5 Questions to ask before you join a startup in 2022
Updated: Jan 15, 2022
Everyone understands CTC and in hand salary is different. In fact, search CTC vs in hand salary and you will see a world full of memes on how companies exploit and show their CTC.
But CTC vs in hand difference used to be a problem in 2000 and today everyone drills down the employer to show the break up of CTC before joining the company.
However in recent times, startups in India have become main stream and many of us join these startups for three key reasons:
1) Learning Opportunity
2) High Ownership & Impact
3) Wealth Creation Opportunity
Third point on wealth creation opportunity comes from the fact that startups issue ESOP (Employee Stock Option Plan) in which you get to own a part of the startup at a very low share price. As the startups start growing, its share price increases and you also create wealth for yourself as an employee.
But like CTC, this is a new concept as many employees do not understand ESOPs and don't know the right questions they must ask before joining any startup. They also have a flipside which is captured in the TnC like vesting, buyback, exit and other clauses.
To help you avoid these mistakes, here are top 5 questions you must ask before joining any startup.
Question 1: What is the Vesting Schedule and Cliff period?
Benchmark: A good startup will have a 4 year vesting period in which 1 year is cliff period when 25% vesting happens and after that every month or quarter uniform vesting starts happening for remaining 75% of the ESOPs.
Question 2: What is the allocation share price or how many shares are being offered?
Benchmark: Generally whenever ESOPs are offered, they are mentioned like 10 lakh worth of ESOPs but that does not show anything unless you know allocation share price. Once they share it is at 1 lakh a share price then you know, you have 10 ESOPs.
Question 3: What is the valuation of company and current share price?
Benchmark: This is critical to know as you do not want to be in a situation where by the time you join company, it raises another round and you are offered ESOPs at higher value. This question along with question 2 will help you understand that you are getting a fair deal.
Question 4: What is the buyback and bonus ESOP policy?
Benchmark: A good startup will a regular buyback of shares happening and they will also have more ESOPs issuance as bonus in appraisal cycles or reaching a new milestone and so on.
Question 5: What happens to your ESOPs when you leave the startup
Benchmark: A good startup will have a well defined exit policy and a buyback programme so that tax implications are reduced when one employee leaves a startups and can easily decide on the action they must take on the exit.
Needless to say but one last question, which we have assumed but you should not, is the ESOP communication given on paper through a grant letter or just a verbal/email confirmation done once you join in? Ask for a written ESOP grant letter.
These 5 questions will help you get some idea on how to navigate the discussion around CTC as well as ESOPs.
Also, as we always say- 10 L rupees salary at all companies is same as money is fungible but 10 L worth of a good startup is much better than 1 crore worth of ESOPs in a poor startup.
Be cautious in what you pick.
If you could not understand few of the terms, we have answered these in our FAQ section.