How Open Should a Startup CEO be with Staff?
bothsidesofthetable.com
bothsidesofthetable.com
I personally prefer not to own a home in
these circumstances but if you really want
to buy a home I’ll happily help you by
writing a letter.
1. The employee in an early stage startup should know better, but:
2. You, as their CEO, someone they hopefully trust and respect, shouldn't be doing anything to encourage them getting into a financially untenable position.
edit: I want to mention another scenario. Let's say you have six weeks of cash left, and prospects for a bridge round are shrinking by the day. For whatever reason you've decided not to tell your employees what's up.
What do you do then? Still tell this poor bastard, "if you really want to buy a home I’ll happily help you by writing a letter"? That's incredibly risky at best and morally repugnant at worst. Maybe things work out and you get more cash. Maybe you don't, but he's able to get another job within days. Maybe you don't, he can't, and he loses his house.
That's a serious gamble you're taking not with your own life and livelihood but with someone else who has placed their trust in you. What's your reaction? 'Them's the breaks with working at a startup,' perhaps?
I know Mark lives in L.A., but I've seen similar behavior occur in both Seattle and SF companies, and I find it abhorrent.
Here's another part that bugs me:
If you find employees building spreadsheets
and spending time on exit scenarios and what
their take would be then you know your company
has “optionitis.”
Even at a billion dollar exit, 1% is borderline fuck you money after taxes.
Hint: I would work 4 years for 50% FU money. Imagine what the equilibrium price of such an auction would be.
(Maybe it is in the UK with its high level of basic social services?)
But what really established the options mentality is that Microsoft grew another 1000-fold to the peak of the dot-com bubble. Someone who joined Microsoft before the 1986 IPO got rich. But so did someone who joined after the IPO. In fact, even someone who joined in 1995 would still get rich. That's why there were tens of thousands of Microsoft millionaires.
The other key difference is that Microsoft was mostly-bootstrapped. They did take investment, but not enough of it to significantly dilute the founders and employees. At the time of the IPO, Bill Gates owned 45% of Microsoft, Paul Allen owned 25%, and Steve Ballmer owned 7.5%.
It's very different today. You get tiny slices of equity, often junior to the VC investment. The company is more likely to be bought out for cash than to IPO. And when you're bought out by a larger company, your options are either cashed out or converted into options on the larger company. Those options are highly unlikely to grow another 1000-fold.
Furthermore the CEO's advice was not bad. I looked for a job, in tech, in Los Angeles, in 2003. I know what that market was like. Even if the company folded, the employee would have had a good shot at finding another one quickly. Whether or not to trust the ability to do that is another question. But whether to take the risk really is a question of choice.
Oh, really?.. Your smart employees suddenly stop comprehending basic math when it comes to their future compensation?
Or maybe - just a guess - when the CEO was recruiting engineers (who, perhaps, don't have much experience with the business side of startups) he told them they would have 0.75% of the company but forgot to mention dilution?.. Could that be the "nuance" employees struggle with?
Most startup engineers think the equity is a signing bonus, almost like a gift-- say, a teaser-- and that they're going to get an order of magnitude more as long as they perform. The fact that it vests over 4 years (with cliff!) and that initial employee allotments are almost never improved is glossed over until they actually join the company.
Oh, please. You're overselling your hand. Programmers aren't victorian textile workers -- they have their pick of jobs, all with fantastic perks, great working conditions and greener grass just around the corner. Nobody is holding a gun to your head and telling you to work at a startup. If you don't think a particular job is a fair deal, then go do something else. Unlike most people, you have lots of great choices.
There are many real problems with software as an industry (e.g. age and gender discrimination), but if your worst complaint is that you're not getting as rich as you thought you might from your day job thinking hard thoughts and typing, then you need a perspective adjustment.
Meh/. This is a weak argument. Most people in nearly every company from the PA to the CEO sits at a desk with a screen and makes clicking sounds 95% of the time. With the minor process of of 'talking' added, this is the basic description of ~all jobs. It helps to critique the argument at a level of resolution that matters.
