Posts from management

Followership

In evaluating leaders, at the top of a company, or in the ranks of company leadership, an important quality that I look for is followership. Specifically, will the team line up behind this person?

Of course, leaders have to have other qualities. They need to have domain expertise if they are leading a specific function, they need to understand the needs of the business and the sector that it is operating in, and many other things too.

But what I have learned is that followership is super important. If the team doesn’t line up behind a leader, it is extremely hard for them to be effective.

For internal promotions, it is relatively easy to see followership and promote people who have it. You can also help people develop the management skills (listening, communicating, etc) that lead to strong followership.

When hiring someone from the outside, determining if they will have followership is harder. You can reference for this quality. But to some extent followership is a function of the culture of the organization. Someone who had strong followership in one kind of organization may not find it in another one.

It can take a leader some time to develop followership, particularly if they are hired from the outside. The team will need some time to figure out this new person, how they operate, and how they feel about them. But if a new leader has not developed the followership they need to lead the organization, or a part of the organization, within six to nine months after joining, then it is likely that a change will need to be made.

When developing your own organization and internal leaders, you should be very specific about followership and the need to develop it on your team. You should help mentor and coach younger managers on how to develop it and you should move quickly on leaders who don’t have it and won’t develop it on their teams.

It is always so impressive to me to see what leaders with strong followership can accomplish, when everyone is lined up behind them and delivering on what they ask of the organization. That is what I would wish for every organization, but sadly many don’t have it and they underperform as a result.

The Heartbeat (Continued)

I wrote a post last year called The Heartbeat in which I advocated for a cadence and a rhythm in an organization.

I was reminded of that in this exchange on Twitter over the last 24 hours:

Many of USV’s portfolio companies use an OKR process to create this rhythm in their teams. What I have learned from watching these companies and listening to how the teams talk about the OKR process is that to some extent it is “form over substance” in that the process is ultimately more important than the specific objectives and key results that flow through the process.

I am not saying that teams shouldn’t be thoughtful in setting objectives and committed to hitting them. They should.

But I am saying that the regular setting of objectives (quarterly is a time frame most companies use) and the weekly or bi-weekly reporting against them is the most valuable thing that comes from the process. It sets the heartbeat and keeps it. And that is so valuable.

Many VC firms, including USV, use a weekly team meeting, often on Mondays, to align the group, report on the week that has past, and focus on the week to come. That weekly cadence allows us to be responsive to entrepreneurs, come to relatively quick decisions as a group, and stay in sync.

Public companies report on a quarterly basis. That rhythm sets up a cadence of setting expectations (guidance) and reporting on results (earnings reports). It is not entirely different from the OKR process in a few important ways. It creates a cadence that is super valuable for execution and performance.

I am a fan of all of these processes. They set a cadence and rhythm for an organization and force decision making and provide for timely execution.

The best companies master this and working in those organizations is fun and rewarding. Setting objectives and meeting them on a regular basis is a virtuous system that brings out the best in people and teams.

The Finance Function: Looking Back And Looking Forward

High growth companies need to have a strong finance function. You can’t drive a car (or a plane) without some instrumentation. Most importantly, you need to know when you are going to run out of gas (or electricity).

The mission critical things that must be done in the finance function are mostly accounting related functions; pay bills, make payroll, keep track of expenses, maintain the books and records of the company. These are “must dos” and you need a person who has an accounting background to do most of them. But these are all “looking back” functions in the way I think about the finance function.

What is even more important in a high growth situation is the ability to look forward, to project, and to make sure that the company doesn’t run out of money.

In order to look forward, you need to know where you are, and that requires a solid baseline derived from looking back. So one feeds the other. But they are different.

Looking forward requires modeling and it requires the ability to anticipate. An example of this is “we are going to get a big order from a new customer next month, let’s put that revenue into the model.” But if you don’t anticipate that it may take up to ninety (or more) days to collect that revenue, then you have messed up the modeling and that is the sort of rookie error that could lead to an unexpected cash crisis.

There are many reasons why a company needs a forward looking projection to run the business but avoiding the unexpected cash crisis is number on on that list in my view.

In my experience, the people who are strong at the looking back function are often not strong at the looking forward function. You may need different people to do these roles. In a large company, there are entirely different departments that do these functions. There is an accounting department and there is a financial planning department (often called FP&A).

If you are a small company and have limited resources, you will often attempt to get both the look back and the look forward from the same person. If you aren’t getting what you want in doing that, don’t be surprised. I would rather see a small company outsource the accounting work and staff for the planning/modeling work. Accounting is a bit of a commodity, many people can do it well. Seeing the future from around the corner is most definitely not commodity and if you have someone who can do that well, hold on to them, pay them well, and make sure they are happy and rewarded in the job.

