Organizational debt is like technical debt, but worse
steveblank.com
steveblank.com
I think a lot of people join startups and take a bad deal because they think the company will take care of them when the company makes it. Or they think they'll have more opportunity for promotions in the startup because of its small size and their early stake. The problem is usually executive roles are filled from outside the company rather than from internal promotions, and as this article illustrates, the founders don't necessarily care about the people at the bottom until it's bluntly pointed out to them how mass departures could fuck up the business.
You can learn from this and never be played like a sucker again, but many people it takes 2 or 3 goes around to realize. But it's fine for the CEO, there'll be another 22-year-old around to take this deal in a year.
There are many examples where I don't think there's a strong connection between the level of professional experience with the familiarity with the startup environment/lingo/negotiation.
You already had 2 broken promises and you are still wondering if you should give the other person the benefit of doubt..
What's that they say about, "fool me once, shame on you.. fool me twice, shame on me"... not sure if they have something for "fool me thrice.. "
And how does your stake compare to theirs?
And are some of those larger shareholders also paid from the company on a monthly basis or do they work for free?
10K in the hands of an employee is a hell of a lot more valuable to them than another 10k is valuable to a millionaire/billionaire
* As opposed to no money, aka the types of companies where the real profit is in the difference between what they pay their employees and the market rate.
As an employee, for some of these equity packages you'd almost need an MBA to decipher if they're any good with all the things that can happen, so I usually don't even bother and just go to places that pay fairly or have interesting work.
Maybe a simple way to think about it: if your market salary is 100k, and they offer you 60k/yr and 2% of the company, is that 2% of the company worth 40k? (And how far can they dilute it?) To me that generally sounds like a bad deal, but your milage might vary depending on the circumstances.
Don't be a sucker, man
One of them got a lot of press as a successful startup and landed several new large contracts. Which is why, after a year of executive self-congratulations and bonuses, their lead developer, who had saved several failed projects singlehandedly, left for more realistic pastures. They only brought him up to just below market when he talked about leaving, had no intentions about rewarding him for past underpaid accomplishments (which were obviously investments on his part), and despite their poor compensation packages had an overly strict culture for non-executives. Management compensation was top priority, and retention was assumed - they thought people would just stay despite having better alternatives. Even if he stayed, he'd have to watch other people get screwed. He wasn't the first, and doubtless he won't be the last rat to abandon that ship. I left as well, seeing that they really didn't care about anyone who didn't have ownership and a briefcase.
It's really not that uncommon. Being at the top of a company requires only one of three things: luck, lies ("charisma") or capital. Quite a lot of new business owners get mislead by their own kool-aid. They start believing that their vague "vision" is the most important thing and treat the people who do the real work as replaceable cogs. They give no thought to training costs or productivity and have high turnover rates. Merely treating the staff better could have a huge and positive financial impact. They'd probably know about these management issues if they didn't defensively fire people who voiced dissent. But a fool and his competent staff are soon parted.
Personally, I favor the Netflix model. It's part of the employer's job to make sure employees are fairly compensated at all times, whether or not they express discontent: http://www.inc.com/francesca-fenzi/management-ideas-to-steal...
This is why Spolksy has his tiered plans where everyone gets paid the same (hiring someone at a higher payrate means raising everyones pay)
http://www.inc.com/magazine/20090401/how-hard-could-it-be-em...
1. When I've just delivered something of high business value
2. When the company is really needs me to deliver something of high value
3. Annual review
4. Right before quarterly/annual budgets
5. When I have a competing offer
I've asked for a raise, not too long ago, without any information in hand about competing salaries. That conversation did not lead to a pay increase. I found out -- not long after that conversation -- that the post-funding folks make substantially more than the pre-funding folks.
Salary aside, it is an excellent job. I enjoy working there, believe in the mission, and I am relatively unlikely to leave for a more lucrative offer. I think management knows that, which is why they don't feel the need to pay myself (or other early employees) market rates. Management pays the least an employee will work for.
