How to Start a Startup Final Lecture – Closing thoughts and Later Stage Advice

Presenter – Sam Altman

Later Stage advice

  • Management
    • Establish structure – important around 25 employees
    • clear reporting structure
    • clarity and simplicity
    • Avoid temptation to have ‘coolness’ via lack of structure
      • but keep in lightweight
    • Mistakes
      • Being afraid to hire senior people – most founders do it later than they should
      • Hero mode – extreme leading by example and during yourself out
      • Delegating- not giving people enough responsibility
        • wrong way is to tell people what to do
        • better way is to say you trust them to come up with the decision using your judgement and this is what I think.
      • Not developing a personal tracking and productivity system

      Codify how you do things (and why)

      • How you do things
        • in the beginning it is easy, when you are small you just decide how it is going to happen.
        • Write it down in a wiki or something and it will become law.
          • if you don’t, it will just be an oral thing that is passed from who the person shadows
  • HR – it is fine to ignore it at first, but it can speed you up
    • Have a clear structure
    • performance feedback – simple and frequent
    • compensation bands tied to performance. In the early days, it is whatever the person negotiates. Putting these bands in place makes it fair and standardized.
    • Equity – be generous
      • your investors will give you bad advice
      • distribute 3-5% per year
        • this dilutes you and your investors as you do this
        • the most successful companies give a lot of stock out to the employees every year
        • *do this with refresher grants
        • Structures – 6 years, pyramid vesting, continuous forward vesting
        • Get an option management system early
    • There are a lot of training/requirements once you hit 50 employees
    • Monitor for burnout
    • Hiring process
      • Full-time recruiters
      • Internal announcements – should announce every offer before you do it. a lot of people might know that person and have some feedback
    • New employee ramp-up
    • Diversity on the team
      • it is good to hire some diversity in perspective on the team early on. if you get this right, it will have a lot of benefits in the future
    • Growing past the employee base – hiring an engineering VP when you have earlier engineers that have been around longer
  • Company productivity
    • Productivity will go down the more people you have
    • The reason companies become unproductive is that they are not aligned or trying to undermine eachother
    • Clear roadmap and goals:
      • All employees can say they have the top 3 goals
    • Transparency and rhythm in communication
      • all hands meetings
        • go through the results and the roadmap for the entire company
        • roadmap
        • Offsites – take your best people to a cabin in the woods or something and talk about what they want to be when they ‘grow up’
    • Your goal is to create a company that creates enduring value over a long period of time:
      • Repeatable innovation and a culture of excellence as it grows
  • Legal, finance, accounting, tax
    • clean books, accounting firm, audits
    • collect your legal documents -easy to fix now if your missing something
    • FF stock in the B round
    • IP, trademarks, patents
      • you have 11 months to file for a patent or provisional patent after you have invented something
      • Trademarks, US and int’l
        • it is a good time to do it early
      • Grab all domains for your company, misspelling, etc.
    • Financial planning and analysis
    • Consider hiring a FT fundraiser (after B round)
    • Tax structuring (IP structured in Ireland?)
  • Your Psychology
    • It keeps intensifying
    • Ignore the haters – internet commenters, journalists, etc.
    • Long term commitment; long term strategy
      • since so few founders are committed to having a 10 year plan, the ones that do are at a huge advantage
    • Monitor burnout – take vacation
    • Focus – losing focus kills startups. When you are burning out, you will tend to do easier things. Focus is what made you successful in the first place
    • Ignore acquisition interest – don’t get demoralized by a low offer, don’t start any acquisition conversation unless you are ready to take a really low number’
    • Startups fail when founders quit
      • If you can manage your psychology in a way where you won’t quit
  • Marketing and PR
    • start thinking about this once the product is working, don’t ignore it
    • Don’t outsource key messaging
    • Get to know key journalists yourself
      • do not pick a PR firm
      • Pick 3-4 journalists that you establish a relationship with
  • Dealmaking
    • Build a great product
    • Develop a personal connection
      • it shouldn’t feel like a transactional relationship
    • Have a competitive dynamic – the way you get deals done is to have a competitive situation. “if you don’t sign with me, you you will miss out”
    • Be persistent!
    • Ask for what you want – most of the time you won’t get laughed out of the room and you might get it.