Because looking forward is really where it is at in the finance function at the end of the day. That’s where the good stuff and the bad stuff mostly happen. And when it is done well, it is a thing of beauty.

The Hidden Cost Of Extending Option Exercise Periods

Many people in startup land believe that the answer to the challenges around forcing departing employees to exercise vested options is to simply extend the option exercise period to the maximum (ten years) allowed by the IRS.

It certainly is one of the techniques that are available to companies and one that a number of our portfolio companies have adopted. Another option, and one that I prefer, is for a market to develop around financing these option exercises (and the taxes owed) when employees depart.

However, if you are thinking about extending the option exercise period for departing employees, you should understand that it will cost your company something.

Here is why:

Options are worth more than the spread between the strike price (the exercise price) and what the stock is actually worth. They have additional value related to the potential for the stock price to appreciate more over the life of the term of the option.

There is a formula that options traders (and companies that issue options) use to value options. It is called the Black-Scholes formula.

If you click on that link, you will quickly realize that the math used in the Black-Scholes formula can be complicated. But fortunately, there is a neat little web app that I frequently use to estimate the value of an option. It is here.

So let’s say that your company is issuing options at $1/share (your 409a) but your most recent financing was done at $2/share. Then a four year stock option is worth roughly $1.25/share.

If, on the other hand, you offer a ten year option exercise period to your employees, the value of the option rises to $1.52/share, reflecting the longer period of time that the stock could appreciate over.

That is a 20% increase in the cost of issuing stock options. You could mitigate that by reducing the number of options you issue to incoming employees by 20% but that might make your equity comp offers less attractive to the “market” because incoming employees won’t value the longer exercise periods appropriately.

Stock based compensation costs are real costs even though many in startup land think of options as “free” because they don’t cost cash. The accounting profession has attempted to estimate these costs and companies do put stock based compensation costs on their income statements. If you go with ten year exercise periods instead of four year exercise periods, expect those expenses to go up significantly. Twenty percent is just the amount in my example. It could be larger, possibly as high as fifty percent (or more) if your exercise price is a lot closer to the current value of your stock.

This extra value of a ten year stock option versus a four year option is known as “overhang” by investors. It is the cost of carrying a group of people who have a call option on your stock but don’t have to pay for it for a long period of time. Generally speaking investors don’t like a lot of overhang in a stock.

All of that said, employees are the ones who create value for shareholders. They need to be compensated for that. And I am a fan of both cash compensation and stock based compensation. I like to see the employees of our portfolio companies well compensated in stock. That has a cost and everyone should be well aware of what it is. Longer exercise periods increase that cost. I would rather put more stock in the hands of the employees of our portfolio companies than give them longer exercise periods. But regardless of where one comes out on that tradeoff, it is important to recognize that it is a tradeoff. There are no free lunches, not even in stock option exercise periods.

Golden Handcuffs

Daniel Olshansky asked me this question on Twitter:

I don’t believe I have ever addressed this issue here on AVC but I certainly have seen it inside of our highly valued portfolio companies.

Here is the issue. Employees join a high growth company, are issued options which become valuable as the company’s equity appreciates, and if they leave they have to exercise the vested part (and pay taxes) and walk away from the unvested part. So they stay even though they may not be happy at work. Maybe they are not in a challenging role or maybe they find themselves in a problematic management situation. This leads to “resting and vesting.”

Here are some thoughts:

1/ A four year option grant is not a gift. It has to be earned via performance over time, not just time. If there is no performance, then the employee should understand the vesting is at risk. Companies should be very clear about this when they issue the options and on an ongoing basis. This is a cultural issue and needs to be treated as such.

2/ Companies need to have performance oriented cultures where there are frequent checkins between managers and team members, with feedback going both ways, and where non-performance results in changes. These changes could be restructuring of teams, changes in management, or departures of employees. Companies that do not actively manage performance are likely to have lower morale and toxic issues like resting and vesting.

3/ Managers and company leadership must do their part to take ownership of these issues. Employees will adapt to the environment they find themselves in. If you have a rest and vest culture in your company, look in the mirror to see the problem.

4/ I would like to see a market emerge for financing of option exercises. There are companies actively working on this. I believe that departing employees ought to be able to borrow against their valuable equity at no recourse to them, so that they can exercise and pay the taxes. This would solve part of the problem, where employees can’t leave because they can’t afford the taxes (and, in some cases, the exercise price).

