Possible Job Opportunity...

[brewer12345]

I have a potential job opportunity that I will have to decide on sooner rather than later, and I thought I would tap the accumulated experience of the posters here. I have been working as a contractor on the side for someone who has been in the exploratory stages of setting up a new business. The pay as a contractor has been quite lucrative, and the work itself has been interesting and stimulating. This is a huge difference from my day job (mediocre pay and increasingly seeming like drudgery). My client has now met up with some like-minded investors and appears to have accelerated his timeline for start up. On Friday, I received a copy of his 15 page business plan, which includes mention of me and a line item in the start-up budget for my ballpark compensation.

My client is off on a trip to Europe and the Middle East at the moment, and won't be back until Saturday. When he returns, I expect that We will be having a conversation about the possibilities of me being part of his start-up and he has begun to broach the subject via e-mail (and in his business plan).

If I were to actually get what is represented in the business plan, my comp would roughly triple (hubba hubba!), assuming target bonus, with the target bonus only accounting for a third of overall comp.. This is just a guess, but I would imagine that benefits would be less generous than my current corporate job, but the rest of the comp increase would swamp any reservations about that. As I have remarked to my wife, money is not the primary motivator for me at the moment, but this amount is enough to get me to sit up and take notice without a doubt.

I will almost certainly be on the job market anyway in the spring (gotta wait until 3/31 for certain valuable vestings), so having an attractive offer waggled in front of me is hardly a bad thing. However, I have some reservations about this particular offer that I would love some commentary on.

First, I have never had a job with a start-up before, so I feel a little uncertain about this. I am used to being a cog in the corporate machine (and a very minor cog at that). I am heartily sick with all of the BS that goes with it, but I also have no clue what kind of risks and unfamiliar cultural stuff I would be risking by going to a start up. I know that the biggest risk is that the new business could flop. I have seen the business plan and done some of the ground laying research as a contractor, so I think I have a handle on that risk (I am OK with it). What I don't have a clue about are the other potential pitfalls of a start up. Anyone care to chime in on this specifically?

Second, I live pretty far from where the main office will be and I am not open to the possibility of moving for a number of reasons. I suspect that my client would be open to the possibilty of me working from home for, say, 2 to 3 days a week, and I could make the grueling round trip the rest of the time. Any ideas on how to creatively bridge this gap? I think there are a few possible win-win outcomes to this issue, but I want to be creative and prepared when it comes time for discussions.

Third, I have no clue what variable compensation might be based on. The cash bonus would be based on pretty clearly identifiable goals, but I don't know whether equity would be on the table or how I would go about negotiating it. I'd assume that if it becomes a possibility, I could negotiate for a percentage, since a nominal amount of shares is essentially meaningless in the context of a newly formed entity. Any guidance on this?

Finally, what am I missing that might be a risk I can't even envision at this point?

I've never really been in a position to take a flier on a start up before. Now that I have a pretty firm financial base, it looks like I can well afford to take a judicious risk. If it blows up, I won't starve and it shouldn't be too tough to get a new job (was heading in that direction anyway). If it works out, I will be swimming in cash flow, which should add considerably to the FIRE stake. Frankly, the biggest possible upside is the chance to do interesting, stimulating work in an atmosphere that does not burden me with idiotic rules, procedures, mores, etc.

 

[Hyperborea]

 What I don't have a clue about are the other potential pitfalls of a start up.  Anyone care to chime in on this specifically?

Long hours.  Very long hours.  Being willing to take on anything because there aren't that many people.  That means doing everything from your main job role to fixing the photocopier (or at least getting it fixed).  Working in that small a group can also be problematic if you have a conflict (personality or otherwise) with one of the other members of the group.

In the long hours watch out for the "death spiral".  The business begins to fail and everybody gets exhorted to work harder and harder and you know all you're doing is running around on the deck of the Titanic rearranging the chairs.

Second, I live pretty far from where the main office will be and I am not open to the possibility of moving for a number of reasons.  I suspect that my client would be open to the possibilty of me working from home for, say, 2 to 3 days a week, and I could make the grueling round trip the rest of the time.  Any ideas on how to creatively bridge this gap?

Is this a technically savvy group?  I've worked with some colleagues in different locations and what has really helped make things work is instant messaging and video chat.  The IM is great for the quick question.  The video chat means that I can write on my white board and the guy on the other end can see it and vice versa.  It saves a lot of misunderstandings and actually seeing them makes them feel more like a human being rather than a remote random entity.