Q&A

  • Most startups fail – how to fail gracefully. It is a very forgiving environment, be ethical be up front.
    • Be up front with investors, tell them early
    • Tell your employees before it fails
      • give them 2 or more weeks severance for employees
  • When to think about hiring a professional CEO – Never. Most of the time, if you don’t want to be the CEO of a company, you shouldn’t start one. You should want to build a great company.
  • If there is a certain market you are excited about, but don’t know a lot about, what should you do? Either jump right in and learn as much as you can OR go to work with a company that is in the industry and jump in from there.
  • When should a group of founders raise some seed money? Wait until you have the idea figured out, and need money. Once you raise money, you need to move fast and get out of the exploratory phase. Wait until things are working.

RG

 

 

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How to Start a Startup Lecture: Sales and Marketing, How to Pitch, and Investor Meeting

Presenter 1- Tyler Bosmeny

How to get from $0 to $1 million in sales

  • Reality is that you are the salesman when you are the founder.
    • “When you are a founder, you should be either building your product or selling”
    • founders have some advantages
      • passion
      • industry and product knowledge
    • Pick a founder to own this
    • Founder passion trumps sales experience
  • The Funnel – a couple strategies for each
    • Prospecting
      • Find the innovators (2.5% of potential market) – it is a numbers game. Which means you need to talk to a lot of people.
      • Reach out to >100 companies
      • Top 3 methods:
        • Your personal network
        • Conferences – go to where your users are
        • Cold emails
    • Conversations
      • When you get them on the phone, remember to shut up.
      • The best sales people will talk 30% of the time. Listen to their problems
        • What would your ideal solution look like?
        • How do you deal with this problem today?
      • Follow ups need to be really persistent. you need to follow up religiously
      • Your goal is to get people to a “yes” or a “no” as quickly as possible. Maybes will clog your process
    • Closing
      • Redlining – Final step to send them an agreement
        • YC has open sourced their template
      • Don’t waste time quibbling over small issues. If it is reasonable, sign the deal and move on.
      • “I will use your product, but it needs this one more feature” – 9/10 times if you build the feature, they will still not use it.
        • Either sign a conditional agreement, or
        • Wait to hear demand from more customers
      • Free trial trap
        • Early on you need commitment, validation, and revenue
          • a free trial gets you none of these things
        • A good way to handle it is have them sign a 1 year agreement, but give them the option to opt out within the first 30-60 days.
    • Revenue/promised land
      • 5 ways to build a big business: you need to have different strategies (see Christopher Janz article for the graph)
        • flea/mice/rabbits – marketing
        • Deer – inside sales
        • Elephants – field sales

Presenter 2 – Michael Seibel

Investor Pitch/Investor meeting

  • The best way to make your pitch better is by making your company better
  • Creating a pitch: Simply explain what you do, and ask for money
    • 30 second pitch – this is your general pitch you tell everyone. A good pitch is invaluable
      • What does your company do?
        • Mom test: if in one sentence, you cannot tell your mom what you do, you need to keep working on it.
      • How big is your market?
        • Figure out what general market you are in?
          • AirBnB could say how big the hotel market is
      • How much traction do you have?
        • “we launched in January, and are growing at 30% per month. Our current revenue is____ and ____ users”
        • If you do not have #’s like this, convey you are moving quickly “We incorporated in January, by march we launched a beta, by April we launched our product” – you are moving fast
    • 2 minute pitch – people who are more interested: investors, users, etc.
      • Clear 30 second pitch +
      • Unique insight – tell them something they don’t know, the aha moment, what the competitors don’t know. They need to aha, it has to be 2 sentences.
      • How you make money
        • one sentence, don’t run away from it. be specific- if it is advertising, say advertising. don’t just spout out any and every answer you can think of.
      • Team – if you and your team have some kind of great track record of making money, say it. How many founders, how many technical, how long have you known each other (should be >6 months), how you met. Keep this to 2 sentences.
      • The Big Ask ($$$)
        • You have to know what you are talking about – convertible note or safe, cap on safe, min investment size. If you don’t know this, the investor won’t take you seriously
  • When to fundraise
    • Investors like to invest in companies with traction
    • How do you flip the scenario – be in a scenario where you are strong and investors are weak. If investors are asking you if they can give you money, that is a good sign you have a strong position
      • Have you created a plan where you can launch and grow to profitability without the investor’s money. Don’t be dependent on the money.
      • Show the investor that you are committed and working fast
  • How to set up investor meetings
    • Warm intro from another entrepreneur or previous investor. Credibility of that person
    • Think parallel – fundraising should be a sprint where you schedule everything within a week.
      • “hey we are building like crazy right now and for the next two weeks, can we meet on the 3rd week?”