5/ I do not believe that the option programs are the problem here. I do think the taxation at exercise is bad public policy and I wish the US government would move taxation to a liquidity event, but I also think we can use the capital markets to address this problem.

6/ I think in the vast majority of cases, the golden handcuff problem is a result of poor management and a leadership team that is unwilling to address this issue head on and make unpopular and difficult decisions about people.

So there you have it Daniel. That’s what I think about this issue. Thank you for asking me about it.

What Kind Of Coach Do You Want?

My colleagues and I are asked all the time for recommendations for coaches, mostly for the founders and CEOs we work with, but often for others on the senior team. I am a huge fan of coaches. I think they can be game changing for leaders and their teams.

I always ask a bunch of questions to find out what kind of coach someone wants before making suggestions.

A key question is whether you want answers or questions from your coach.

My partner Andy wrote a bit about this, in a very different context, the other day.

I’ve spent a large portion of my career investing in early-stage companies. Part of that job is to advise and counsel, to assist a company in reaching its potential. I try to ask for feedback on how I am doing in that job. A constant thing I hear is to provide more direct answers to problems posed to me. Typically, I am told, I answer their questions with further questions.  

Yet, I think it’s important to tolerate ambiguity. Maybe there isn’t a direct answer. Maybe I don’t know the answer. Maybe I want to assist others in coming up with their own answers.

I have to confess that I am more of a “why don’t you try this?” sort of advisor.

Andy is more of a “why do you want to do that?” sort of advisor.

Both can be very valuable but it really depends on what you want/need in an advisor. Getting answers when you want questions can be frustrating. Getting questions when you want answers can be equally frustrating.

So think about what it is you want from a coach before going out and finding one. Getting the fit right is important.

MLK Day Quote

Martin Luther King Jr. was a man of words. He used them to inspire, to rally, and to ultimately bring change. The change he brought is the reason we remember him on this day every year.

Many of his words are broadly applicable, well beyond the worlds he occupied.

This quote strikes a nerve for me as we work with many founders and leaders:

A genuine leader is not a searcher for consensus but a molder of consensus.

Martin Luther King Jr.

Leading is knowing where you want to go and working to get others to want to go there too. That could be your team, your board and investors, your customers, or the entire world.

Molding is the word I like most in that quote. It describes the work of leading correctly. You can’t will people to follow you. You can’t expect people to follow you. You need to work to get them there.

Executive Sessions and Continuous Feedback

I’ve written about these two related but different topics before but I’ve been doing a lot of board meetings as we kick off 2019 and I am reminded of how important both are.

At the end of every board meeting, the board should meet alone with the CEO in an executive session, followed by a session without the CEO, followed by a session where at least one director, but possibly all of the directors, meet again with the CEO.

This requires a fair bit of time to do right. These three back to back sessions will easily take thirty minutes to do right and could take as much as an hour.

When a board meeting goes three or four hours, it is tempting to wrap when everyone has “hard stops” and punt on these executive sessions.

But that would be a big mistake.

CEOs need to know where the board stands on the meeting, the big issues, the team, the strategy, and most importantly the performance of the CEO. And CEOs need to know that in real time and all the time.

The big problems that I have run into with companies over the years often have to do with misalignment between a management team and the board, and most acutely misalignment between a CEO and the board.

A process by which the CEO gets real time, regular, in person feedback from the board will alleviate many of these issues. These can be hard conversations and they can be difficult for the CEO to understand and process. None of this is easy stuff. But when people know where they stand and can react to it, things go better. It is when people don’t know where they stand and are grasping for straws when things go most badly off the rails.

The executive session/feedback process is also used by audit committees to manage the relationships between the board, CFO, and external auditors. I have found that they are incredibly important in that setting too.

If you aren’t doing executive sessions with your board, start doing them. And if you do them, but you skimp on them frequently due to time issues, shorten your board meetings and protect your executive session time. These sessions need to come last and that makes protecting them challenging but I believe a board meeting without an executive session is a bad board meeting.

Leadership and Self Care

I saw this tweetstorm by Jack Dorsey on Saturday evening and thought “Good, Jack is taking care of himself.”

I guess I was the only one who reacted that way given the amount of abuse and vitriol that has been thrown at him on and off Twitter for that tweetstorm.

I understand the frustration that users feel about the things that don’t work right on Twitter, particularly the abuse and hate and the other unpleasant stuff that the Twitter platform attracts, including our horrible President and his nonsense.

I also understand that the country Jack visited and made a number of positive comments about, including suggesting that others visit there, is a place where the government and military has done all sorts of bad things, including genocide.

Certainly the comments that Jack’s tweetstorm was “tone deaf” are accurate.

