A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

A couple of years ago serial entrepreneur Matt Weeks wrote about the Startup Social Contract founders have with their people, with a focus on stock options.

Having worked with startups since the early Eighties I’m intimately aware of how fragile this contract has become and how often it has been totally disregarded in the last decade.

The result should come as no surprise.

Any time a group of workers feel they are being taken advantage of someone will always step up, marshal resources and organize them, especially when the workers are highly educated.

That’s why founders have only themselves to blame for the uprising among the people they need the most.

Employees at startups are being taken advantage of, said Chris Zaharias, who was joined by rally partner and stock option counsel Mary Russell. Founders and venture capitalists make the negotiations around equity (or how much of the company employees own) intentionally confusing.

Equity fairness and transparency is the reason we developed Option Sanity.

While I don’t agree with all the content in the “Startup Employee Equity Bill of Rights,” it certainly reflects how badly the Startup Social Contract is being abused, if not totally disregarded.

And, as Matt says, “If the workers and/or the exec team come to disrespect, disbelieve or ignore this social contract, the company is lost.”

Image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

I read a great article about a guy who is CEO of a private 1.5 billion dollar company that sports a 20% compounded growth rate every year since 1988.

Not bad for someone who focuses on people instead of products and profit.

His name is Bob Chapman and the company is Barry-Wehmiller and he believes that if you create a culture with a relentless focus on building employees so each one achieves everything possible then the products and profits will follow.

Chapman’s sums it up in his tagline.

“We Build GREAT People Who Do EXTRAORDINARY Things.”

This goes back to our conversation about the startup social contract, but goes beyond startup and shows what people-focused value means in the long-term.

Chapman explains his approach in the following TEDx talk and you can learn more at Barry-Wehmiller’s well-stocked YouTube channel.

Image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

Based on current media reading and discussions with founders and startup employees I decided it was time to revisit a 2011 post from Matt Weeks. I might add that the ethics underlying the Startup Social Contract are applicable to any company and every manager. –Miki

“Associate yourself with men of good quality if you esteem your own reputation; for ’tis better to be alone than in bad company.” –George Washington

For early stage companies (and for all well-run private, Pre-IPO or Pre-Acquisition firms), the stock awarded to employees and the executive team is a form of “social contract” that promises them unusually high “return” for their risk, hard work, “sweat investment” and belief in the company.

The unstated social contract goes something like this:

I will initially forego a higher salary and cash compensation, in lieu of stock options that will increase in value at a faster rate than possible elsewhere, and will “return” more than the forfeited cash compensation might have, over time.

This is both an investment risk approach (“Do I believe the company’s product or service can win in the marketplace?”) and a simple ROI calculation (“Is the salary/cash compensation I forfeit going to be made-up (and then some) in a reasonable amount of time?”)

Because I am now an “owner” (“investor”) in this company (seeking to boost stock value. i.e. company value), I presumably have strong incentive to help the company thrive.

This includes being diligent and helping avoid risk, helping to find and fix problems everywhere, as well as going above and beyond my “job description” to help the company thrive and grow. I am super-diligent and respect and protect the company’s assets, reputation and product/service quality.  I treat this as “my” company.

In short, as an owner-employee (at any level), I understand that I have to “have the company’s back” and that others in the company “have my back.” We all watch-out for one another.  Our stock positions fairly and accurately reflect our contributions and risk “investments” we’ve made in this venture.

If the workers and/or the exec team come to disrespect, disbelieve or ignore this social contract, the company is lost.

Image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

Who should make money when you finally cash out?

Most commentary I see talks about what investors and founders walk away with, but what about the rest of the team?

In an interview, Steve Blank addresses this in terms of the impact on valuation and cashing out after a large investment and how it affects what founders receive, but not its effect on the team.

If the founders walk away with a few million each after the investors take their 3-5X return, what will be left for your people?

Those are the people who made the company successful enough to be bought in the first place.

Most of you will agree that the great majority of startups will not have exits similar to Facebook or Google.