Presenters 3/4 , Qasar Younis, Dalton Caldwell

  • make sure the listener knows what you are talking about
  • know your numbers
  • know your market size- build bottom up analysis
  • you should understand something counter-intuitive
  • drive the conversation to a conclusion
  • your team should be uniquely suited for this business

Hallmarks of a good pitch

  • Capture interest, told and interesting story, engage the listener
  • Demonstrate insights and command of the market, passionate not didsmissive
  • collaborative meeting, more than an interrogation
  • Actually ask for money

After the meeting

  • Follow up (anything but a check is a “no”)
  • Work on creating deal heat (supply/demand)
  • Do due diligence on the investors
  • Know when to stop (addicted to fundraising)
  • Build your company – fundraising is not the goal

RG

How to Start a Startup Lecture: Legal and Accounting Basics for Startups

Presenters: Kirsty Nathoo and Carolynn Levy

Setting up a separate legal entity. What kind of entity? You want to create a separate one

  • Delaware Corporation – Delaware is the easiest place to incorporate.
  • Keep it simple – incorporate as a Delaware corporation and don’t say you will just convert later.
  • How to do this?
    • fax two pieces of papers to delaware saying you will be making a company
      • do due diligence, set a CEO, officers, secretary, etc.
      • Designate your assets, IP, code, etc.
      • Ask yourself if you are doing it as yourself, or if you are doing it as a separate entity
    • You can use a law firm, or online
      • clerky.com is a great resource
    • Keep signed official documents in a safe place – don’t lose them
      • you will need them in fundraising, selling the company, etc.

