I hope that title made you laugh. There is not much to laugh about recently. Companies laying off people, companies closing down either temporarily or permanently, people doing stupid things (too many examples), craziness at grocery stores, etc. I am sure you all have your best “un”favorite example.
In these incredibly challenging times, I wanted to pass along 2 articles in case you have not seen them yet. The first, by Steve Blank, it about the virus and startup survival. I don’t need to make any comments on it as it really does not need any. Have a read here. One of the folks at Entrepreneurship at Cornell sent it to me yesterday (thanks!).
The second article is called Coronavirus: The Hammer and the Dance. I am guessing that many of you have already seen this one. Tomas Pueyo, who is a leader at Course Hero, has been quite prolific in his analysis of the virus and what/why we need to do do to address it. A fact-based presentation. I wrote an email yesterday to someone that one “light” from yesterday was that China had reported no new infections overnight. If you would like to better understand why that good news happened, then take 20 minutes and read Tomas’ article. I don’t care if you think this whole thing is an overblown episode in time – read the article. Someone on the Entrepreneurship at Cornell advisory council (former student, now VC!) sent me this one (thanks!).
Happy New Year! Quick post.
First Round Capital is literally a treasure trove of valuable information. Its First Round Review repository is outstanding, and should be a go to resource for any startup founder. Today First Round Review published “The 30 Best Pieces of Advice for Entrepreneurs that We Heard in 2019.” It is a wonderful compilation of advice and tidbits with easy to understand and apply stories. Definitely worth reading!
I was recently in a board meeting and the topic of change of control stock option vesting acceleration came up. I wrote a pretty long post on this topic already so won’t rehash the basics again here. But the recent discussion confirmed my view that double trigger stock option vesting acceleration is very clunky, difficult for management teams to understand when it actually matters (at the time leading up to the change of control) and, in my view, should be used infrequently. I am pretty sure that my view on this is not that widely shared.
Absent provisions in a stock option plan or stock option agreements issued under a plan, an employee’s unvested stock options will simply terminate on a change of control (this is the default plan rule). This makes complete sense – once a company is sold in a change of control, the actual stock underlying the option is worthless going forward (in other words there is no longer a company to hold equity in as it was sold).
When a company is sold it is often very attractive for option holders to have their vesting accelerate immediately prior to the time of the change of control. This allows the option holder to participate in the change of control exit to a greater equity extent assuming the options are in the money. As pointed out in my prior post, option agreements may provide for single (just the change of control) or double trigger (change of control followed by termination of the employee following the change of control) vesting acceleration.
Implementing double trigger acceleration is often really confusing for the option holder (who likely worked hard to get the company sold). Implementing single trigger is easy, understandable and better for the option holder (again, who likely contributed to getting the company sold!!). So, I remain a big fan of single trigger. Simple = more understandable = better for the management team.
Critically, change of control acceleration is NOT standard. Often it will just apply to senior members of the company’s team. If the board (who grants options) is concerned with inadvertent windfalls (like when a senior team member joins 6 months prior to an unpredicted change of control and has vesting acceleration), then there are very easy ways to avoid that. Just have the single trigger acceleration kick in after a set period of time (like 2 years after employment starts) or have it apply ratably over a time period (like 25% of unvested options accelerate if the team member has been employed less than one year, 50% if less than 2 years, etc., so that any windfall is limited).
My overarching theme is that team members work hard to get to exits. Without the hard work of a senior team a good exit won’t happen. Reward them with single trigger acceleration. All incentives will be aligned and, most importantly, the team members will fully understand what they have in terms of equity potential.
Sorry for the big gap in posts!
As a bunch of you probably know, James Holzhauer is on a streak to set the record for Jeopardy game show wins. I just read that the show picks back up on May 20th with “live versions” (which are actually taped). I do not watch Jeopardy at all. But, the news stories have caught my eye so I have read a few of them. The other day I came across a print interview that included this question: Would you describe the traditional way of playing “Jeopardy!” as overly risk-averse?
Holzhauer’s answer: “I would definitely say it’s too risk-averse. The funny thing is, my strategy actually minimizes the risk of me losing a game. There’s times in a football game where a team goes for a big TD pass. If you don’t take a risk like that, you’re not going to win. Really, the big risk is never trying anything that looks like a big gamble.”
In case you don’t know, a core part of Holzhauer’s strategy is to go after the $1000 “answers” first so that he builds up a pot to bet when he hits a daily double. This is why he is the fastest money winner in Jeopardy history.
Anyway, I loved his answer as it made me think of many entrepreneurs – they take risk all the time! And guess what, so do VCs when they bet on those entrepreneurs! Risk is a given and taking risks is required.
Happy New Year everyone! I hope you all have had a great holiday season. Quick post just following up to my most recent post on independent board members.
a16z has a podcast series, and one of my CVF partners just sent me this podcast from them on independent board members. Great quick 23 minutes. Have a listen.
Tidbits of value from the a16z podcast:
- Independent member are able to diffuse hidden agendas among investors.
- Independent members are able to provide feedback to CEO by a trusted non-investor.
- Makes the overall board dynamics way better as the relationship between the VCs and CEOs is just different than the relationship between the independent board members and the CEO.
- The reality is that the VCs have to give up board control too once the independents arrive!
- Entrepreneurs don’t like working for others and CEOs always have to work for the investors. The independents make the board function better.
- Being a board member is MUCH different than being a board observer or advisor. Independents can start as observers/advisors but entrepreneurs need independent board members with board power.