Think carefully and explicitly about the decision-making processes that could have plausibly created this situation where people doing the same stuff get paid substantially different amounts. Think about the values reflected by those processes, and the odds that the company does not have some major storms ahead given the people at the helm.
I gave my company a choice: raise my salary/title to reflect the new hierarchy or lose me to a competitive offer. They fed me a line about how the company was making money, but not enough to raise everyone's salary (translation: we don't think you can get a competitive offer).
I took another job 3 weeks later for 25% more money + actual equity (not bullshit stock options).
Startups can be fun, but in terms of compensation, the early employees will get screwed over.
And then, of course, there are cases of both technical debt and organizational debt where the people in charge don't even realize that they've incurred debt. They think they do have the optimal solution.
I'm one of those developers that isn't a fan of
big formal-ish companies
Perhaps a 'film crew' mentality (and reward structure) is needed? The crew comes in, does the project, has the wrap party and goes onto the next project. The 'day staff' take over afterwards.
I think there is also a typical pattern that perhaps is too trivial yet not that all too uncommon - lack of organizational restructuring as a company grows (the startup style where some people do everything can create bottlenecks and very high risk bus factors).
Are there any others?
The problem is that some people get comfortable doing multiple roles. That however means that they can only invest a fraction of their time. This means that early on the company gets something, which is better than nothing, but as it grows it's only getting something and that's not enough.
This is applicable to most potosi on, but becomes org debt when the founder(s) don't "replace" themselves.
Even if you make it with technical debt, somewhere in your org, someone's life is worse because of that technical debt, but the cause was probably organizational debt. The good employees see it sooner and suffer it longer or leave before others see it. A downward spiral in other words with entropy increasing.
I agree with this. E.g. an organisation without a clear and concrete vision (but with a lot of fantasy) is inherently creating technical debt since it's unclear to the developers what exactly needs to build and what the important parts are. It's usually that within these organisations every other week a new feature is dreamt up by management that HAS to be included asap or the company might miss out to the competition.
Usually management in these type of organisations also LOVE Agile which to them pretty much means; just make shit up as you go along.
Worse on the consequence: lots of "new" features are TOP 1, and the last unfinished top 1 just been cancelled in its first week.
Agile though, those sprints are never called failed, but move on like nothing changed.
this should actually be more intuitive outside of finance such as in a technical or organizational setting. for example, the instant a software engineers detects that they have information which suggests they re-architect their software, should they? of course not, because likely even more information will then being to surface which could completely change their architectural strategy.
The idea behind a company acquiring debt is to increase the number of possible options now at the expense of increased constraints later. So, for example, you borrow $X today which means that you have the option to buy things that would have been impossible without the loan. Later you must repay the loan which means that you will be able to buy less things.
The hope is that you will be able to leverage the extra money to put yourself into a more advantageous position in the future. Having done so, you can handle the constraint of paying back the debt much more easily. For example, let's say that you borrow $100. You buy a lawnmower with the $100 and use it to mow lawns for $10 an hour. After 2 weeks (80 hours), you have made $800 mowing lawns which would have been impossible without the loan. Paying back the $100 is easy because you have $800 to play with.
As a side note, in early stages of a company growth is often constrained by capital, so it is considered irresponsible not to borrow money by many analysts. You should borrow as much as you can get, up to the level of the constraint because that will maximize your growth.
Enter "technical debt". When doing development, there are often many choices to make. Some choices will result in opportunities now at the cost of constraints later on. For example, imagine that you have a meeting with a VC company. You need a demo that shows the vision of your software. You know that you can not build anything functional in the amount of time you have, so you simply write a throw away demo. None of the code can be used in the final product, but it is good enough to show what you mean and it can win the VC money.
In this case, we have the future constraint that we must completely rewrite all of the demo code after the VC meeting. But we were able to raise capital, and continue building the company due to our efforts.