Equity

  • Equity allocation
    • How much equity for each founder?
    • Execution has greater value than the idea. A mistake startups make is that they give too much value to the founder that is credited with coming up with the idea.
    • Founders should have pretty equal equity, if not, it will likely lead to issues. i.e. the founders are not in sync with eachother
    • Looking forwards, not backwards – founders that are thinking forward will focus on everything going forward, not focused on who’s idea it was or who wrote the most code, etc.
  • Purchasing
    • Paperwork – you need to document this. You need to sign a stock purchase agreement.
    • 2-sided transaction: you are getting shares in return for cash, IP, invention, etc. that you are giving.
    • Stock should be restricted- vesting schedule
      • There is no way to go back and fix this, and it has blown up deals in the past. The 83B election – it impacts your taxes and the company’s taxes. You need too sign it and prove that you sent it in to the IRS.
  • Vesting
    • “shares that are subject to forfeiture”
    • Standard vesting period is “4 years with a 1 year cliff”
      • After one year the founder owns 25% of shares
      • Then after that it vests monthly for the next three years
    • A company can repurchase shares – by righting the founder a check
    • You want to do this in case a founder leaves the company – if they leave, it is not fair to the other founders.
      • It gives them skin in the game
      • Single founders should have vesting too
        • skin in the game
        • applies to the culture of the company, requires employees to have a vesting schedule as well
      • Investors do not want to put money in a company where the founders can quit and still maintain their equity.
  • Fundraising
    • Logistics
      • Priced vs. Non-priced rounds (Price = valuation)
        • Convertible notes and safes
        • Convertible notes – you invest 100k and have the rights to purchase at a priced round in the future…
        • Non-priced rounds have a cap. How a cap works is that if an early stage investor invests 100k with a $5M cap, and in the next round the valuation is $20M. That early stage investor would get 4X the shares of the next stage investor.
      • Paperwork needs to be filed!
        • Standard documents
        • different investors might have different rights
        • Use Clerky.com for this
      • Dilution
        • If you give away 25% of the company in the first round and 20% in the second round, you end up diluting and giving away 45% of the company
      • Investors need to be savvy and understand the risk associated with their investment- look for accredited investors
        • Your uncle that let you borrow $10k might get disenchanted and want it back
  • Investor requests – the burden is on YOU to know what the investor is asking for and what you are getting yourself into
    • Board Seat – you want to say know. Make sure if you do it, that they will add value to your company
    • Advisors – everyone wants to give startups advice. Investors will be a de-facto advisor. you should not have to give them additional shares or money because the investor already does have skin in the game and should want the company to succeed because of their investment. Asking for additional shares is just them looking for a freebie.
    • Pro-Rata rights – right to maintain % of share in a company by offering them rights to buy them in order to avoid dilution. The biggest issue for founders is that it will almost always result in the dilution of their ownership as well
    • Information rights – Investors always want information. It is a good thing to give investors monthly updates, but watch out for over-reach if they want weekly updates or budget, etc.
  • Company Expenses
    • What is a business expense?
      • Paying employees, hosting costs, office expenses
        • You can write business expenses off on a tax return
        • The company will have its own bank account that you will have to keep separate from your own.
        • The investors gave you money and trust you to use it to make the company a success
    • Keeping track of expenses
      • Keep all of the receipts to understand what are and what are not business expenses
  • Doing Business
    • Founder employment
      • Founders are employees of the company and must be paid wages/salary
        • Working for free is against the law- even for founders
        • Run lean (minimum wage)
      • Set up a payroll service, you need to pay your payroll taxes
    • Hiring and firing – your co-founders can fire you
      • Unpaid wages become leverage – a fired founder
      • Avoid problems by…
        • paying your co-founders
        • Paying yourself
        • Paying your payroll taxes
    • Hiring your employees
      • Paperwork
      • Consultant vs. employee
        • There are subtle differences:
          • Both an employee and contractor will sign documents assigning any IP they create to the company they are working for
            • Contractors will sign a consulting agreement, not withhold taxes, but you need to provide a 1099
            • Employee will sign an IP assignment agreement. But the company will pay taxes, is responsible for paying those over to the founders.
            • Employees MUST also be paid a wage, they cannot make less than minimum wage and they cannot just take equity.
              • You must pay all required fees: workers compensation fees
              • You need to see proof that the employee is approved to work in the U.S.
              • Just use a Payroll service provider
      • Equity for employees
  • Firing Employees – “you are not a real founder until you have had to fire somebody.” You have to do what is right for the company vs. what is easily
    • Fire quickly – don’t let a bad employee linger. If a bad employee stays around too long, it can create toxic
    • Communicate effectively – do not elaborate. don’t rationalize, don’t apoligize. Just say “we are letting you go”. Have a 3rd party present.
    • Pay wages/salary up to the point of termination (and accrued vacation)
    • Eliminate access
    • Repurchase unvested stock
  • Legitimacy
    • Know your key metrics
    • Balance sheet and income statements
    • Tax returns

Q&A

  • How to search for an accountant, how to do this?
    • Bookkeeper vs. accountant – tax returns have to be prepared annually by an accountant – it is not worth the founders’ time
    • How to find one? Recommendations from people. It is best to deal with people that are used to dealing with startups.
  • Budget for incorporating? If you use Clerky – it is in the hudreds of dollars, not the thousands. Don’t waste a lot of money on it. Once you get moving on, it will dictate the level of legal costs. Clerky has a lot – past just the incorporation, they are a great resource.
  • Cryptocurrency – banks struggle with dealing with cryptocurrency at this time.

RG

How to Start a Startup Lecture: How to Design Hardware Products

Presenter – Hosain Rahman

He believes that wearables will be the center of where everything is going. In order to be design great products, you need to have a complete platform: Hardware, software, services, and data.

