Startup exec hiring is rebounding. Consider this diligence checklist before jumping into a new gig.

You are seeing an uptick in messages from recruiters. Many of the hiring companies have strong teams and are backed by solid VCs. But given the roller coaster of the last few years, you want to be thoughtful about this next move.

If the above strikes a chord, read on.

A career decision is not unlike an investment decision. Just as VCs run due diligence before investing capital, you should run due diligence before investing years of time and energy.

No company is perfect. The red flags called out here shouldn't be taken as reasons to walk away from an opportunity. In some cases, you are being brought on to turn things around.

OK, let's dig in.

Market Size and Segmentation

It is shocking how many execs take market size on faith and an analyst quote. A thorough understanding of market size and segmentation serves as a foundation for critical decision making -- from what to build to how to staff the company. Consider it a red flag if the company isn't able to walk you through a bottom's up analysis of each of their target segments. This involves describing each segment's characteristics and relative priority. You should understand roughly how many prospective customers are in each segment as well the segment's per-company spending potential. Another red flag is when the company's medium term ARR projections are >30% of the total addressable market. This level of market share is the rarefied air occupied by Salesforce in CRM and AWS in cloud infrastructure.

Positioning

Positioning is not aspirational messaging from marketing. Positioning is what the market actually thinks about a company relative to alternatives. A company with broad market awareness and a good reputation for something specific would have strong positioning. At a high level, a company might have a reputation for offering superior product at a premium price. Or a company could be known for having a commodity product available at a low cost. When you understand positioning, you understand how a company's product wins in the market. Your interviewers should be able to explain this to you. It is a good sign if functional leadership from sales, marketing, product, and CS are aligned in their answers.

Growth

A company's positioning may sound compelling, but is it translating into healthy growth? To answer that question you need data. Ideally, four or five years of data. NOTE: If you are talking to an early stage startup, you obviously shouldn't expect much historical data.

• Top line y/y growth rate: Take a look at how the company performed during the market tailwinds of 2020-2021 vs the market headwinds of 2022-2023. Specific growth rate expectations vary by company size, but weak growth during the updraft of 2020-21 is a red flag that you should investigate.
• Win rate and sales cycle: This should be done by cohort. First, take the number of prospects that entered the pipeline during a specific period and track what happened to them over subsequent periods. For example, you might take all new pipe opportunities created in January 2023 and determine how many close by July 2023. Adjust the time horizon based on the company's actual sales cycle. And keep an eye on how win rates change over time. In general, a win rate above 30% is strong.
• Quota attainment: A healthy sales team should see 60-80% of sellers hit quota in a given year. Much like top line growth, you should expect reasonably strong quota attainment during 2020-21. If fewer than 50% of sellers hit quota on a consistent basis, you will want to probe for product-market-fit issues, sales staffing issues, and quota design issues.
• Net revenue retention (NRR): In simple terms, NRR reflects whether revenue from your existing customers is growing or shrinking. Positive NRR means that revenue gains from customers who increased spending exceeded the revenue losses from those that terminated or contracted their contracts. An NRR of 110% is good. An NRR of >120% is great. An NRR of <100% is an indication of a leaky bucket.
• Sales efficiency: A burn multiple shows you how much the company is burning in order to generate incremental new ARR. Burn multiple = (net burn / net new ARR). A burn multiple of <2.0 is good. Customer Acquisition Cost (CAC) shows how much net new ARR the company's investment in sales and marketing generated. CAC = (last period's sales and marketing expenses / new customers acquired this period). CAC payback is an indication of how long customer revenue takes to "pay off" customer acquisition costs. To determine the CAC payback, divide CAC by the average gross profit per customer. A CAC payback of <12 months is good.

Your Option Grant

In order to build something great, you must be a believer. When it comes to exits, you need to believe that your startup will be among the 5% or so that make the headlines. But when evaluating your equity grant, you should be clear-eyed and rational. Here are a few things to inspect.

• Ownership percentage: Ask for the number of fully diluted shares, which includes outstanding options and convertible preferred shares. Your ownership percentage = (option grant / fully diluted shares). The amount granted to c-level execs can vary widely -- from >5% to <0.5% -- based on age and stage of the company.
• Change of control provisions: This describes what happens to your options if the company gets acquired. Many change of control provisions include acceleration clauses that allow for immediate vesting of options if the company is sold. This is good for you.
• Exercise window: The exercise window is how long you have to exercise your options after you leave the company. If you don't exercise within the window, you surrender the options. If you do exercise within the window, and the company doesn't exit, you can lose a lot of money -- on the order of a child's college fund in some cases. The good news is that many companies have recognized that 90-day exercise windows are employee unfriendly. An emerging win-win model for both employer and employee is one that extends the exercise window based on years of service. Here's a list of startups with extended windows.
• Preference stack: Investors hold preferred shares. The total amount invested is referred to as the preference stack. A liquidation preference is a clause in the terms of preferred stock that determines the order in which shareholders are paid out when a company is sold. The preference often includes a multiple, such as 1x, 2x, etc. A 2x preference means investors get double their investment before anything is paid to common shareholders. You are a common shareholder. You will want to know the size of the preference stack as well as the liquidation preference multiple when evaluating your grant.

Culture

I saved the most important item for last. None of the other items matter much if you aren't happy. I divide culture into two buckets. The first includes the common characteristics of all healthy companies. The second is unique to your personal work preferences.

In my experience, successful companies foster transparency, trust, and respect. A lack of these traits can lead to a toxic culture. During the interview process, pay close attention to each interaction, especially how interviewers talk about the company and their colleagues. You can dig deeper by asking interviewers to describe "star" employees, as this can be revealing of the company's underlying culture. Finally, consider conducting backchannel references on the exec team.

Next, consider your personal preferences. If a mission-driven culture is important to you, ask how the mission shapes decision making. If you are most comfortable in product-first cultures, ask how the roadmap is prioritized. The list goes on. As a seasoned exec, you know your preferences.

Conclusion

You should treat the decision to join a company as the major investment that it actually is. It would be rare if a company provided you with everything on this list. But don't be afraid to ask. A good fit is in the best interest of both the company and the candidate.

This information will also enable you to hit the ground running when you start. The first 90 days will involve getting to know the team, the customers, and the product.

But that is the topic of another post.

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If you're interested in talking live about this or other topics, message me here on LinkedIn.