the product on Twitter and other social media?
If the people don’t love the product, it’s only a matter of time before the startup farts out.
What about the user and/or revenue growth rate? What is the company’s main growth channels? In other words, how do they currently acquire the majority of their customers. If they continually purchase new customers, that could be a red flag. Paid channels are not sustainable and they are hard to scale. On the other hand, if you realize the company is growing organically (like word of mouth, social media, partnerships, etc) then that could indicate that they have a healthy growth model. Try to take a guess at their customer acquisition cost (CAC) and their average revenue per user (ARPU). This ratio is super important to know if the startup has a sustainable business model. Many claim the CAC should be one third of the ARPU.
Both product and growth are two of my most important topics when assessing a startup. A good product with healthy growth can change your career (for the better)!
Founders & Team: another super important factor
Who are the founders? What are their backgrounds? Do they have any previous successes? What culture have they engrained in their startup?
These type of questions are less about right vs. wrong. Instead, these are gut feelings. How do you personally feel about the founders. You’d be surprised how often the personality, values, and characteristics of a founder get embedded into the startup culture. Do your homework by researching the founders. Look for past successes, leadership qualities, maturity, strong values you agree with, etc.
On the note of the tech industry. Be weary of startups that do not have strong tech teams. Are the founders technical? That is, do they code? If not them, then do many of the early employees code?
What’s the company culture like? Is it a coding culture or sales culture? If the former, do they have enough salesmen to push the product? If the latter, is there a solid product to sell or is it mere vaporware? This is the tech industry… the company should invest heavily in their engineers’ growth.
Regarding the company culture, can you align yourself with the vision and values of the founders and team? Is this a cause you can rally behind? The days are long and after the novelty of your new job wears off, the only force pushing you forward will be the meaning behind what you are building.
Let’s Talk Salary
Use these websites to calculate a ballpark salary for yourself. Keep in mind these are market averages, but it should give you a better idea of where you might belong on the salary spectrum.
That’s all for now
I know I likely missed a bunch. I’m flattered and honored if you’ve read this far and I genuinely want to hear from you on twitter. Drop me a line on twitter if you found this post helpful!
If you liked the post, please hit ♥ so others can enjoy it too.