One Management Concept B E N H O R O W I T Z , A N D R E E S S E N H O R O W I T Z

Sometimes I’m right and I can be wrong My own beliefs are in my song The butcher, the banker, the drummer and then Makes no difference what group I’m in

Sly and the Family Stone

In Management Concept Form

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

Demotions Raises We evaluate a Sam Altman blog post History’s greatest practitioner

A G E N D A

1

2

3

4

Do You Demote Or Fire?

B U S I N E S S E X A M P L E 1

Scenario Executive has been working extremely hard and is well liked and

a great part of the culture. However, he is not world-class at running his function and you need someone who is.

Options

Fire him or demote him

Players You, exec, every other employee

•  It’s tough to fire someone who has put in a big effort

•  A demotion is a “have your cake and eat it too” scenario

•  No cultural backlash

You

Exec

•  May not want the demotion, but it at least gives him an option

•  Saves the embarrassment of getting fired

•  Enables him to keep growing with the company even through he’s demoted

•  Does he keep his same equity package?

•  Is he going to work as hard being the guy who reports to the guy?

•  Do I have any respect for him now that he’s been demoted?

Everybody Else

You

Exec

Employees

What does it mean to fail on your job? What is required to maintain your equity?

CULTURE

An Excellent Employee Asks You for a Raise

B U S I N E S S E X A M P L E 2

•  You want to retain them

•  They have done great work, so it’s “fair”

•  They will like you if you give them the raise and you want to be liked

Your Perspective

Employee’s Perspective

They Do The Shmoney Dance

•  Unfair that I didn’t get a raise

•  I did better work, so doubly unfair

•  Maybe I should quit

Every Other Employees’ Perspective

Cultural Conclusion

Every employee has a fiduciary responsibility to their family to ask for a raise all the time

Right Answer

•  Formal performance evaluation process

•  All the right inputs

•  Run as frequently as needed

•  No raises outside of the process

We Evaluate a Sam Altman Blog Post

B U S I N E S S E X A M P L E 3

Sam Altman Blog Post Excerpt

Most employees only have 90 days after they leave a job to exercise their options.  Unfortunately, this requires money to cover the strike price and the tax bill due for the year of exercise (which is calculated on the difference between the strike and the current FMV).  This is often more cash than an employee has, and so the employee often has to choose between walking away from vested options he or she can’t afford to exercise, or being locked into staying at the company.  It’s a particularly bad situation when an employee gets terminated.

Sam Altman Blog Post Excerpt

This doesn’t seem fair.  The best solution I have heard is from Adam D’Angelo at Quora.  The idea is to grant options that are exercisable for 10 years from the grant date, which should cover nearly all cases (i.e. the company will probably either go public, get acquired, or die in that time frame, and so either the employee will have the liquidity to exercise or it won’t matter.)  There are some tricky issues around this—for example, the options will automatically convert from ISOs to NSOs 3 months after employment terminates (if applicable) but it’s still far better than just losing the assets.  I think this is a policy all startups should adopt.

Quick History

•  FAS 123 replaces APB opinion No. 25 in 2004

•  Previously, long exercise periods would kill any chance of a company going public or being acquired

•  Not the case with FAS 123

•  Want to be fair

•  Don’t want employees to stay who don’t want to be there, but feel handcuffed

•  Want to reward people who stay

Your Perspective

Perspective of 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’ll make sure that everyone knows that.

•  If I was fired, I just got screwed a second time.

•  Is it smarter for me to stay or leave economically?

•  Are my colleagues being treated fairly?

•  Does my loyalty matter?

Perspective of Employee Who Stays

•  Companies lose employees in Silicon Valley at around 10% per year

•  SV companies dilute at 6-8% per year when they are private for employee comp

•  If an employee doesn’t exercise her stock during the exercise period, it goes back into the pool where it can be reissued to new or existing employees

Situation Analysis

•  Losing all your stock is a big financial incentive to stay

•  A 10 year option on a highly volatile security is quite valuable

•  When the employee goes to the new company, she gets the new company stock plus the 10 year option

•  The employee who stays gets the option only

Situation Analysis

Two Alternative Cultural Statements

•  We treat new employees with the utmost straight-forwardness and fairness and we will therefore give you 10 years to exercise your stock if you quit or are fired.

•  We’ll tell you up front: You are guaranteed to get your salary. For your stock to be meaningful, you must (a) vest, (b) stay until we exit or have the cash to exercise, (c) make the company worth something. We do this because we massively value those who see it through and will minimize the dilutive cost of those who leave.

1

2

Touissaint L’Overture HISTORY’S GREATEST PRACTITIONER 4

•  Born a slave

•  Most brutal form of African slavery

•  Vision: End slavery, take control of Haiti, and make it a first class country

Brief History and Context

Conquering the enemy

T O U S S A I N T M A N A G E M E N T E X A M P L E 1

Question: What do you do with the defeated leaders?

CULTURE

1 3 THE CULTURE

2 YOUR ENEMY

Perspectives

YOUR SOLDIERS

Soldiers Perspective

•  Do we get to pillage? We like to pillage…

•  They were trying to kill us, let’s kill them.

Enemy’s Perspective

•  We are fighting savages, so if we lose, we are dead

•  Anything else would be extraordinary

•  Toussaint wanted a first-class culture

•  He believed that Haitian culture was inferior to European culture and he believed that the slave culture was the most broken of them all

Culture

Solution

Make them part of Toussaint’s army

What do you do with the slave owners?

T O U S S A I N T M A N A G E M E N T E X A M P L E 2

CULTURE

1 3 SLAVE OWNERS

2 TOUSSAINT

Perspectives

SLAVES

•  Free us, we fought for this

•  Kill those bastards!!!

•  Give us their land

Slaves

Toussaint

•  Economy is key to being a first world country and sugar is our top export by far, so productive plantations are critically important

•  I was a slave and my army is mostly slaves

•  None of us have the expertise to run sugar plantations

•  We earned that land fair and square

•  None of us have the business connections to trade sugar

•  Our business cost structure is predicated on slave labor

•  We paid a lot of money for those slaves up front

•  We paid a lot of money for the land

•  We have all the know how and business relationships, so you have to deal with us

Slave Owners

Solution

End slavery

Let the slave owners keep their land

Require plantation owners to pay salaries to workers

Lower the taxes of the plantation owners, so that they could keep sugar business thriving

1

2

4

3

•  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

Results

Conclusion

It’s not your perspective or the perspective of the person that you are talking to at the moment that matters.

You must consider the people who are not in the room.

They are the company.

They are the culture.