Everything is a system:

  • Wearables – tracking hardware, sensors, algorithms
  • Engaging application and service
  • Science and Data Insight
  • API partners and signals

How they create:

  • Exploration – broad, dreaming, imagining, futuristic, rigorously defined building blocks
    • What you’re doing: Building and tinkering
    • To move on to the next step, ask yourself: would you invest $50k in this investment?
  • Early validation- proving your thesis like a Ph.D. Outline the story, explore the system
    • What your doing: Checking for robustness
    • Prioritize concepts, approve budget for resulting programs
    • Design Reviews
    • To move on to next step: does it fit into strategic vision, feasible to make, business viability, early experience benefits?
  • Concept – Big, human-centric concepts. Starting on a journey, painting experiences in broad strokes, asking big questions, selling the experience
    • Define the “why’s”
    • Beginning to define the features
    • imagine what is possible
    • Help determine if the product has merit
    • What are the ‘hero experiences’
    • To move on to next step: Highly resolved “whys” and differentiation strategy (from competitors, from other products in the family); product roadmap
  • Planning – Emergence of a product. No turning back, building belief, sobering truths, breakthroughs, diverse input
    • Making a plan, validating and feasibility, beginning to build a story.
    • Drives: the retail calendar, quarterly forecasting
    • Make key decisions around trade-offs
    • Sign off on the plan to move forward
    • To move on to next step:Prioritized features, functionality, and minimum bar; business plan and product roadmap
  • Development – Bringing to life. Anchoring the relay, pride in craftsmanship, laser focus problem solving, shared understanding of what, why and how.
    • To move on: design sign-off; Engineering sign-off; Founder sign-off
  • Continued innovation – Feeding the fire – go from imagination to execution on specific challenges, creating dialogue with the world

Framework

  • Why’s – clear, memorable articulation of the human and business problems we are trying to solve
  • Themes – experience-based story tracks that translate ‘why’s’ into actionable concepts
  • Pods – cross-functional teams empowered to explore, act on and ultimately ‘own’ a theme
  • Hero/Sidekick experiences – scenarios that elevate concepts to signature solutions: own able system-oriented, intentional
  • Features – the building blocks or core objects of an experience: scalable, measurable, delightful

Why’s – List of consumer problems we are solving. They use these as a guidepost for their creativity:

  • What is the user problem that once we solve, the users can’t live without

Product run-through

  • The Why’s of UP24
    • Real-time feedback to stay on track with goals
    • Understand data in a more meaningful, relevant and timely context the “so what”
    • Need guidance, including structured and motivating activities to keep you going
    • Ongoing encouragement and in-the-moment validation that you are on the right track and doing well
    • More fluid and frictionless way to manually log activities and never want to “miss” a sleep
  • Their point of view of how UP24 would complete the wearable experience:
    • 24/7 engagement
    • understand and act in the moment
    • Actionable insights
    • Progressive and contextual tagging
  • Behavior loop (UP24)
    • Track – create the habit
    • Understand – lead to the habit of reflecting and learning about what you track
    • Act – combine the three, and the user can trigger action. Ideally, UP will do this as early as possible
  • Users they design for (UP24)
    • Social supporters
    • Suggestion seekers
    • medical managers
    • Appearance enhancers
  • What makes a smart action?
    • Real time
    • Customizable
    • Social
    • Progressive
  • Design a storyboard
  • Secondary experiences get added in afterward

When doing a consumer interview, think about the questions you need to ask that will make you smarter about your thesis instead of asking them to validate what you want to do.

Q&A

  • How do you look at a tradeoffs as a system? You need to address them and realize there will be tradeoffs but make sure that the tradeoffs still meet the goal that is on the board. This gets more difficult  as you get bigger.
  • Creating competing products in the same space? They have a unifying theory, and think through how the pieces get pulled together. You have to think about your category, replacement cycle, etc. which will be different depending on what market you are playing in.

 

RG

How To Start a Startup Lecture – How to Run a User Interview

Presenter: Emmett Shear

Most startups are not making something that is useful for just the founder. You need to know what your users want. He started a startup where you are basically watching people play video games. Created a way at Twitch for them to easily talk to their users.

Finding users: Who would you talk to about a note-taking app for lectures

  • Students
    • different subjects
  • Professors
  • College IT
  • School administrators
    • This is who you would be selling to
  • Parents

Dig into details of the answers. Don’t ask them about specific features – in the first set of interviews you are going to hear the problems the users have. If they get into specific features, the users don’t really have that good of ideas around which features should be added.