Knowing that, it is your responsibility to honor the social contract you made with your employees, when they traded their compensation for equity in your startup.

Therefore, it is of paramount importance for founders to never lose sight of the numbers; the more investment you take the lower your team’s return when the company is acquired.

Image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

Long-term success is as much about attitude as it is about product.

How do you rate yourself on the following?

I believe that

• good information can come from nobody; bad information can come from somebody;
• values verbalized must be values lived;
• to be valid, a social contract can not embrace the concept of “but me;
• fairness comes from applying all rules evenly and equally, no exceptions;
• listening, especially when it’s something you don’t want to hear or from an unusual source; and
• it’s sometimes necessary to modify or let go of an initial vision and pivot in order to succeed.

What would you add to the list?

Option Sanity™ embodies fairness.
Come visit Option Sanity for an easy-to-understand, simple-to-implement stock allocation system. 
It’s so easy a CEO can do it.

Warning.
Do not attempt to use Option Sanity™ without a strong commitment to business planning, financial controls, honesty, ethics, and “doing the right thing.”
Use only as directed.
Users of Option Sanity may experience sudden increases in team cohesion and worker satisfaction. In cases where team productivity, retention and company success is greater than typical, expect media interest and invitations as keynote speaker.

Flickr image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

I seem to write too many stories about bosses who don’t walk their talk, which, I realize, is an overused, hackneyed expression.

But that doesn’t mean it’s not an accurate one.

Here’s the background and I have to admit it really floored me.

“Mark” is a thirty-something engineer and was the third person to join 23 year old “Jim’s” startup early in 2011.

Out of several offers he chose Jim’s. He’d read and heard a lot about the values that Millennials demanded and Jim’s description of his values and the culture he was building based on them closely matched Marks own.

Things were going well and they had grown to 6 people when they landed on the radar of a major corporation.

Near the end of the year Mark heard a rumor that the company was being acquired.

When he asked Jim if it was true he said it was and that they hoped to keep the staff.

Mark was flabbergasted; not because Jim was selling, but because the acquiring company’s culture was known to be diametrically opposed to almost all of Mark’s stated values.

When Mark said as much Jim said that it was an amazing offer and that he would be a fool to turn it down. Although they could easily raise an investment round, his holdings were far more valuable with the acquisition than if they were diluted by new investors.

Mark asked Jim if he had meant anything he said during the interview or if it was all just BS.

Jim’s response really blew me away.

Mark said he shrugged and said “that was then and this is now.”

What do you think? Was Jim justified? What would you do?

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

I met an interesting guy over the holiday.

“Chris” has a small startup in the financial services sector and is starting to gain traction.

He said it’s been an uphill battle and that he wishes he had spent the same energy doing something “socially responsible,” because it would be a lot more satisfying.

I’ve heard similar comments from other entrepreneurs and small biz owners.

Happily, this is one of those times it is possible to “have it all,” because all it takes is changing the way you look at the world.

Having a socially responsible business doesn’t require a focus on solving social ills and it certainly doesn’t mean forgoing profit—without profit your business won’t be around.

It does mean running your business in a responsible manner

• pricing fairly, passing on savings whenever possible and never gouging
• fair wages and other compensation
• fair employee treatment (not playing favorites, etc.)
• reducing your carbon footprint
• community involvement and contributing whenever possible; and
• believing that it’s not all about you.

None of this is rocket science and all of it makes good, profitable, business sense.

In fact, Chris and others who feel the pull to help fix the world would do well to read Richard Branson’s Screw Business As Usual to see how others are ‘doing well by doing good’.

Note: the unseen pause is between ‘screw’ and ‘business’, not between ‘business’ and ‘as’,

Option Sanity™ is socially responsible

Come visit Option Sanity for an easy-to-understand, simple-to-implement stock process—so easy a CEO can do it.

Warning.
Do not attempt to use Option Sanity™ without a strong commitment to business planning, financial controls, honesty, ethics, and “doing the right thing.” Use only as directed.