Huh? Even if we restrict things to the civilian sector, there are a LOT of jobs that don't involve that-- police, firefighters, EMS, doctors, nurses, farmers, manufacturers, construction, etc.
The comment you replied to refers to the perceived difference between what "the startup mythology" promises and the reality that many software engineers at startups are given in hard benefits.
Some software engineers at startups work 100-hour weeks because they think they will receive massive compensation in the form of stock. They perceive the stock they have already received to provide a much larger amount of raw wealth than it would if they crunched the numbers. They perceive that their company might provide them with much larger grants of stock if they perform exceedingly well in building the product. Sometimes their bosses guarantee them that they will receive a massive cut of the company, if they just work a little bit harder for a little bit longer.
I don't know how common situations similar to the above are, but they do exist. I imagine many folks reading Hacker News have been on one or both sides of the table in that situation (stock-granting and stock-receiving). I believe that is what the comment you responded to is criticizing.
Nowhere was there a comparison made to victorian textile workers.
Nowhere was there a claim that '(not) getting as rich as you thought' was the worst complaint about the software industry.
You made the latter two arguments up, and then knocked them down.
Yeah, no kidding. I'm the one who made the comparison, because everything he's complaining about depends on an assumption of victimization that just doesn't apply to software engineers. You're exactly right that modern workers are nothing like victorian textile workers -- and that's my point. You're empowered to do whatever you like with your career, but the complaint is...that other people are exploiting you? No. If you're being exploited, it's because you made a bad decision.
Are there naive people who make bad bets and work hard for little gain? Sure. But as in all things, caveat emptor -- it's not your employer's job to second-guess your motivations, and make sure that you're always acting in your own rational best interest. And while we all make bad bets from time to time, I've never experienced the sort of Machiavellian scheming from employers that the rest of you are complaining about.
And of course because they are software engineers they will always act like perfectly logical proof machines and if they don't know laundry list of startup terminology and financial details of stocks and options well yeah sucks to be them. /s
> You're empowered to do whatever you like with your career, but the complaint is...that other people are exploiting you?
Yes employers exploit employees. Is this that surprising? This perfect balance of power between the two exists in simplified models of the world we like to build in our heads.
Yes they should know better, they should know the financial details. They don't seem to act rational working 100 hours a week for a %0.01 of equity. Good, we've got that squared away. Now how come so many of the supposed rather rational individuals end up in that situation? That's where it is interesting. Survivorship bias and hanging out on HN might help reinforce it as well. Maybe there are other factors? Are some idealists and like to believe in a cause? Ok, now, does the CEO also know that and is exploiting it?
I did, and I'm not sorry I did, but I can say with confidence that this shit is not for everybody. AND I paid a heavy financial toll for 'equity', which is nonsense, but I got agency, which is priceless.
You don't get ahead by keeping those around you in the dark with respect to the rules of the game you are all playing.
Doing that consciously is pretty low. What you want is for everybody to have as thorough an understanding of these issues as time and resources allow so that everybody will be on exactly the same page. Only by maximum alignment of your interests will you maximize your chance of success.
Generally speaking, smart people are pretty good at reading a situation. But they're also pretty good at inventing narratives to fill in the gaps in whatever information you've given them. If there's a particularly glaring gap or inconsistency in your story, you're going to create a culture of uncertainty and resentment.
Money is the toughest topic of all. Who's getting what, how much of it is left, how much is considered a good exit, and who gets what in that exit -- all of these things are going to be subject to open and not-so-open speculation. Accept as much, and avoid inadvertently creating sketchy or conflicting narratives by telling different things to different employees. When it comes to the financial direction and health of the company, how much you've raised is increasingly becoming a matter of public knowledge. How many employees you have is public knowledge (at least within the company). Your monthly burn rate is not public knowledge, but a smart person can arrive at a halfway decent guess. No need to get into the weeds on these topics, but be honest at the high level.
