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

Don’t mix inexperience with bad judgment.

It’s okay to be a first time entrepreneur or company advisor.  You know the domain, you know the market, and you know your customers.

You’re there as an entrepreneur to invent the company and drive it to success or as an advisor or board member to help the team succeed.

But growing a business from small to large, with all of the nuances of growing the team, financing and operations is another matter.  It’s hard work and there are known pot-holes.  It’s just hard to see them while running at 120 MPH.

Sometimes first-time startup folks cut the wrong corners.

In the process of having urgency, working with very little (if any) cash, and wishing to keep the “attention” of startup colleagues, sometimes those stinky “admin” details like stock plans get left for later “when we get our first real investment.”  Read: “when my investor or lawyer says I have to do it.”

“Lean” startup is a great mantra, but some “process” and steps are needed to ensure that the company and the team are headed for success.  And here’s why stock is so important.

Good judgment says “use stock to get the best people.”  This is tempting when cash is tight (or non-existent) and for good reason.  This is a great instinct and is fully aligned with the start-up entrepreneur’s mindset of “stock is important” and “my company is valuable, and will be even more valuable in the future.”  You want to enroll early employees in this story.

Using gut instinct, ad-hoc grants and haphazard allocations however, is not a good idea, and can sabotage a team’s ability to grow and survive rough times.  And for all those first-time entrepreneurs—there will be rough times.

Belief in the mutual commitment of team members, and belief that the company will survive and thrive after those tough times (even perhaps leading to the epiphany and “pivot”) is what holds a team together.

Inexperience is normal and can be managed through passion, being coachable, and by building a great team.

Bad judgment cannot.  Stock is not some abstract thing that can be picked from a tree, used as needed, and re-grown.  It is precious and has both positive and negative impact on workers.  It is the most common source of “drama” in the founding team.  There’s enough drama in a startup.

It is just plain bad judgment to avoid putting a coherent and thoughtful stock option allocation process into place at the beginning.  No entrepreneur would put-off creating a budget and cash-flow management plan.  It’s just as important.

Having a clear plan and system ensures that both the early co-founders and all key team members that follow them (from office assistant to big-hitter sales pro) understand and buy-into the company’s philosophy and process around fair stock allocation.

A good allocation plan and philosophy eliminates drama, is unemotional, transparent and authentic. There will be no whining, and no hurt feelings.  When things get tough, there will be no resentments about who has more stock.  The result is that there will be a better chance of survival through the predictable (an unpredictable) storms.  Sure, there may still be some drama, but it will be more manageable.

In thinking about what is needed and what is not needed in your “Lean Startup” think about the difference between inexperience and judgment.  Passion ignites the rest.  Don’t let bad judgment sink the ship.

Good Judgment = essential.

Direct Experience = helpful but not essential.

Passion = essential.

Fair and transparent stock allocation process = priceless.

Option Sanity™ counteracts naiveté

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

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

Do you do whatever it takes to hire, including a “ready, fire, aim” stock allocation methodology?

Can you slip on Joe, Jean or Pat’s shoes?

• From the minute Kristy walked through the door Joe wanted her on his executive team. Her energy was as high as his own. She was smart, articulate, with a keen sense of humor; she understood the commitment required by a startup and her family supported her. While salary wasn’t an issue, Kristy said another startup had offered her a lot more stock than Joe mentioned. She wasn’t as strong in some areas as he would have liked, but it would be so great working with her… So Joe offered Kristy 5% more stock than the other company and more than any other member of his team.
• If Jean didn’t find a good UI designer she would be forced to use a contractor or fall behind schedule, so when she interviewed Richard, she was ecstatic. Richard’s technical skills were excellent, but he demanded an additional 25,000 shares above what comparable team members had received. Afraid to continue looking and unwilling to consider a contractor Jean convinced her boss to make the deal.
• Pat hated hiring, seeing it as a necessary evil that took time away from his real job of building the company. When he found a candidate who could fill a role he did whatever it took to land the person quickly. His actions typically involved substantial extra stock, since he had limited cash and perks to offer.

Is this lazy or just the inexperienced use of a sophisticated tool (stock)?

Founders and bosses that consider a ready, fire, aim methodology an acceptable way to award stock are doomed.