Users of Option Sanity may experience sudden increases in team cohesion and worker satisfaction. In cases where team productivity, retention and company success is greater than typical, expect media interest and invitations as keynote speaker.

Flickr image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

“Associate yourself with men of good quality if you esteem your own reputation; for ’tis better to be alone than in bad company.” –George Washington

For early stage companies (and for all well-run private, Pre-IPO or Pre-Acquisition firms), the stock awarded to employees and the executive team is a form of “social contract” that promises them unusually high “return” for their risk, hard work, “sweat investment” and belief in the company.

The unstated social contract goes something like this:

I will initially forego a higher salary and cash compensation, in lieu of stock options that will increase in value at a faster rate than possible elsewhere, and will “return” more than the forfeited cash compensation might have, over time.

This is both an investment risk approach (“Do I believe the company’s product or service can win in the marketplace?”) and a simple ROI calculation (“Is the salary/cash compensation I forfeit going to be made-up (and then some) in a reasonable amount of time?”)

Because I am now an “owner” (“investor”) in this company (seeking to boost stock value. i.e. company value), I presumably have strong incentive to help the company thrive.

This includes being diligent and helping avoid risk, helping to find and fix problems everywhere, as well as going above and beyond my “job description” to help the company thrive and grow. I am super-diligent and respect and protect the company’s assets, reputation and product/service quality.  I treat this as “my” company.

In short, as an owner-employee (at any level), I understand that I have to “have the company’s back” and that others in the company “have my back.” We all watch-out for one another.  Our stock positions fairly and accurately reflect our contributions and risk “investments” we’ve made in this venture.

If the workers and/or the exec team come to disrespect, disbelieve or ignore this social contract, the company is lost.

Option Sanity ratifies the social contract

Come visit Option Sanity for an easy-to-understand, simple-to-implement stock process.  It’s so easy a CEO can do it.

Warning

Do not attempt to use Option Sanity™ without a strong commitment to business planning, financial controls, honesty, ethics, and “doing the right thing.” Use only as directed.

Users of Option Sanity may experience sudden increases in team cohesion and worker satisfaction. In cases where team productivity, retention and company success is greater than typical, expect media interest and invitations as keynote speaker.

Flickr image credit: Kevin Spencer

Last week “Ben” wrote me in response to my answer on Quora.

Hi Miki,

I saw your post (on quora) and was wondering if you can help me out. I’m starting an online business and I’m working with a great developer but is requesting a large potion of future earnings (profit). Let me be honest, he is the heart of the project and it was not easy to find him… (so i’m happy).

We are still at the beginning – so no profits are coming in yet but we can see that the business has potential to really make it.

He is barely charging me for the work he is doing now but i still would like to work on a smart package that will keep him in the game for a long time.

We emailed a bit and then started chatting (he is overseas) and, with Ben’s permission, I want to share our last two conversations, because they illustrate why it is so important to do culture from the start.

The first part of our conversation addressed the importance of finding out exactly what the developer meant by “earnings.” I warned Ben that there are many ways of figuring earnings, which means that the number can be easily manipulated, so it was crucial that they jointly decide on exactly what was meant.

Then I asked about culture, because compensation, especially equity, should reflect and support the values and culture of the company. Here is a shortened version of the conversation.

Miki: Have you thought about the culture you want in the company?

Ben: what do you mean?

Miki: Every company has a culture, “the ay things are done here” and the culture usually reflects the values of the founder. For example, everyone talks about having a ‘fair’ company, but if you don’t craft your policies to reflect/enforce that then it ends up as nothing more than talk.

Ben: ok, im not really sure then how im to “craft” it. i think im kinda lost. im really just trying to pick up this cool idea that i have and i KNOW will work (im sure you have heard that before.) i didnt thin i was going to run into these issues right now

Miki: Does the guy you are working with ‘fit’ you? Does he have the same beliefs about the kind of place he wants to work?