  • Find extremes of people – you will get different responses if you are talking to college kids vs. high school kids vs. parents…

Getting feedback is good, but if it is coming from people who are already paying (and not leaving). The things that people who were NOT using the service and complaining about are the ones that you might need to listen to more. It is also really good if you can get users that are really well informed (have used your competitors as well). Look at feedback and don’t necessarily build what they ask for. Build for the goals they are trying to go after. Twitch dumped almost all of their resources into things that people never asked for.

Honestly, this was one of the less actionable lectures, he jumped around a bit and didn’t have a clear message.

RG

How to Start a Startup: Week 8 Reading

Making Yourself a CEO – Ben Horowitz

CEO’s are not born, it is a skillset that takes years to develop and it is extremely difficult to know whether a CEO will make it. Being a CEO takes a lot of ‘unnatural motions’- from an anthropological standpoint, it is natural to do things that make people like you as it enhances your chances of survival. To be a good CEO, in order to be liked in the long run, you need to do things that upset people in the short run – unnatural things. The key one that Horowitz starts with is giving feedback. It is unnatural to be critical of other people that you want to like you, but evaluating people’s performance and constantly giving feedback is what a CEO must do. If you cannot even do this, it only gets harder with writing reviews, taking away territory, handling politics, setting compensation, and firing people.

How do you handle the unnatural? -one method is “The Shit Sandwich” – a technique described in The One Minute Manager.  The concept is that people open up to feedback far more if you start by complimenting them (slice of bread #1), then you give them the difficult message (the shit), then you wrap up by reminding them how much you value their strengths (slice of bread #2). This also focuses the feedback on the behavior than the person, because you establish up front that you value the person.

  • This can tend to be overly formal since you have to plan and script the sandwich to make sure it comes across correctly
  • After a few times, it can lack authenticity
  • Senior executives will recognize the shit sandwich immediately

Ben’s alternative to the “shit sandwich” approach is that you need to elevate yourself above this approach. To do that, you need to match your own personality and values:

  • Be authentic- don’t try to manipulate the person’s feelings. Don’t fake it.
  • Come from the right place – if you decide to fire somebody, fire them. Don’t prepare them to get fired, prepare them to succeed. If they don’t take the feedback, that’s a different conversation
  • Don’t clown people in front of their peers – never embarrass somebody in front of their peers. If you do, your feedback will have very little impact other than to a) cause the employee to be ashamed and b) cause the employee to hate you
  • Feedback is not one size fits all – everybody is different. Your tone needs to match the employee’s personality, not your mood.
  • Be direct, but not mean – watered down feedback can be worse than no feedback at all because it is deceptive and confusing. Don’t beat them up though, because you want to create a dialogue, not a monologue.

Feedback is a dialogue, not a monologue- just because your CEO doesn’t mean you’re right. Your employee should know about their function than you do, so you might be wrong. Therefore, the goal of your feedback should be to encourage people to open up vs. close down discussion. Encourage people to challenge your judgement and argue the point to conclusion. You want to apply pressure to get high quality thinking, but be open enough to find our when you are wrong

High Frequency Feedback – once you have mastered these keys, you need to practice it all of the time. As CEO you should have an opinion about absolutely everything. Say what you think, both positive and negative. This will have two positive effects:

  • Feedback won’t be personal in your company – if it is consistent, people will get used to it. People will focus on the issues, not see it as a performance evaluation.
  • People will become comfortable with discussing bad news- if people are comfortable with talking about what each other are doing wrong, it will be very easy to talk about what the company is doing wrong.

More unnatural skills – As CEO, you need to learn a lot more unnatural skills than just this. You will feel awkward or incompetent when you are doing some of these things. This is the process, this is how you get made.

 

A Good Place to Work – Ben Horowitz

At his company Opsware, he would teach management expectations – specifically the expectation to have regular meetings with their people. He even instructed them on how to have a good 1 on 1 meeting. He realized that these meetings were not happening and took a step back to think through why they are important.

What is a good place to work? “In good organizations, people ca focus on their work and have confidence if they get their work don, good things will happen for both the company and them personally. People wake up knowing that the work they do will be efficient, effective, and making a difference both for the organization and themselves. These things make their jobs both motivating and fulfilling.”

