Will the paycheck clear at your new startup job?

Photo courtesy Flickr user Alan Cleaver

(MoneyWatch) I frequently hear about how great it is to work for a startup: The relaxed environment, the camaraderie, the potential for rapid and meteoric growth. But there's a downside as well -- namely, uncertain financial results can mean rapid insolvency.

If you take a job at a startup, do you have confidence the check will clear, dependably, every month for the foreseeable future? That's a good question and one that the Harvard Business Review recently tackled. Authors Karen Berman and Joe Knight explained how to evaluate if the startup you're hoping to work at can make payroll. In a nutshell, here's what they recommend.

Get a copy of the company's balance sheet. If the company is already publicly traded, you can find it online among the firm's most recent financial statements. Use that data to calculate the current ratio. To do that, divide the "current assets" (on the assets side of the balance sheet) by "current liabilities" (on the liabilities side of the sheet). Any number below about 1.2, Berman and Knight assert, is a red flag that should give you pause.

Says Forbes in citing the HBR piece:

Joe is part owner of a small manufacturing company called Setpoint. If Joe's around when a job candidate is interviewing, he always offers the candidate a chance to review Setpoint's financials. So far, exactly zero candidates have taken him up on the offer. We suspect it's because they wouldn't know what to look for.

If you're concerned about the stability of a startup, assessing the financials might not be a bad idea. And for a public company, you can do that silently. But if the business is privately held, as many startups are, getting a look at the financials can be more problematic. Forbes suggests asking the company for a look at the data in exchange for signing a non-disclosure agreement.

That sounds risky to me and unlikely to garner you much positive feedback during a job offer negotiation. Would you ask a potential employer for a look at the books? Sound off in the comments.

Photo courtesy of Flickr user Alan Cleaver

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