I like your idea of minimizing the into-the-weeds discussions about options. Employees should be there because they believe in the company, and they should hope for the best when the company succeeds. To whatever extent possible, don't hire mercenaries -- people who are just there for the payout. Hire people who want to be there, can handle the risk, and will be more than happy when the company wins big and everyone benefits. But give them enough options so that they will win when the company wins, and so that their incentives are aligned with yours.
I don't believe it's the startup CEO's job to educate her employees on the finer points of dilution, financing, liquidation preferences, etc. Any employee joining an early-stage startup should be doing that sort of homework in the first place. But it is the CEO's job to give her employees a reasonably fair deal, and to explain her long-term goals and expectations. And the CEO should not use her superior financial knowledge or position to take unfair advantage of employees who might not have as much information or financial savvy.
And when you take it upon yourself to mediate the truth, you're put in a position of unlimited temptation with fewer people around to keep you balanced.
I've seen it happen time and time again, and anything but full transparency only works if everything goes well.
But if things don't go well, which happens in the vast majority of start-ups, I've never encountered a CEO who could resist the temptation of hiding essential bits of truth after they already justified to themselves that they were "shielding employees from the emotional burden of the full truth".
And when the shit does hit the fan, those employees will no longer trust the founder/CEO, with two consequences:
a) If there is still an opportunity to save the company, the employees will choose to run rather than fight. After all, who fights for a leader they don't trust?
b) When the ship does go down, they will not only never work for you again, they will tell all their friends and colleagues to avoid working for you.
Trust is a fragile thing. Unless you know how to get it exactly right (which usually comes from getting it wrong a few times), don't mess with the truth. Hire people who can handle the truth.
When I said that there's a "fine line between shield...and creating..." I was basically trying to say what you guys are saying here: that 'mediating' the truth is a really dicey proposition.
I may not have phrased this as clearly as I could have, as evidenced some of the responses.
Of course it is. Explaining the rules and terms of the game makes everybody better players. It's not you against your employees, it is all of you against the world and your competitors are part of the world.
If you're not even willing to explain the rules of the game to your own team how do you expect to win the game?
Jonnathan needs to be careful saying stuff like that can make people think your going to rip them off good luck recruiting with that perception hanging round your neck.
I felt I argued pretty strongly against "ripping off" employees. Here are a few lines from my post:
"give them enough options so that they will win when the company wins, and so that their incentives are aligned with yours."
"And the CEO should not use her superior financial knowledge or position to take unfair advantage of employees who might not have as much information or financial savvy."
It is never okay to rip off employees, or to take advantage of informational asymmetry to give them a raw deal.
But I was talking about the how people will perceive your comment - you came a cross as taking a hardline "Caveat emptor" line.
How you "present" to your employees and the public (to use a some HR jargon) is key - and if your misunderstood it can can have serious consequences - Quiet how Eric Schmidt still has a job I dont know given his propensity for gaffes that makes Prince Phillip seem diplomatic.
I have worked for a boss who was a FSTE 100 director and he was very good at explaining that he couldn't always tell us every thing that he knew.
I'm sorry you got that from my post. It was certainly not the intent. But if I was unclear, I'll accept responsibility for any misinterpretation that has resulted.
I tend to use overly elaborate sentences. Speaking more plainly and clearly would do me a lot of good. That's a consistent problem I have on HN, and it's my fault.
If I had to sum up my OP in three sentences, it would be as follows: "People are smart, and they'll figure out if you're keeping things from them. So don't hide things from them that affect them. That being said, it's not necessarily your responsibility to get too far into the weeds on every last detail of how startup financing works."
In general, I'm in favor of transparency. I'm in favor of giving employees an honest deal. I'm in favor of treating employees as partners, not as "human resources." I don't, however, believe the CEO's job is to be the parent figure of everyone in the company. And accordingly, I believe startup employees should educate themselves as much as possible about the risks involved before joining a startup. Some of those risks are outside of the CEO's total control, in fact (e.g., Series A investors, the Board of Directors, M&A processes, etc.).