Is buying candidates with stock a short-term solution guaranteed to tear the team apart as word spreads (more on that subject later in the series) and people feel betrayed or a viable way to solve your staffing needs?

Is buying candidates with stock actually shorthand for bad culture?

For more information see Insanely Stupid Hiring.

Option Sanity™ short-circuits ready-hire-aim actions.

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

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

Whether you are a startup entrepreneur, work in a startup, invest in startups or just find the whole topic interesting this series is intended to shed some light on the dark mysteries surrounding stock and options and they way they’re handled (or abused).

In general, the way startups choose to give out incentive stock options (ISO) reflects the founders’ attitudes towards fairness and merit; and it sends some signals about whether these values are authentic or just platitudes.

I’m also delighted to introduce Matt Weeks who, in addition to being on the RampUp Solutions board, is President of Actio and deeply involved in the startup world, as well as having held marketing positions in corporate America. Matt will be contributing his knowledge and experience detailing the ins and outs of startup MAP, even though he may not think of it like that.

Here’s a sneak peak of some of the ideas we’ll be discussing.

• Risk mitigation
• Why managers who don’t have a plan are condemned to becoming part of someone else’s—such as the candidate’s
• Good vs. Great
  1. Leading by bullying (lack of transparency and authenticity) can (possibly) make a company “good”
  2. Leading by authenticity can dependably make a company great (because the team is driven by common goals, outlook and honesty)
  3. Why when push comes to shove #1 falls apart (sounds obvious, but there is more subtly here than you might think), while #2 holds together and fights through.

There’s lots more, so plan on joining us every Friday as we explore these and other topics.

One last note. This series offers value even if you have no intention of being and entrepreneur or getting within a hundred feet of a startup. When all is said and done, entrepreneurs are people; people have MAP and the more you learn to recognize MAP characteristics the better off you will be, because MAP drives culture in every organization, large or small.

Option Sanity™ reflects and supports your company’s values and culture

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

I doubt there are any Wall Street bankers who don’t consider themselves leaders and they exist in a world where innovation never stops.

Now, those wily, innovative leaders have come up with a new product to avoid new regulations.

Investment bankers in the US have begun using equity derivatives to convert restricted shares paid as bonuses into cash, side-stepping new guidelines on remuneration which were designed to prevent bankers cashing out for at least three years, according to a headhunter.

Popular wisdom wants us to believe that leaders ‘do the right thing’, but when it comes to those on Wall Street it’s strictly the right thing for themselves.

Image credit: HikingArtist on flickr

I’m no happier about the AIG and other bonuses paid to screwed up Wall Street banks, but I’m not sure why any of us are surprised.

“In the largest 25 corporate bankruptcies between 1999 and 2002, while hundreds of billions of dollars of investor wealth and over 100,000 jobs disappeared, the Financial Times found the “barons of bankruptcy” made off with $3.3 billion.”

Giant compensation packages, guaranteed bonuses and platinum parachutes are excused by Boards and executives as necessary to attract the “best and brightest,” but here’s what’s really going on.

The ‘names’ demands outsize compensation/stock options/guaranteed bonus/etc. in order to validate their ‘brand’.

Those responsible for hiring not only meet the demands, but even exceed them in an effort to attain or sustain the company’s reputation as a better home for ‘stars’—the more stars you have the greater the bragging rights— mine’s bigger than yours in high school locker room talk.

Now let’s consider the folly of this attitude.

Those hiring often seek a name brand in the mistaken belief that the brand comes with a warranty that guarantees good results.

But no matter who you hire you’re actually paying for their past performance, which is always influenced by

• circumstances—boss and company positioning in its market and industry
• environment—culture and colleagues;

and let us not forget that minor factor

• the economy.

The hiring mindset is that everything the brand accomplished was done in a total vacuum and dependant only on the brand’s own actions, therefore changing every single surrounding factor will have no impact on performance.

Put like that it sounds pretty stupid, doesn’t it.

This is one of the prime reasons that so many CEOs bring their ‘own team’ over when they move, as do managers all the way down the food chain—they know they didn’t do it alone.

CEOs aren’t like movie and rock stars whose very names draw consumers into spending money—nobody ever bought a product from GE because Jack Welch was CEO, nor do they carry Jobs iPods—so why pay them that way?