But I would like to take the other side of the argument here and make a few important points.

Say what you want about Jack Dorsey, he came up with the ideas for two hugely impactful products that I use every day and many others do too. Those products are Twitter and Square.

Not only did he come up with the ideas for those products, he has breathed life into them with his work and his passion and they are two of the best products brought to market by the tech sector in the last decade.

Jack is not a conventional CEO. He does “run” two companies. But he has very strong teams who operate both companies underneath his leadership.

And since he came back to Twitter full time in the summer of 2015, Twitter has slowly but surely addressed much of what was ailing it. The stock has doubled in the last 18 months and user growth has stabilized. And, most importantly, the company is addressing many of the most troubling aspects of the service, certainly not as quickly as its critics would like, but the service is undeniably dealing with the abuse issues more seriously than it has in the past.

Square is a company that Jack has run since day one. And as Jack tweeted out the other day, the Square cash app is doing great.

And here is Square’s stock price since going public:

Even with the recent pullback, Square is up 5x since its IPO in late 2015.

So, it’s not like Jack hasn’t been doing his job. He is leading not one, but two companies, and from the outside, I would argue that he is doing a pretty solid job at that.

I am not on the inside at either Twitter or Square, so I don’t really know how things are going at these companies, but from where I sit, I would say he’s doing well.

So, with all of that backdrop, I want to make a point about the toll leadership takes on someone and the need for self care, particularly in high stress jobs like running public companies.

Leadership is a burden. You are the one everyone looks to for inspiration and direction. The things that land on your desk are the things that nobody else wanted to or could deal with. Leadership is lonely, stressful, and takes a toll on people.

Just take a look at the faces of every President on the day they took the job and the day they left the job. You will see the burden and toll of leadership right there.

And so, it is very important for leaders to take care of themselves. That can take many forms, but here are some things that I recommend to the leaders I work with (in no particular order):

  • Vacations
  • Sabbaticals
  • Eating Healthy
  • Drinking Less
  • Exercise
  • Meditation
  • Coaching
  • Working On Your Marriage
  • Spending Quality Time With Your Family

And yet, for some reason, we criticize our leaders for doing these things. Like taking a vacation, or doing a workout, or going on a meditation retreat is some abandonment of their duties.

I think it is exactly the opposite. It is their duty to take care of themselves. Because if they don’t take care of themselves, they can’t take care of their companies and all the stakeholders who rely on them.

I am glad Jack went on a meditation retreat. I am glad he is taking care of himself. I understand why that tweetstorm was tone deaf, but let’s not get carried away here. Leaders are humans too. Let’s be decent humans to them.

Disclosure: My wife and I own shares in Twitter and I was on Twitter’s board a decade ago.

Being Public

The back and forth that Elon Musk did over the last few weeks about being public begs the question about whether the challenges of operating a public company outweigh the benefits.

Elon wrote this in a letter to Tesla’s employees:

As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.

I fundamentally believe that we are at our best when everyone is focused on executing, when we can remain focused on our long-term mission, and when there are not perverse incentives for people to try to harm what we’re all trying to achieve.

A few weeks later, Elon wrote this:

After considering all of these factors, I met with Tesla’s Board of Directors yesterday and let them know that I believe the better path is for Tesla to remain public. The Board indicated that they agree.

So which is it?

I strongly believe that being public is the best form of shareholder ownership for the vast majority of companies and advocate for that path to the companies in the USV portfolio that have the opportunity to be a public company.

The pressure of quarter to quarter execution is hard on a team. But running a company is hard. And the accountability that comes from this quarterly reporting is a good thing too. If you have problems in your business, you can’t hide them. You have to come clean about them, deal with the implications of them, and fix them.

The long-term vs short-term thing is the critique I hear most often. But I don’t buy it. The best run public companies manage to think and act with a long-term focus while being public. I think it comes down to leadership, courage, and foresight more than whether you are public or not.

Stock price volatility is a factor no matter if you are public or not. At least when you are public, everyone knows when your valuation is going down. Private companies are able to hide that from their employees, the media, and others. Which is just kicking the can down the road and that always ends badly. I prefer the transparency of being public on this one.

And the short seller argument is nonsense. People are always working against you. Your competitors are working against you. The media may be working against you. The regulators may be working against you. Short sellers are just another group that wants to see you fail. But they are not the only ones and you can make them pay by executing against your commitments and guidance.

For me, it just comes down to leadership, courage, execution, and setting and meeting expectations. All good companies must have those in place. If you do, being public is not only manageable but preferable.

And I am pleased to see more and more high growth tech companies coming to this conclusion and taking the plunge.