That's not meant to be a cold, caveat emptor sort of statement. It's just meant to be realistic. Ideally, a good CEO is transparent and honest. He or she should keep employees up to date on the company's finances, and on how things may change if major turning points arise. A good CEO always does the right thing by his or her employees. But the employees should still do their homework. The CEO should be transparent, but the employees should still be capable of self reliance and diligence. It's a two-way street.
(The article, for instance, brings up the case of an employee who's thinking about buying a house. It's not the CEO's job to manage that employee's personal finances. While she should share any pertinent facts with the employee, and perhaps offer solid advice, she's not responsible the employee's personal-life decisions).
I hope this clarifies what I was trying to say. And again, I'm very sorry if I was not clearer.
"...It's not you against your employees"
With all due respect, that's not what I was saying. Or at least not what I was trying to say, and if I was unclear, I apologize. I said "it's not the CEO's job to educate employees on the finer points," not that the CEO shouldn't discuss these matters in a frank and honest manner if they come up. And I took great pains to state that the employees and the CEO should be on the same page, with the same incentives, on the same team.
I don't disagree with you here, nor do I find what you're saying to be in general disagreement with me. If I phrased something confusingly, again, that's my fault.
I believe the CEO should explain his decisionmaking, how he's structuring the options, how those options affect employees, etc. I don't, however, believe the CEO should be totally responsible for proactively explaining financial minutiae and what-ifs -- plenty of great educational resources are available about those subjects, and the CEO can (and probably should) provide employees with guidance about them.
Of course, that being said, the CEO should answer any questions the employees may have, and should answer them honestly. Furthermore, he should give those employees a fair deal in the first place.
Yes, that's where we disagree. See if you can get your employees versed well on those finer points then they'll be able to make better decisions (or at least, better informed ones...) so that in the longer term they will stick around instead of that they find out that they are in over their heads. I'd rather not work with someone than work with someone when I know they don't understand the deal we are making as well as I do.
That attitude has saved me a lot of headaches and the only time that I deviated from it (it was pretty much a charity project anyway) I ended up in a lot of trouble over exactly that point. So, do yourself a favour and spend that extra time to educate your employees, even if it doesn't come up about any financial package that you have agreed to (preferably before they agree to it!), in the long term that will pay back big time, and it will save both you and the people you work with a lot of grief and headaches. It's up to them to educate their spouse (if applicable) but if you know and they don't then it's up to you to do your bit.
CEO -> takes initiative, not just reactive.
Transparency is why the engineers stuck around as long as they did. Options for the engineers were 0.05%, but the CEO managed to get them doubled to 0.10%, a tenth of a percent.
The engineers stayed in the hope that an aqui-hire would keep the team together. No one thought that an exit had any monetary value to anyone except the VCs and the founders.
It was a high functioning team. Heartbreaking to see it cast to the wind.
The rule is simple: if you are either late to the party, not aware of your value or compensated as an employee (rather than taking no money off the table in the first couple of years or so) then you will end up with a very small part of the equity.
If you are (a) a (co-)founder, (b) aware of what you contribute or (c) willing to be paid mostly or wholly in equity then you will end up with a substantial portion of the equity. You will then still have to make sure about how the rules around dilution and vesting work to make sure that you get what's yours. But that can be learned in an evening or two. (as opposed to being learned in 3 years with a lot of headaches as a final result and not much else to show for your hard work). This is not nearly as hard as learning how to program or engineer stuff so any tech guy worth their pay will be able to do this. If you can't find anybody to help you out on this front and you need answers feel free to mail me.
PR advice is how to manipulate the public.
Management advice is how to manipulate the staff.
Maybe you should revisit your reaction to these three cases. What is the difference? Answer: only in the third case are you on the other side of the table.
> I hate when companies publish too much information about the total stock option allocations, the company valuations, the dilution faced in every round, etc.
The startup employee cannot take their options seriously at all in a situation where this attitude prevails. To her credit the author seems to understand this:
> if money comes through options at the end of our journey that’s icing on the cake
A perfectly reasonable attitude for people to take, although it means the startup is going to have to compete for employees with cold, hard cash.
