Don’t Be Naïve: 7 Things to Know Before Taking a Biotech Startup Job
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of future security, not knowing where you’ll draw a paycheck in 18 months, then a startup may not be the right place for you. But as More discussed, people shouldn’t really think of big companies as the bastions of stability that they were once were.
“Let’s not be naïve to the trade-offs of working in a big company,” More says. “One of the saddest things of the prior generation is all these pension funds that were attached to big companies like Kodak. When people signed up, they thought ‘I’m covered, I’ll have a pension and healthcare covered for the rest of my life.’ Then the companies went backrupt, and courts invalidated those benefits. There can be nothing more sad than relying on something you thought was a sure thing, and have it not be there. I actually like the way the world is headed, where nothing is a sure thing. You have to control your own destiny and be thoughtful about your destiny. If you’re joining a startup, you have more of that control.”
What’s my role in this company, and how might it grow as the company grows? If the company succeeds, candidates should get a sense of whether there will be potential to take on new responsibilities and advance their careers. Part of this comes from asking yourself whether the people in senior management are folks you can really learn from, that you see as mentors. Are they interested in helping you add new skills to advance from director-level to VP or higher? If you have ability to make a bigger impact, does this leader see the ability and understand how to unleash it?
As Le says, people should ask themselves whether they feel like they’re considering a narrow position that might grow dull over time, or whether it’s the start of something longer and more interesting. He encourages people to ask themselves, “Is this something I can see myself doing down the road and being happy with?”
Stock options are nice to have, but keep them in perspective. One of the great things about working in a startup is the opportunity to have some meaningful ownership in the company, some skin in the game. Stock options, which usually vest over a certain period of years, are often held out as a major carrot for prospective startup employees. If you and your teammates perform well, the thinking goes, you will share in the rewards. Many times, these options are described in glowing terms by companies as the yellow brick road to riches.
But of course, many startups fail, making the stock options worthless. What fewer people realize is that startups can be successful, and still not provide stock rewards to the people who slaved away all those nights and weekends to make it a success.
As we all learn in kindergarten, life isn’t fair. This is where employees should take off the rose-colored glasses about startup life. Remember there’s a difference between preferred shares (the ones held by venture capitalists) and common shares (the ones held by founders and employees). Preferred shares have preferred status. There’s a whole confidential world of liquidation preferences, and things like participating payout clauses, that are quite relevant to the financial futures of startup employees, and yet hardly anybody knows anything about.
These preferences are often used to reward venture capitalists first and foremost, and sometimes leave little more than table scraps for the founders and employees. For example, it might sound shocking, but More says it’s conceivable for a biotech startup to have agreements in place to assure that the entire first $100 million of proceeds from an acquisition—a successful outcome by most measures—would go to the venture capitalists. If those are the terms by which a company raised money, then common shareholders would only be able to get their proportional rewards based on what’s left after the first $100 million is paid out. Even then, sometimes the VCs have preferred shares that allow them to collect again on the remainder of proceeds beyond the first $100 million, through what are known as “participated preferred” shares.
Vast numbers of people in the industry are clueless about these investor-friendly terms. More says he’s encountered CEOs who should, but don’t, understand these critical financing clauses. VCs, because it’s their job, know the rules by heart. Check this primer that appeared in VentureBeat in 2010 for more details on liquidation preferences, and this glossary from the law firm Fenwick & West to better understand the financial terminology.
To be clear, these aren’t rare situations in biotech. During parts of 2011 and 2012, as many as one-third of all biotech venture financings included such “multiple preferences” of some kind beyond 1x, sometimes as high as 3x, before any consideration would go to common stockholders, according to the Fenwick report. Some of this is legacy from the dark days of recession, when VCs held the clear upper hand in negotiations with entrepreneurs.
Essentially, if the company has such an agreement with its VCs, the slim odds of employee stock options being worth something just got slimmer. It’s fair for a prospective startup employee to ask whether the VCs will get a multiple return on investment before the common stockholders.
One last point on stock options. This information, to be understood, must be put in context. Getting 10,000 stock options might mean little in a company with 100,000 million shares outstanding, but it would obviously mean a lot to a company with only 200,000 shares. Companies will generally not share the capitalization table, which describes the company’s ownership structure in detail, with candidates below the top executive levels. But it’s fair game for a job candidate to ask how many shares outstanding there are, and what percentage ownership the employee holds on a fully diluted basis. “You are a shareholder and deserve to be treated as such,” More says.
Gilman, who left an academic job at Cold Spring Harbor Laboratory to start his biotech career, said candidates would be wise to pay little attention to the equity they’re being offered, and the year-end cash bonuses that might be dangled as an incentive to hit certain goals. Most startups are chronically strapped for cash, and not likely to pay out bonuses, either. “My advice is to take that option grant and stick it in the deepest drawer you have, and don’t ever think about it,” Gilman says. “Nine times out of 10 it will turn into nothing.”
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