Ben: what do you mean “in the kind of place?”

Miki: mood, attitude, how you are treated. Remember your old bosses? You don’t want to hire someone later who thinks like one of them, do you?

Ben: no! im not just saying this about myself, im very fair! i dont think he knows that about me yet. i think he is a good person and we have a good connection and i like him as a person. he has good values

Miki: Good!

Ben: but i guess we still need to work on trust right now

Miki: Trust is a value. By looking at his values and your values you will start to see what you want in your culture; and you should make a list.

Ben: im starting to understand what yr talking about

Miki: You can also use your culture to screen new hires, because you don’t want to hire people with opposite values

Miki: I’ve known managers who sow distrust, it’s the way they manage, and some who talk fair, but play favorites. The neat part is that you can build your policies, such as compensation, to reflect and support the values you want and then talk about them when interviewing and people who don’t “fit” won’t join

Ben: i get it

Miki: I thought you would. Build your infrastructure from the start and it’s easy.

Ben: but in my case even if i give him a high % its not going to give him power in the company

Miki: Don’t think that way. From what you say he has power, he can leave or threaten to leave. You don’t want to run your company by power, you want a culture that draws employees in and focuses them on the company’s success and you want to have fun at work or why would you work that hard?

Ben: agreed

Miki: The ‘experts’ have finally caught up with workers and are saying that “culture trumps strategy” and “culture is why company’s succeed” etc. There is a saying that people quit bosses, not companies.

Ben: how true

Miki: Even in a company with a great culture a jerk can create a lousy one below himself. Another thing, money won’t hold someone if they are unhappy and those who join you just for money will leave for more money, because they aren’t invested in the company.

Ben: i know! :)

Miki: So part of holding your guy is creating a place he LOVES and to do that you need to know what he loves.

Ben: ok… so i should be talking to him for a second tonight but i will brush him off and meet with him on Sunday because i dont want to do it over the phone

Miki: Don’t brush him off! Tell him you are working on a fair way to handle the equity and one that will affect the future. Tell him enough to know what you are doing (research, thinking, etc.), so you can build trust; the more transparent your are the better. Just take it slow and give you both time to think, offer thoughts and discuss. That helps build trust on both sides.

Ben: sounds better your way

(End of first conversation)

Ben: we could not meet at the end so we v-chatted on skype and talked a little. we both felt that we will get to an understanding and we are wasting time… he started working on the platform and we are going to meet as soon as we can.

Ben: i red the other stuff [links to various posts about culture] you gave me …

Miki: Was it helpful?

Ben: yes!

Miki: I’m glad

Ben: its getting me talking in a diff way

Miki: GOOD! Something to remember is that it’s easier to do it right at the beginning than fix it later

Ben: yes… i kinda feel ok that he has started on it. i really think we will work things out

Miki: Be sure to ask him to make a list of his most important attitudes/values to have at work, stuff like fairness, merit, etc.

Ben: i know, but that sounds like a test and when the guy is about my age its going to come off the wrong way…

Miki: No, not if you have examples to show him and explain that you want to build a good culture and to do that you need to identify the most important values, prioritize them and then create a culture that fosters them with a small amount of policy and process that enforces them. For example: It’s great to say “we treat our people fairly” but if the equity is handed out based on charm or prejudice or whim it’s not fair. So what you ask him is what values does he want to see built into the company culture, what is important to him. You don’t just ask for a list:) You create a conversation so he understands what you are working to do and that you want him to be involved in it. One of the least transparent things that managers do is ask for information without explaining why they want it. Does that make more sense?

Ben: yes, send more links

Any of you, or your friends, who are doing a startup should follow Ben’s lead and work on your culture from the beginning. If you would like the list of links I sent Ben, just let me know, either in comments or drop me an email.

I’ll keep you posted on how this goes.

Be sure to join us tomorrow on If the Shoe Fits for a look at Matt Weeks view of the social contract, an integral part of any culture.

Stock.xchng image credit: arkitekt