The closing speech even confirms it. I thought work-for-resume went out of style in the tech world along with unpaid internships. I guess not.
American-style corporate capitalism is an original sin culture. You're worthless until validated ("saved") by an abstract phallic symbol called a corporation. The work-for-resume culture isn't going to fade out for a long time.
This had one huge benefit: no matter how smart you are when there are 10 brains working on the same problem you get a lot more input and this will lead to making better decisions. You're going to have to adopt a clear mechanism for soliciting that input and for publishing the decisions so people don't get stuck in the past.
One additional benefit: there is no rumour mill.
This has worked wonders for me, I'm not sure how well it would adapt to non media b2c start-ups.
Rumor mills get started very quickly. A first whiff of something being hidden or suspicion of "owners talking to so and so. Is that an investor? Are we in trouble? Will I be here next month?". That really kills the morale.
What starts to kill it is perhaps irrational thoughts and filling in the blanks when there is a perceived deception or hidden things going on. Whether those things are happening or not, the rumors already started to take effect.
Once we grew to over a 100, IMHO, a combination of factors inhibited their ability to be that open:
1. we moved to a larger office with multiple stories, which put a little extra cost into simply walking across and asking questions.
2. it was a different sort of challenge communicating a common message across to that many people and they couldn't figure out how to 'scale' the openness.
Eventually I noticed that rumours about salaries and customer nonpayments and layoffs and revenues and profits started up. It was still entirely possible to simply ask the founders about a rumour, but not everyone believed/knew this was possible (especially newer hires) and so untruths would circulate for longer than was healthy.
This line of thinking leads to yet another way to delineate what a start-up is: a start-up is a company where everybody knows everybody else.
Is the author offended when VCs or CEOs make spreadsheets to understand their equity stakes?
Of the author was honest, the message would be "options are a Market for Lemons", so just pay a cash to people who you can't bear to share the risk AND responsibility AND rights of an equity stake.
- the CEO negotiated in bad faith with a customer, lying about the nature of the product they were sold. The customer finally got around to suing.
- I was constantly told there were cash flow problems, and thus my invoices were always being paid late, why more contractors couldn't be hired, etc. Like I said, I was caught up in the work and trying to keep things running. I finally demanded some of my invoices be paid, and the client breached my contract, point blank telling me to ^&$($ off
It turns out the founders were paying off the loans their other companies had "made" to the startup before paying any of the salesguys, IT staff, etc which is why all the contractors hired to help me kept disappearing and not answering my emails. All the while, the CEO's wife was whining how he hadn't been making any salary...
Startups are not part time hobbies. That's the moral of the story, I guess, along with "don't work with sociopaths". People who play "chicken" with their entire IT staff are idiots. I didn't have a problem with having no equity, as that hardly ever pans out, but being manipulated like that was intolerable. So any engineer with a startup should be familiar with the sales process, the basic cash flow, the contracts being signed, etc. Keeping the blinders on like I did is a fatal mistake - there is too much money involved in IT nowadays and all the less than honest people are being drawn to it like flies.
As that famous idiot once said "trust, but verify".
There's nothing more disturbing than openness about finances and runway than a CEO that suddenly clams up. Or maybe that is actually very informative.
When you join up, if you're clear about stating what this group does and give employees a way to approach and resolve problems through these people then, at least in my experience, it's worked.
When a newstart comes onboard they're hired for cultural and role fit but other roles in the organization need to be explained so that communications channels are introduced: we have a regular Friday at 5 meeting where everyone sits down with beers and we recap and talk through issues) or; members of that inner circle integrate themselves with each of the teams
It requires permission and empathy to execute but that's what you need in a leadership role. What people want to hear is: we'll take care of the 80% behind the scenes because we're the ones with domain knowledge in that area, if there's something that you feel storngly about, speak up and we'll listen. If it's big and everyone deserves a say then we'll lay it out for you and you can tell us what you think.
Ultimately the people with the most at stake, be those the founders or the VC's or the other capital partners, they're the ones who get the say because they're the ones with their money at risk.