A bad place to work? “In a poor organization, on the other hand, people spend much of their time fighting organizational boundaries, infighting and broken processes. They are not even clear on what their jobs are, so there is no way to know if they are getting the job done or not….” Ben then went on to threaten the executive he was talking to and the manager in question that they will lose their jobs if they do not comply within 24 hours. He says it was necessary to be this harsh for a couple of reasons:

  • Being a good company doesn’t matter when things go well, but it can be the difference between life and death when things go wrong
  • Things always go wrong – in bad companies, when the economics disappear, the employees disappear. In tech companies, when the employees disappear, the spiral begins, value declines, etc.
  • Being a good company is itself an end!

 

How to Minimize Politics in Your Company – Ben Horowitz

Corporate politics almost always starts with he CEO. Contrary to what you might imagine, it is often the least political CEOs that run the most ferociously political organizations: Apolitical CEOs frequently accidentally encourage intense political behavior. Ben defines politics as people advancing their careers or agendas by means other than merit and contribution. – this is the kind of politics that really bother people.

How it happens –  An example given is executive compensation – a senior employee comes to you and requests a raise. Suggesting that he is paid far less than current market value – even that he has a competitive offer in hand. If you give the employee a raise, it creates a strong incentive for political behavior. You were rewarding behavior that has nothing to do with advancing your business. The employee will earn a raise by asking for one rather than you rewarding them for outstanding performance. How is this a bad?

  • Other ambitious staff members will immediately ask for raises. Now you have to deal with political issues vs. actual performance. Also, if you have a competent board, you will not be able to give them all out-of-cycle raises so these executive raises will be on a first-come, first-serve basis
  • The less aggressive members will be denied off-cycle raises simply by being apolitical
  • The object lesson for your staff and company is that the squeaky wheel gets the grease and the political employee gets the raise

How to minimize politics – Technique in 3 keys

  • Hire people with the right kind of ambition – Which means that they have ambition for the company’s success with the executives own success only coming as a by-product of the company’s victory.
  • Build strict processes for potentially political issues and do not deviate – Activities that attract political behavior are:
    • Performance evaluations and compensation
      • Protect your company by conducting well structured and regular performance and compensation reviews. This should be an airtight compensation policy. Ideally it should involve the board of directors.
    • Organizational design and territory
      • You need to be careful of what you say when an issue like this is brought up. Generally it is best to say nothing at all – at most ask “why?” but be careful not to react to the reasons. If you are going to re-org, do so quickly and do not allow time for lobbying and politicking.
    • Promotions
      • Every time your company gives somebody a promotion, everyone else will evaluate if that promotion was for merit or political favors, then react in one of three ways:
        • Sulk and feel undervalued
        • Outwardly disagree, campaign against the person and undermine them in their new position
        • Attempt to copay the political behavior that generated the unwarranted promotion
      • To avoid this, have a formal visible, and defensible process for promotions. The executive level promotions should include the board of directors.

Be careful with the “he said, she said” – There are two specific complaints you will hear:

  • Complaints about an executive’s behavior – in this case, get them into a room and have them explain themselves – make sure both executives are in the room (complaining and targeted executives). Failure to have both present will invite manipulation and politics
  • Complaints about an executive’s competency or performance – These are much more complex and rare. It is likely if you are getting one of these complaints that it is something you a) already know or b) is completely shocking.
    • If it is A, you know you have let the situation go on too far, you must resolve the situation quickly – usually meaning the executive needs to be fired. Even if the executive can improve their performance, they will lose the support of the organization and never regain it.
    • If it is B, you need to stop the conversation immediately and make sure it is known that you in no way agree with their assessment. You don’t want the complaint to become a self-fulfilling prophecy. You should then re-assess the employee in question, if they are doing an excellent job, figure out the complaining executive’s motivations and resolve them.

