Yesterday I gave a presentation on startup myths and corollary truths. I thought you might enjoy it…..so here it is (without the voice over): Presentation – Startup Myths February 2012
Happy Valentine’s Day!
Category Archives: Management
Startups Paying Bonuses…..an Oxymoron??
I am a huge believer is paying bonuses when a company can afford to pay them. And there lies the issue. How do you define “afford”. I like to define it as having positive cash flow at year end to cover the payments. Positive cash flow in this context = profit.
With that definition, here are some things that would not qualify:
- “Hey, sweet, we just closed a $3mm Series A”
- “We rock, we just signed an agreement with the largest distributor in the country!
- “Sweet!! We just got FDA approval for a new drug”
- “Guess what – it is end of year holiday time!”
I hope you sensed a little bit of sarcasm in my text tone. But yes, I have heard these and more. Closing a Series A has nothing to do with profits; the investors want the $$ used to build a business. Signing a large distributor has nothing to do with profits until you start selling lots of product (hopefully at a hefty profit) to the distributor. Likewise for FDA approval – start selling the drug. And holiday time, the biggest offender, has nothing to do with profits and everything to do with emotion.
Motivating the team is obviously key. Do bonuses motivate? In general, it is hard to say that they don’t at least help to motivate. So, at startups its is critical in my view for the CEO to set the tone from the beginning in terms of when bonuses can be paid. If the team knows from the beginning that bonuses derive from profits that will serve to manage expectations well. I think of the bonus mentality as an evolution that the CEO controls.
[just pushed “publish” instead of “save”…..sorry….here is the rest]
With respect to holiday time recognition the evolution might look something like this: Year 1, holiday party. Year 2, holiday party with $30 Starbucks gift cards. Year 3, holiday party with $100 Apple Store gift cards. Year 4, holiday party with $2000 cash bonuses (assuming profits exist to cover them). Again, the expectation management is the critical component that must be managed from the top.
With all this said, I am 100% fine with paying a one-off bonus regardless of profits to a particular team member for an extraordinary effort. For example, perhaps the head of bus dev did such an amazing job getting that big distributor signed up that the board decides to pay a “thank you” bonus to this person (despite the fact that the bus dev guy’s job is to get such big contracts signed up).
Look forward to your comments.
No Mess (Hanging Deferred Comp)
It is really easy to underpay yourself in a start up. After all, there is typically not enough $$ to pay yourself well or at all. It is easy to cut your salary during a cash flow crunch. By using the word “easy”, I do not mean easy as in fun or simple. Rather I mean easy as in you have no choice. And having no choice is not too easy!
Prior to receiving outside funding, founders often work for very little salary. Ideally, everyone is motivated by their equity stake and the hope of future reward. A serious issue arises when the “salary not taken” shows up as deferred compensation on the company’s balance sheet or rears its head in discussions with potential funders. This is not going to make for a pleasant talk. It also makes for a messy balance sheet. It is difficult or impossible to get deferred compensation paid once you have outside investors. I think the most important point here is actually expectation management.
A similar situation arises when bonuses are granted even though they cannot be paid due to lack of cash. Is employee moral boosted by paper bonuses that might get paid in the future if cash flow improves? Doubtful. I am guilty of falling into this trap as a board member. The situation never ends well and, again, a messy balance sheet results.
I love to approve bonuses when cash flow exists to pay them (i.e., hey, we are selling product and making some profit). I love paying market salary when cash flow exists to support. I wish my VC fund were larger so that I could get paid more out of our management fee. Reality is……it is not. Reality is…..the payday hopefully comes later with exits.
Luckily, we don’t carry any deferred salaries on our books.
Being Part of a Team
I have been doing a lot of thinking lately about the desire to be part of a team. Let’s call this “Team Desire”. Some people have it. Some people don’t. Some VCs have it and some don’t. Some have it more than others. I would think that all CEOs have it, and if they don’t they should consider switching titles.
Being part of a team…….hmmmm. Do those that have Team Desire have some need to feel included? Maybe. Do those that have Team Desire have some need to be recognized? Maybe. Do those that have Team Desire have a need to feel reassured? Maybe. On these 3 questions, my general thought is “who cares.” These are not overly healthy aspects of Team Desire, but I am sure they exist often.
I have Team Desire. This applies to my role as a VC and in many other aspects of my life (like my soccer team or my group of skiing buddies). In my VC role, there are at times conflicts between being on the company team and, well, being a VC. Some CEOs see those conflicts as apparent too often (in my view) and some don’t. Some VCs might see those conflicts as apparent too often and others surely don’t. When things at a company are not going so well, the conflicts are more apparent.
Personally, I get over the real conflicts and apparent conflicts by knowing that certain rules of the VC dynamic are not changeable and not worth arguing about too much. VCs fund companies. Investors have lots of “say”. VCs need to be treated like important shareholders and spoon fed constant information by the CEOs of portfolio companies. VCs have board reps and the board controls the company. Plain and simple rules. I take these rules for granted. Once I do that and hope that others on the team do also, then becoming part of the functioning team is pretty easy. Team Desire wins. It becomes easier to help and have the help accepted. While the CEO cannot fire the VC from the board, the CEO can and should fire the VC from the inside team if the VC is not playing like a team member. I think that most VCs actually want to play on the team for the right reasons and advance the cause dramatically.
At the companies in which I am involved, it is always about the team. Earning trust from management and visa versa. Working hard towards achieving goals and helping out in any way I can. If a CEO considers this intrusive, then the team is not functioning right – either it is intrusive (and that needs correcting) or the perception is misguided (and that needs correcting).
I am sure that I will continue to think about this topic more and write more about it. Team Desire is the way my mind works. Interesting topic – not that easy to write about.
No Mess (Employment Agreements)
I thought it might be useful to start a blog series on stuff that VCs don’t like to see. I know, some of you are laughing right now thinking “that will be an endless series…..” I will pick random topics, but if you have any ideas, please let me know.
Today’s “No Mess” topic relates to restrictions on firing people. Put simply, VCs like to see boards of directors that have maximum flexibility to terminate employees. This relates to all levels of employees (not just senior execs). Here are some examples of things that result in unattractive restrictions:
1. Employment agreements: if possible, avoid putting the phrase “employment agreements” and word “VCs” in the same sentence unless of course the sentence is “VCs really don’t like employment agreements.” Employment agreements typically confer a severance payment to the employee (for example 3 months salary), and that means $ out the door (in other words an unattractive restriction). Employment agreements, if they do exist, should always condition the payment of severance on the receipt of a written release from the employee and ideally an agreement not to compete as well.
2. Employee handbooks that provide for severance: I once ran into a situation where a startup company had an employee handbook (not all small startups have those, but this one had about 150 employees) that provided for 2 weeks severance upon termination for all employees. Yikes. Again, an unattractive restriction. I know, I am sounding callous.
The general rule is that employees are “employees at-will”, which means that they can be fired any time (except for reasons related to a protected class like race, religion, sex, national origin, etc.) and can quit at any time as well. An employment contract alters the “at-will” norm as does a handbook that provides for severance. Again, it might sound a little callous, but these provisions cause problems often.
As the Godfather might say “Make sure that you can get rid of people without a mess.”
Enjoy the weekend.
ithaca VC 