That's a pretty extreme example, but another example might be something like this. We could do a usability study for your new UI to make sure that it works well for the user right from the beginning. Or we could just code up the simplest UI that we can think of. The second choice will cost less and allow use to get it into the hands of the user early. Possibly this is important because we need to beat our competitor to market with a feature. We will still have to do the usability study at some point, and refactor all of our code, but hopefully we will be in a better position to afford that extra work later on.
Just like real debt, there can be problems. For example, imagine that we borrow $100 and instead of buying a lawnmower, we buy beer and drink it. We've had a good time drinking the beer, but now we owe $100, have no way to pay it back and have a hangover to boot.
The technical equivalent happens far more often to companies than the money thing (although, I often wonder what happened to all those Aeron chairs that the dotcom companies bought up in the late 90s). You often get a naive CEO who thinks, "We should take on as much debt as people will give us because we can leverage it to build growth!". So they say, "Don't worry about the future, just give me code as fast as you possibly can". He isn't sitting there thinking, "I am taking on future constraints, but can I actually use this to leverage my growth?".
You get in a situation where the coders are just hacking their fingers off, but to no actual benefit. You end up with no way of mitigating the bad code (repaying the debt) and you have the headache of dealing with all the grumpy programmers who leave to find a company where they can "do it right".
You asked, "Where is the evidence that technical debt, let alone organizational debt, is actually related to the economic indicators of success?" The answer is that it is not necessarily related. It depends on what you have done with that debt. If you have simply had an orgy of coding madness without leveraging the opportunities to increase growth (as many startups do), then there will be no relation.
My own personal view of this is: programmers should be in charge of the "technical debt bank". They should do their best not to incur debt, but if they are asked to do so they should ask a question of their own, "How are we going to spend this debt?" It is important that the programmers understand the business issues so that they can "loan" an appropriate amount of debt. If the business is basically saying, "Keep giving me debt. I don't care how much. And we're going to spend it on beer and Aeron chairs", then the responsible programmer/banker should perhaps have a serious chat with the business.
If you are with a good organization, though, the answer will usually be of the form, "We need to get features X,Y,Z done by this date so that we can bring in W revenue. Once we have accomplished that we will be in a better place to repay the debt".
If you think each business is a "random attempt", I hope you're never a founder. Modern businesses are highly non-random. It's true that investing in startups is in some sense gambling, but it's gambling on a highly filtered subset of all existing businesses, which is in turn a tiny fraction of all possible businesses.
The "where is the data" line is especially misleading here because no data just means no data. There are no high-n, double-blind studies validating the concept of technical debt. But there are also no studies demonstrating it's not a useful concept. And that's most of life: the decisions we have to make rarely can be solved by looking up journal studies. When that's the case, we have to apply other tools.
Sure, you could be a very special snowflake, so smart that the world really does always break down into "obvious to brobdignagian" and "dumb/meaningless". But if you're that smart then I'd suggest that either a) you should use your smarts to make your Olympian view comprehensible to us mortals, or b) you're wasting your time talking with the likes of us.
For startups, technical debt can show up as unreliability (remember Twitter's fail whale?), or it can sink a product before it ever becomes famous enough for you personally to remember.
If you have evidence that there are successful company growing with massive organizational debt, I'd be interested in hearing some examples.
As a bit of a dovetail, I had another random thought after typing the previous message. Technical debt is a little bit different than monetary debt because if I borrow money to leverage the business, the business (hopefully) grows in the same currency that I borrowed. I make more money and can pay it back.
Technical debt is different because even if I make a lot of money by taking a technical short cut, it doesn't mean I will have the capability of repaying the "loan". The people who made that short cut may not be capable of refactoring the code. Hiring people who can do the work seems like it would help, but then you have all the problems discussed in the original article.
Looking at it from the risk perspective, it can be a lot clearer that you might want to avoid the situation right from the off. Although the person who prompted me to write my response has unfortunately been entirely unhelpful, I suspect that's what they were ultimately thinking. "Will you actually be able to pay off this technical debt even if you grow the business?" Sometimes you can look at your staff and say that the risk of failure is nearly 100% ;-)