Third, I have no clue what variable compensation might be based on.  The cash bonus would be based on pretty clearly identifiable goals, but I don't know whether equity would be on the table or how I would go about negotiating it.  I'd assume that if it becomes a possibility, I could negotiate for a percentage, since a nominal amount of shares is essentially meaningless in the context of a newly formed entity.

If you don't have it in writing when you start don't count on ever getting it.  Maybe you will but don't count on it.  You are in your strongest negotiating position before you've said yes.

 

[Jarhead*]

I've never really been in a position to take a flier on a start up before.  Now that I have a pretty firm financial base, it looks like I can well afford to take a judicious risk.  If it blows up, I won't starve and it shouldn't be too tough to get a new job (was heading in that direction anyway).  If it works out, I will be swimming in cash flow, which should add considerably to the FIRE stake.  Frankly, the biggest possible upside is the chance to do interesting, stimulating work in an atmosphere that does not burden me with idiotic rules, procedures, mores, etc.

Brewer 12345:

Above says it all. (It's not going to get any easier re: rules, etc.).
My guess is that in your case, if you don't step through door that is open to you, it might be a kick myself in the butt situation up the road.
You're still a young pup, and with your obvious grasp of financial matters, what do you have to lose?
Good Luck, Jarhead

 

[wabmester]

Start-ups are not generally known for wonderful salary-based compensation. Some founders are very generous with other people's money, but those rides are often very short and sweet. So, I would wait until your client has actually secured funding, get his comp offer in writing, and have a back-up plan in case things blow up.

 

[nwsteve]

Brewer,
You do not mention the area where you will be applying your skills. The reason it may be important relates to how much of an "individual contributor" it is versus part of a team.

All of Hyperborea's points are all "right on".

I did C Level Exec Search and can not emphasize enough the shift in reality from large corp to start-up. The absence of systems, processes and resources can be a hugh source of frustration. Things as simple as who orders and gets office supplies can turn into sources of conflict.

I encourage you not discount this source of cultural shift and spend some focused time reflecting about what you enjoyed in corp life. If it was being focused on only your professional tasks, you may find the startup world way way too unruly.

If any promise is not in writing, it is a conversation not a commitment much less a contract

You mentioned your need to stay where you are till 3/31/05--does this timing match? If not be sure to include any "costs" from walking away from vesting.

With any start-up, it is really critical do the "due diligence" on the financing. Is the money in the company's accounts or is a letter of intent or ? . Be sure you are able to see there are "tangible" economic reality in the plans. The busted dot-coms had business plans that said they were going to make tons.

Finally, if the opportunity is genuine and you have a true passion for it, and reasonable trust with the key players, what better time to liberate yourself. You have FI and even if you only get a couple years, you may find it a very liberating experience from Corp America
nwsteve

 

[brewer12345]

Start-ups are not generally known for wonderful salary-based compensation.   Some founders are very generous with other people's money, but those rides are often very short and sweet.    So, I would wait until your client has actually secured funding, get his comp offer in writing, and have a back-up plan in case things blow up.

I would largely agree, but in this case we are talking about an asset management/hedge fund business, in which cash comp is pretty generous relative to other types of start-up businesses. Naturally I am not going to put my neck on the line without documentation and until I am convinced that the business is actually going to fly (including financing).

Keep those comments coming! Very useful thus far.

 

[Brat]

You are now in the recruiting, or romance stage.  Once you accept the offer it you are "married". It is now that you have the most leverage.  The terms can change after you are hired- including compensation.  If you are really critical to the business it is approprate to consider an employment contract.  Even if your participation isn't key to the business, draft one to help organize your own thoughts.  Keep in mind that if the business goes south any severance agreement could be worthless.

If you must leave your current situation before 3/31 there should be a "signing bonus" equal to your loss.  

If you take the leap put the extra money you are earning in savings until you have a year's living expenses in the bank.  Don't change your life style for 3 years, at least.  After 3 years the business shouldn't be on life support, after 5 years you should be able to relax a little.

I want you to describe the 'worst case' senario and feel comfortable with that situation.  Go in with your eyes wide open.

You indicate that you are considering making a move next year in any case.  Begin to network now to see what other options may be out there for you.  If you go with the start-up maintain your network.  Relationships are the most effective employment resource.

we are talking about an asset management/hedge fund business,  

I had thought you considering a firm were in a technical/science field.  You may be joining a new VC! The one career killer in asset management is unethical conduct.  This is a business where personal relationships with key players inside and outside the firm are as important as business acumin.

There is a lot of pressure on a key player in a VC or an assett management firm to contribute to the bottom line, it appears that next year a lot of money will be invested. Whether you are an analyst, a partner, or a professional staffer it will be a demanding year.  

