Congratulations! The startup you’ve been watching for months wants to hire you as their lead developer. To sweeten the deal, they’re offering equity – for a much smaller knock on your salary than you expected. However, you are new to the startup space. You’re excited to be part of growing something extraordinary. But how do you know if this equity is ever going to be worth anything?
In this guest post, Philip Joubert, co-founder of South African tech jobs marketplace OfferZen gives his advice on how to navigate your equity deal.
Here’s the hard truth: Without an exit event, your equity doesn’t mean a whole lot. While it’s an exciting time for startups in South Africa, profitable exits have been few and far between.
Knowing if an early stage startup is likely to exit is not easy. To assess it, you need to start thinking like a venture capitalist. It will serve you well to leave your emotions at the door and be brutal in your analysis. Indeed, you need to be even more cool-headed than the average VC investor: They generally have a portfolio of investments and only need one or two of them to make a good return. You, on the other hand, are probably putting all your eggs in one basket.
To help you check out whether your equity is or will actually be worth anything, here are three tactics you can use:
Have any VCs invested in the startup?
While it’s unlikely you will get access to the same financial information shared with investors, you can start by finding out whether any VCs have invested in the startup. It is also important to figure out whether it’s an actual VC – outside investment from a wealthy family member will not give you the info you are looking for. Why? A VC carries out stringent due diligence and risk assessments and that’s why it serves as a good proxy. They need to figure out whether an investment is ultimately going to give them returns and allow them to be able to pay back their investors. Moreover, if a VC has put money in the pot, they are expecting an upside within a certain timeframe.
The amount of the investment will also give you an indication of the company’s valuation at the time and, in turn, an idea of what your equity is worth.
Consider the founding team
The next useful proxy is the founders and their previous successes. This doesn’t mean your equity is only valuable if you work for Mark Shuttleworth, Elon Musk or the Paddock brothers.
Building a startup is hard, especially in South Africa, so find out if the founders have run the gauntlet before. Have they hung in there when things were tough and come out the other side with a solid viable business?
This is the grit, resilience and savvy that counts as success in the early stages. And spotting this will help you identify the emerging startup heroes in South Africa.
Look at the product and speak to real customers
Finally, an objective evaluation of the startup’s product or service is important. You may think the product is cool, but do others think the same? Check in with the target market. Ask for the details of five of the startup’s customers. Give them a call and chat to them. Find out what excites them about the product, what frustrates them, and whether they’ll keep using it.
Use this information to asses the business and figure out whether it is solving a real problem and is something that people want. Is it going to grow and does it add value in the world? And of course, don’t ignore your gut feeling about it.
While these three hacks — spot the VC, look at the founding team, and speak to customers — will give you more data to work with than just your initial excitement, you will need to make the final decision on what works for you. Everyone is different and has different risk appetites and personal factors to consider. For some people, this might be the first time they have been offered equity. For others, big promises might have turned to fairy dust in the past.
My sense is that we are on the cusp of the South African startup market exploding and that we’ll be building products and services that make a real difference. Find a startup that fixes something that’s broken in the world!