Moreover, assuming that performance occurring during an expansion is a valid yardstick for performance in general, let alone a downturn, is sheer idiocy.

You have only to remember the difficulties faced by people whose management skills were honed between 1991 and 2000, the longest expansion in our history. When the recession hit in March of 2001 they had no experience whatsoever of how to drive revenue or manage in a down economy.

That recession and the previous one in 1990 lasted only 8 months each. The longest recession we’ve had was 2 years, January-July 1980 and July 1981-November 1982, and that one had a 12 month break in it. This means there are a very small number of managers with any actual experience managing in anything even close to what’s happening now.

The current recession officially started in December 2007, so it’s already 15 months old and the end isn’t in sight.

What experience makes these folks the ‘best and brightest’ for today’s world?

Just what the hell are companies still guaranteeing oversized compensation and exorbitant exit packages when now is definitely the time to pay for future performance—no guarantees.

Image credit: flickr

Last month I suggested you join a discussion going on at Business Week, offering readers the chance to weigh in and comment on serious workplace topics.

The August 25 issue offers insights gleaned from readers and experts to which I’ll be referring over the next few weeks.

First up are some interesting comments from an interview with Jim Collins of Good to Great fame. Here are some comments that struck me as excellent wisdom.

“…a “stop-doing” list or not-to-do list is more important than a to-do list, because the to-do list is infinite. For every big, annual priority you put on the to-do list, you need a corresponding item on the stop-doing list. It’s like an accounting balance.”

How true! In all my experience I’ve never seen a to-do list, professional or personal, at any level or walk of life that could realistically be finished, although they were constantly added to and/or rearranged.

That made them a continued source of frustration and demotivation.

There’s a reason that IBM’s slogan is ‘THINK’ and Collins research shows that those who with the highest level of effectiveness give themselves time to think. And while his solution takes a lot of self-discipline it’s not rocket science.

“The key is to build pockets of quietude into your schedule—times when you have an appointment with yourself and it’s protected. I have on my calendar “white space” days. I set them six months in advance, and everyone around me can see them. It’s not that I’m not working, but absolutely nothing can be scheduled on a white space day.”

Technology is the excuse I hear most often for not doing this and, again, the solution is grounded in the self-discipline required to turn things off.

“You don’t report to your BlackBerry” should be engraved on your frontal lobe.

Collins also offers great advice to all those functioning in bureaucratic organizations sans the power to alter the situation, but with potential worth staying for.

Although Collins focuses on senior executives with corner office potential, his advice resonates for workers at any level.

“They were focused on what they could control. That is Job One. But they were also really good at figuring out the three to four people in the organization who really mattered and became very good at presenting to them evidence and arguments that were persuasive.”

This is advice that anyone can follow. Instead of allowing all the stuff that you can’t control or change to frustrate you, focus on what you can do while learning and tapping into your company’s social network.

Collins even answers everybody’s question, “How long should I stay—when should I give up and leave?”

“If you produce exceptional work, your ability for influence is very high. Most people, even in bureaucracies, are hard-working, well-intentioned people trying to do good things. If you ever wake up and say the majority of people here aren’t that, then for sure it’s time to jump.”

There’s a lot more packed into a fairly short interview. I hope that you’ll take a moment to read it.

What resonates most with you?

Image credit: stephmcg CC license

Image credit: bluegum CC license

One of the things that RampUp does for its startup clients is help implement our unique approach to awarding stock options. The original methodology was conceived by RampUp’s angel Al Negrin for his own startups and we’re currently in the process of turning the consulting service into a software program called Option Sanity™.

Among all the neat things that Option Sanity™ does is track award dates and provide an audit trail that discourages backdating.

It also provides the intelligence necessary to avoid the level of idiocy present in TeleTech Holdings’ restatement of 12 years’ worth of financials dating back to 1996.

Yup, 12 years of misdated stock options, but no misconduct!

“If we eliminate misconduct, we find ourselves in the land of cluelessness, sloppiness and ineptitude… There were other goofy mistakes, like recording option grants for folks who were no longer on the payroll…And the firm’s options accounting treated some consultants like employees.