 

RG

 

How To Start A Startup Lecture: How To Manage

Presenter – Ben Horowitz

  • One Management Concept: When making a critical decision, you must understand how it will be interpreted from each person’s point of view and its impact on the union of the individual views. i.e. culture.
    • See your decisions through the eyes of the company.
  • Demotions
    • Do you demote or fire?
      • Hard working and well liked person that is over their head.
        • If you demote
          • will he keep his equity package?
          • Is he going to work as hard being the guy who reports to the guy?
          • Do I respect him as much after I demote him?
        • Ben seems to be firmly in the “fire” camp. It is a lot cleaner.
  • Raises
    • Excellent employee asks for a raise
      • Your perspective
        • You want to retain them
        • they have done great work, so its ‘fair’
        • They will like you if you give them the raise and you want to be liked
      • Employee’s Perspective
        • They have thought about it a lot
        • it is a very serious thing
      • Everyone else’ perspective
        • Unfair that I didn’t get a raise
          • “you either need to be the guy that asks for the raise, or quit and go to the company that evaluates performance”
        • I did better work, it is unfair
        • Maybe I should quit
      • Cultural conclusion
        • every employee feels they have a fiduciary responsibility to their family to ask for a raise all of the time
      • Right answer
        • Formal performance evaluation process
        • all the right inputs
        • Run as frequently as needed
        • No raises outside the process
          • message to the employees- “you can lobby all you want outside of the process, but it will not be reviewed until the evaluation process is completed”
  • Evaluation of Sam Altman Blog Post
    • The way almost all stock options work in Silicon Valley is that when you leave the company, you have 90 days to exercise the options. If you do not buy that stock in that period, it is gone.
      • Your perspective
        • you want to be fair
        • Don’t want employees that don’t plan on staying long term
      • Perspective from employee who leaves
        • I worked for my shares; i shouldn’t be prevented from getting them due to economics
        • Did you tell me the truth when you hired me? If you didn’t, I will tell everyone I know about it
      • Perspective of employee who stays
        • Is it smarter to stay or leave economically?
        • Are my colleagues being treated fairly?
        • Does my loyalty matter?
      • Situation Analysis
        • Turnover is around 10%
        • Losing stock is a big incentive to stay
          • good news is that people stay
          • bad news is they are staying for the wrong reason
        • Cultural statements:
          • Give them 10 years to exercise your stock if you are fired or quit
          • Up front, say you are guaranteed to get your salary, you must vest, you must stay until we exit or have the cash to exercise, make the company worth something. We do this because we massively value the people who will see this through…
    • Tousant
      • Born a slave
      • most brutal form of slavery in Haiti
      • Vision – end slavery, take control of slavery, and make it a first class country
      • When he would conquer an army, he would incorporate them into their culture
      • Perspectives
        • Soldiers
          • We want to pillage
          • They were trying to kill us, we should kill them
      • What do you do with the slave owners
        • Slaves
          • free us, we fought for this
          • kill them
          • give us their land
        • Toussaint
          • Economy is key to being a first world country and sugar is our top expert by far. Sugar plantations are critically important
          • No experience in sugar plantations
        • Slave owners
          • business cost structure was predicated on slave labor
          • Paid a lot of money for the slaves up front
          • paid a lot of money for the land
          • have to know the trade
        • Solution
          • End slavery
          • Let owners keep their land
          • Require plantation owners to pay salaries to workers
          • Lower the taxes of the plantation owners so they could keep business thriving
        • Results
          • Only successful slave revolt in human history
          • let plantation owners keep their land
          • total defeat of Napoleon
          • Booming economy + world class culture
          • Under Toussaint, Haiti had more export income than the USA
  • Conclusion – you need to see the perspective of all of the people in the company.

Q&A

  • Firing someone – when you hire people, you try to hire the best. The reason they typically fail is that you did not match them to the needs of your company well enough. Explain the situation – and how you have to move on. How to explain the situation to the employees – nobody feels good about it, thank them for their work, let people know that they are moving on. Leave the people with their dignity
  • How did you deal with the stress of being a CEO? Doesn’t have a great answer for it – helps to be married to someone supportive. Stay focused on what you can do, not what is happening to you.
  • How did Toussaint get the French Generals to work for them? They were surprised they weren’t going to kill them, and was able to make them extremely loyal. The army had English, French, Slaves, etc. on in his army.
  • As the leader, if somebody is your enemy and you want to convert them. Show them the way. Elevate your culture, mission, way of doing things. Make it compelling.

RG