I agree with Mark that a lot of this stuff is just a distraction. You've come to work for us because you are good at what you do and you fit our culture, the company needs to open upfront about what they want to do (are we aiming for an aquihire or for leveraged growth). If that goal changes then the company needs to have had that discussion with employees so they cna reconfirm in or out but if you sign up then you've got to trust the people making decisions to be working towards what you've all agreed on.
It is because when you share too much of this information with staff you develop an “options culture” the I find unhealthy. If you find employees building spreadsheets and spending time on exit scenarios and what their take would be then you know your company has “optionitis.”
Well, that's largely because employee equity offerings are pathetic. People who make these calculations do one of two things:
(1) realize that even at-valuation-- and it's an open question whether their personal valuation should be equal to that, or several times lower, than the VC's-- they are getting shafted. Most often, the startup equity grant for an engineer is an insult. I think there's an uncanny valley effect: low equity, from a startup, pisses me off more than zero.
(2) realize that they'll need to become executives to get real slices, and start playing the same political games for which startups are "supposed" to be an antidote. Often, the founders will stoke this competitive culture but shaft everyone; even the winner gets a pathetic prize-- maybe twice that shitty equity slice but in a high-burnout-risk role.
Join our company because we’re doing exciting things.
Join because you’re going to get more responsibility at a young age than you would a bigger company. Join because we’re a meritocracy and promote success not tenure.
Join because every year at the end of the year you can say that your resume is significantly better than it was the year before. Join because as we continue our successes we will have more resources to reward you with and reward we will.
Most startups are not doing exciting things, are not meritocracies, and while they may inflate titles, don't have the leeway or slack in the schedule for anyone to do anything interesting, so there's actually a lot more grunt work than in a typical BigCo job. Also, most of them don't do shit for a person's resume; the exceptions are also the few where the options end up worth more than toilet paper. If the startup ends up being good for your resume, that's because you rolled a natural 18/00 and have no need of a resume from here on out.
Now, onto the meat of the matter... I tend to agree with Mark that full transparency will terrify and upset the employees. VC-funded startups are disgustingly secretive about things that matter (e.g. cap table) but there are a lot of things that companies, as abstractions, provide a service by hiding.
To get to why most people can't handle the miseries (esp. fundraising) that startup CEOs have to deal with, read into the Gervais Principle. Venkatesh Rao's series on it starts here: http://www.ribbonfarm.com/2009/10/07/the-gervais-principle-o... . Mine starts here: http://michaelochurch.wordpress.com/2013/02/19/gervais-princ...
Here's a summary (of a much bigger topic): the MacLeod pyramid of an organization has a Sociopath tier at the top, a Clueless middle, and a Loser base. Losers are subordinate and strategic (they know what's worth working on) but not dedicated; they know they're getting a raw deal in a zero-sum game but accept it for the risk reduction and easy life. Clueless (typically, destined for middle management but unable to rise above it) are subordinate and dedicated but not strategic; they have no insight into what is worth working on. Sociopaths tend to be dedicated and strategic, but not subordinate.
The Sociopath-Loser trade is a risk transfer. Losers get easy jobs that are hard to lose, and steady paychecks worth less than their average value to the company. (Loser is non-pejorative; it doesn't mean you're bad at what you do or socially unsuccessful. It just refers to the losing bargain of lifelong non-owning employment.) Sociopaths are the risk-seekers who tend to be founders. Most people, if they could handle all the risks of entrepreneurship, would want to be founders themselves.
One way in which VC-istan goes rotten is that it attempts to prevent the healthy and inevitable slide of the put-upon, unappreciated Clueless into (rationally disengaged, more healthful) Loser patterns. "Lean startup" is code for "no Losers"; everyone must work 70 hours per week. VC-istan startups are all-Clueless enterprises; the Sociopaths are the real executives, the VCs and king-making press factors.
However, Mark is fundamentally right on the insight that full transparency would fly in the face of the Loser/Sociopath risk transfer on which companies are typically founded.