As in many of these options messes, the compensation committee’s use of “unanimous written consents” instead of real meetings (and befuddlement over who had authority to make grants) led to massive confusion about the dates on which options were officially granted. The investigators had to reconstruct the circumstances behind every grant to figure out the “appropriate” date (and hence the real exercise price) for each one. The company admits that some dates “could not be determined with certainty.”

All of which goes to prove Hanlon’s Razor: Never attribute to malice that which can be adequately explained by stupidity.

What do you think?

Image credit: duchesssa

There’s no time to post about all the interesting articles on corporate culture that I find, so I thought I’d offer several up with a few notes.

Wow! A founder who not only knows the front-line people (read: those the customers see) are the key to success, but puts his founder stock where his mouth is. No, not some high tech hot-shot in Silicon Valley, but Robbie Lee, CEO and founder of U.S. Dry Cleaning Corporation, the nation’s fastest-growing chain of dry cleaning operations.

According to Deborah Rechnitz, chief operating officer, “Robbie believes very strongly that our front-line employees are the key to our success. He also wants them to know that the company values their efforts and that they too can participate in the success of the company.”

Michigan isn’t the first place most people think of when cultural innovation is mentioned, but that’s what Rich Sheridan, CEO of Menlo Innovations in Ann Arbor has successfully fostered.

“Inside Menlo’s offices above a coffee shop a few blocks from the University of Michigan’s central campus, there are no walls.

• No cubicles.
• Nobody working long nights.
• Nobody working weekends.
• No offshoring of work to programmers in India or other countries.
• And nobody telecommuting, sort of counterintuitive for a technology firm in the era of virtual offices.
• And if a client is a cash-starved entrepreneurial start-up — is there any other kind? — Menlo might just cut its usual rates for custom software by 50% in return for equity in the client’s business or royalties from its products.”

Casino’s are the last place you expect to find good culture, but apparently Caesars gets it right.

“It’s something you hear over and over about Caesars in its birthplace; good people, the place runs right; the staff make good money. Not the best money, like they raked in back in the good old days . But still among the best.”

Many Canadian companies also have their cultural act together, among them are…

• “When people have passion projects or interests . . . there is a culture here that they’re not shy or unwilling to come forward… It’s that kind of flexibility, out-of-the-box thinking and attention to corporate culture that truly differentiates a company from competitors” explains Chris Bedford, president of Calgary-based branding agency Karo Group.

• “Creating an open dialogue where employees truly have a voice and are listened to also makes a profound difference. “We’re constantly hiring,” he says. “Not only are we overstaffed, but we’re cherry-picking the best people and it all comes because of the reputation,” according to Bruce Rabik, chief operating officer of Rogers Insurance Ltd.”

There are great lessons to be learned from these cultures and the people who create/enable them. And if you want to implement similar ideas in your company, I’m willing to bet that every one of them would take the time to address your how-to questions.

Image credit: Sameen

A post on Yielding Wealth asking readers how they defined ‘wealthy’ reminded me of a post I wrote year ago about executive pay, which included having your taxes paid on various perks, and even on compensation.

But the “golden coffins” being made public due to a rule change 18 months ago really blow me away.

This isn’t about life insurance; it’s about really big bucks if they happen to die while still in office. How big?

“Eugene Isenberg, the 78-year-old chief executive of Nabors Industries Ltd… If Mr. Isenberg died tomorrow, Nabors would owe his estate a “severance” payment of at least $263.6 million, company filings show. That’s more than the first-quarter earnings at the Houston oil-service company.”

At 78 there’s a good chance he’ll collect, too.

And then there’s the death-related non-compete clause.

“The CEO of Shaw Group Inc. is in line to be paid $17 million for not competing with the engineering and construction company after he dies.”

We all know that the pay-for-performance principle often doesn’t hold true, but death benefits have to be the ultimate nose-thumbing on that subject.

Shareholders are in revolt and have forced Comcast to scrap its plan to pay the 88-year-old chairman of its executive committee his $2 million annual salary for five years after his death.

In addition to hard cash, stock options are subject to accelerated (read: immediate) vesting resulting in yet more money upon death.

Certainly sounds like a good motive for a murder mystery—unless you’re a shareholder.

Read the article and you tell me, are death benefits fair?