 

[brewer12345]

Look hard at the financial backers.  A primary cause of business failure is cash flow.  If they are known VCs, staff has evaluated the business plan and determined that there is a good chance of success.  VC participation is no guarintee of success, they often pull their participation when the business doesn't meet their goals.  Also, financial backers become the corporate board, they determine who stays and goes.  I have known founders to be fired.  Financial backers will want to be able to take their money elsewhere in a few years, the business may be sold off or go public. As one of the founders of Whole Foods resently said, a VC is like a person with a very high limit on their Visa Card.  The money is short term.  

If you take the leap put the extra money you are earning in savings until you have a year's living expenses in the bank.  Don't change your life style for 3 years, at least.  After 3 years the business shouldn't be on life support, after 5 years you should be able to relax a little.

I want you to describe the 'worst case' senario and feel comfortable with that situation.  Go in with your eyes wide open.

 

The potential backers are not VCs. I believe the capital will be coming from my client and his partner plus a group headed by my client's former boss who were investigating a similar start-up possibility. The former boss will want to be out in 5 to 10 years, and my client and his partner intend to be the sole/majority owners when that happens. I suspect that there is also a possibility that the business could be IPO'd or sold at some point if it is successful. Basically, the capital would be coming from people who are professional investors and know the business they are considering for the start up (part of it, anyway). They are very, very sharp operators, IMO.

Basically any and all extra cash I earn would be dumped into investments, so upgrading my lifestyle isn't in the cards.

Worst case scenario is that it doesn't work out and I am out the door in 6 months or less. I am quite marketable elsewhere and I have more than enough assets to sustain myself for the long term (years) if needed. I may also set up a HELOC before leaping just to have extra flexibility.

Question: I would intend to negotiate a contract. How much protection is this likely to provide in the real world? Assume the business is at least moderately succcessful and has ready cash.

 

[Brat]

A contract is a from of a pre-nup. They are common with executives in industry. You may not need one in this situation but if you draft one as a part of your own thought process it will help you evaluate the situation.

I expect that there will be a number of opportunities next year in your field. Is this the best for you?

The vacant space on Sand Hill Road is filling up.

 

[brewer12345]

A contract is a from of a pre-nup.  They are common with executives in industry.  You may not need one in this situation but if you draft one as a part of your own thought process it will help you evaluate the situation.

I expect that there will be a number of opportunities next year in your field.  Is this the best for you?

The vacant space on Sand Hill Road is filling up.

I think this spot is in fact nearly ideal, save location.

What/where is Sand Hill Road?

 

[Hyperborea]

What/where is Sand Hill Road?

The centre of VC funding for Silicon Valley. It's the road in Palo Alto where the original and most of the current VCs have their offices.

 

[BigMoneyJim]

In my very brief experience from startups I learned:

- Startups run on enthusiasm and pie-in-the-sky dreams
- Everbody does everything, including selling and cold calls
- They like to offer stock options and other incentives in lieu of decent salary
- Those who invested the money will know if/when it is time to bow out and do so suddenly and without warning if it comes to that

Personally I will never consider stock options when deciding upon salary again.

It sounds like you may be closer to the inner group than I was, though.

 

[ESRBob]

Brewer,
It seems like a lot of us have had experience with venture funded tech startups, which is its own world.

You seem to be going either into a hedge fund, or in a something that serves that industry.

My experience there is the hedge funds/asset management industry are swimming in cash, and if you have your wits about you, there are some huge opportunities there, whether this particular venture flies or not.

Not sure how long the party will last, but it is obscene the money many of them are making. (1.5-2% of assets, plus 20% of the profits.) Plenty of Billion dollar hedge funds are being managed by a grand total of about 6-10 people. Do the math -- 10 people (only 4 or 5 will be on the gravy train) need to figure out how to split 20 million a year of base fees, plus 20% of any profits.

As a result, you also have to ask yourself, if you are a Bogle-Head like most people here, whether you can get onto that gravy train without losing something in your integrity. (I can help you with the rationalizations if it should ever come to that! 8) )

Good luck!

ESRBob

 

[johnblake]

Excellent suggestions. Here are a few more
-check the integrity of all those involved (try to get multiple references). Make sure there are no wackos
-make sure there is enough invested to last 12-18 months.
-check the bus. plan for realistic deadlines and goals
-Make sure your confident they'll add the headcount they need to accomplish their goals
-talk to them about company culture. Are -they- workaholics? Do they enjoy time outside of work? What are their expectations of you?
-check their management styles, do they mesh with your style?

