Red flags when evaluating founding roles

Concise Summary of Startup Role Red Flags

Equity Red Flags

• Too little equity at seed:
  • Founding engineers: expect ~0.5–2%
  • Designers: ~0.3–1.5%
  • PMs: ~0.3–1%
  • Below ~0.25% at seed (without strong justification) suggests they don’t value early employees or the pool is already depleted.
  • Ask: “How much of the option pool is remaining?” If a ~15-person seed company has <5% left, you’re getting scraps.
• No double-trigger acceleration:
  • You should vest remaining unvested equity if (1) the company is acquired and (2) you’re terminated.
  • If missing and they “haven’t thought about it,” that’s a yellow flag on legal sophistication and how they think about employees.
• Liquidation preference worse than 1x non-participating:
  • 1x (e.g., 2x) or participating preferred can wipe out employee outcomes.

  • Ask for the full liquidation preference stack in writing.
• Option pool <10% at seed:
  • 5–8% at seed is a sign of under-allocation or heavy prior grants.
  • Means constrained refreshes and less equity for future hires.
• 30–90 day post-departure exercise window:
  • Old norm: 90 days (forces you to pay or lose options).
  • Founder-friendly norm: 5–10 years.
  • If they won’t extend, understand you may be forced to walk away from your equity when you leave.
• Vague or hidden cap table details:
  • If they won’t share ownership structure before you join, that’s a major red flag.
  • You can’t evaluate equity without knowing the denominator.

---

Founder Red Flags

• Can’t clearly state the problem and customer:
  • Ask: “What exact pain point do you solve, and for whom?”
  • Vague answers like “we help businesses be more efficient” suggest weak understanding or no PMF.
• No real answer on competition:
  • “We have no competitors” = they haven’t done the work.
  • They should name competitors and explain why they win in a way that matters to customers.
• Hand-waving away prior failures in the space:
  • If many companies have tried and failed, they should have a concrete theory of what’s different this time.
  • “They just executed poorly” without specifics is a bad sign.
• No track record of hiring and retaining strong people:
  • Look at early employee tenure; <12 months on average is a warning.
  • Privately ask current/former employees about management, culture, and follow-through.
• Bad or missing reference checks on founders:
  • Use mutual connections to ask about: handling pressure, decision-making, and keeping promises.
  • If no one will vouch for them positively, that’s a major red flag.
• Uneven or unresolved co-founder equity split:
  • Extreme splits (e.g., 70/30 with equal contribution) or no vesting create resentment and risk.
  • If there’s no formal co-founder agreement, that’s a structural problem.

---

Product & Market Red Flags

• No paying customers at seed (with time already elapsed):
  • Some pre-revenue seeds are fine (e.g., LOIs, clear path to revenue).
  • But ~18+ months in with no paying customers and no clear model is a warning.
• High churn that’s hand-waved away:
  • Good founders know churn, why it happens, and how they’ll fix it.
  • “Those weren’t our ideal customers” or “churn doesn’t matter” without a plan = leaky bucket.
• TAM only works at max assumptions:
  • “$50B TAM” based on entire industry, not the realistically addressable slice.
  • Ask: “What % of that TAM can you realistically capture in 5 years?”

  • 5% is usually unrealistic; most winners get ~1–3% of a large market.

• Recent pivot with no concrete learning:
  • Pivoting is fine if driven by specific customer feedback.
  • Ask: “What specifically did you learn that led to this pivot?”
  • Vague “we learned a lot” without details is a red flag.

---

Process Red Flags

• Rushed process and pressure to decide fast:
  • “We need an answer by Friday” after a few days is usually a tactic, not a real constraint.
  • Good teams let you do references and think.
• No clear 30–60–90 day plan:
  • Ask: “What does success look like in the first 90 days?”
  • If they can’t answer, you’re walking into an undefined role; okay only if you explicitly want that.
• Inconsistent messaging between founders:
  • Conflicting statements on revenue, hiring pace, or strategy signal misalignment at the top.
  • Misalignment cascades into chaos for the team.
• You’d be the 3rd person in the role in 2 years:
  • High turnover in a function suggests mis-scoped role, unrealistic expectations, or poor management.
  • Ask why predecessors left and what would have needed to change for them to stay.

---

Key Takeaways

• Equity structure > equity percentage:
  • Aim for 1x non-participating preference and double-trigger acceleration as baseline.
• Founders must be clear on customer, problem, competition, and prior failures.
• At seed, no/weak revenue + high churn + vague model = low odds of PMF.
• Process red flags (pressure, misalignment, no plan) predict future dysfunction.
• If you wouldn’t recommend the role to your best friend, don’t take it.

---

FAQ

How do I raise red flags without seeming difficult?

• Frame it as due diligence: “I’m doing my homework — can you help me understand X?”
• Keep the tone: “I’m excited and want clarity,” not “I found a problem.”
• If they get defensive over reasonable questions, that’s a red flag.

Is it okay to walk away after accepting an offer?

• Before signing: yes, completely fine.
• After signing but before starting: unideal but acceptable if new, material info appears.
• After starting: it’s like any job; leaving within 3 months burns a bridge, but if you uncover serious misrepresentation (e.g., cap table, terms), you’re justified in reevaluating.

What if there are red flags but the opportunity seems “too good”?

• “Too good” usually means: brand-name founders, big equity headline, or hot market.
• Brand names can still fail; high equity with bad structure is worthless; hot markets create FOMO, not guaranteed value.
• Write down the red flags and ask: “If this fails in 2 years, will I still feel good about this decision?” If the answer is no because of those flags, it’s not actually that good an opportunity.