Congratulations Brewer, this sounds like a good opportunity.

 

[wzd]

Worst case scenario is that it doesn't work out and I am out the door in 6 months or less. I am quite marketable elsewhere and I have more than enough assets to sustain myself for the long term (years) if needed. I may also set up a HELOC before leaping just to have extra flexibility.

That and the previous comment about being gone from your current job 3/31 make it sound to me like you have all but decided. Don't let them know and good luck with your negotiations

I have a number of friends who made leaps to startups. All of the above comments apply to what I have heard from them. Many made out well, but some were out of work in a year or less. However, I only recall one that regretted the switch, and that was because he had 5 kids to feed, and wished he had stuck with the security of the old job. The others enjoyed the experience, even if the company went under, and went on to other jobs. They were tired of the corperate BS, and enjoyed the small company. Other than the one with regrets, I only know of one who went back to a big corp. The rest (~15) bounced around various small outfits.

Disclaimer: They had me locked up with golden handcuffs, so I never took the jump, and now I value my free time too much (for a technology startup and it's long hours).

RE: HELOC - I don't know why everyone doesn't have these as insurance. I just waited for a bank to offer a no-cost/no annual fee promotion and took it. Now that I am semi-retired, I probably would not qualify anymore, but it is still there if I need it ( most of my assets are illiquid).

 

[Brat]

As someone I know has said, even a small % of the carry of a  fund is REAL money.

I don't know of any analysts who can keep their committment part time when business is hot.  Be prepared to expend more time and energy than you now expect.  

The greatest power you will ever have is the ability to shake hands and say goodby.

 

[brewer12345]

Brewer,
It seems like a lot of us have had experience with venture funded tech startups, which is its own world.

You seem to be going either into a hedge fund, or in a something that serves that industry.

My experience there is the hedge funds/asset management industry are swimming in cash, and if you have your wits about you, there are some huge opportunities there, whether this particular venture flies or not.  

Not sure how long the party will last, but it is obscene the money many of them are making. (1.5-2% of assets, plus 20% of the profits.)  Plenty of Billion dollar hedge funds are being managed by a grand total of about 6-10 people.  Do the math -- 10 people (only 4 or 5 will be on the gravy train) need to figure out how to split 20 million a year of base fees, plus 20% of any profits.

As a result, you also have to ask yourself, if you are a Bogle-Head like most people here, whether you can get onto that gravy train without losing something in your integrity.  (I can help you with the rationalizations if it should ever come to that!   8) )

Good luck!

ESRBob

Actually, I have basically never been a die-hard indexer. I have done far better than the indexes by managing my own assets. I am currently having a great time watching PPD put the heat on the shorts. Damn thing is now by far my largest position simply due to appreciation.

I can't quite figure out why otherwise responsible fiduciaries are willing to hand over millions of dollars to a very lightly regulated asset manager who dumps the assets in an offshore repository and charges them 1.5/20 and often requires them to agree to a lockout period where they can't get their cash back for years. Then again, I don't understand why people buy Hummers. Seriously, the good managers are easily worth it, but there seem to be an awful lot of opportunists attracted by the fees.

The business plan is pretty similar to the numbers you cite, at least at first. Over time, the plan is to add more assets (duh) and to branch out in largely uncharted waters where fat profits lurk beneath the surface. Yes, there are huge sums available to be distributed.

Thanks for all the comments, guys. I would welcome any further wisdom.

 

[wabmester]

A friend of mine works for a hedge fund startup involved in Japanese securities. I'm sure he makes a ton of dough, but in the early stages he had to do a lot of pitching, and now his life is tied to the Japanese markets. Odd hours and even odder holidays.

 

[BUM]

Brewer12345,

All of the above seems very Yogi'ish..."when you come to a fork in the road, take it." but be careful.

Most of the "head" issues have been sufficiently discussed. The advice given seems sound and well intentioned. I've always worked for small outfits and have been amused by so-called matrix management, where everybody does everything (except get sick or go on vacation).

The "heart" issues need similar attention. You mentioned the unwillingness to move. I spent 18 years 200 miles from the home office... that was before the days of telecommuting. Some advantages and disadvantages there. Remember the home office is where the decisions are made and important things happen.

Maybe the most important "heart" issue is simply, what you (and mrs. brewer) want to do.

The head-work is your due diligence the heart decides and usually wins in the long run.

Any psych's want to back me up on this?

Regardless this is one of life's nicer problems to have. Treat it as such and I'm sure you'll arrive at the best decision.

BUM