Are all your team members equally pulling their weight? It comes up all the time — I’ve had the issue myself — and it was common enough for a few startup CEOs to throw together an ad hoc session at BarCampDC2 last weekend. Of course, it never starts out that way — but then, the road to hell is paved with good intentions. How to make sure things stay balanced, and equitable?
Things change along the way, some in our control, some not. But the best way to ensure that things won’t go well is to start off unfairly. And it starts at the top —Venture Hacks contributors noted in their Quick and Dirty Guide to Starting Up, ‘Co-founders are the biggest failure mode for startups.’ Presuming you’ve gotten past that, have a good, complementary founding team, what’s the right ‘comp plan’ for the first few people you add?
Paying them, as it turns out, is really the only true mode of control. If their only compensation is stock (or stock options), you might as well resign yourself to the fact that whoever is paying them — their day job, or contracting work — is their master. (If they’re married, I’m pretty sure that’s what their spouse would say.)
So how do you get them to do your bidding?
That’s the problem. The startup is your dream, not theirs. (If it were, they’d be founders, too.) Do you find that talk about how rich everyone will become just doesn’t seem to resonate? Uh-huh.
Here are some observations and suggestions:
1. Start off fair. At least then, you’ve got a fighting chance. To me, this means, err on the generous side with stock. (Since it will vest, if things don’t work out exactly as planned, the downside isn’t horrible.) Discussions go on all day long at Hacker News about the topic, but until cash compensation comes into the picture, the first few team members (after founders) are ‘near-founders,’ and need to receive upwards of 10% ownership. (If there are two founders, consider 33% each for the two founders, then 33% for the ‘near-founders’ as a group. For some of you — especially first-time founders — this will be blasphemy. “My idea, my company, my 100% commitment, blah, blah, blah.” Remember these words, wee hopper:
Optimize for success, not ownership.
2. Strive for transparency. At the CEO [gripe] session at BarCamp, one of the conversations that transpired surrounded the amount of money that some startup CEOs are able to walk away with as part of an acquisition. Resentment for founders being enriched is not uncommon — and often unpreventable. But I’ve found that employees are far less upset if relative ownership is explained early on — the earlier the better. Exact numbers aren’t needed. But the relative stakes of founders, officers, and everyone down to the admins (I believe all employees should be stockholders) should be something that’s talked about (unless you really haven’t been equitable). I have always taken the time to sit down with each new employee and walk through a reasonable scenario, which goes something like: “If we execute, then in three to five years we could be acquired for $100M (hey, dream big!), at which time your 50,000 shares would be worth around $250,000 . . . and that’s just for this first grant; you should expect to get additional grants.” (Now see #3.)
3. Remember what the motivators are. Among the things I found when I moved to the area from the West Coast, equity was often nowhere to be found (except with the founders). Most notable to me was Mario Morino himself, advocate of entrepreneurship, founder of the Potomac Knowledgeway, and great giver-back to the community. Don’t get me wrong, his philanthropy has been exceptional, and he’s been a role model for many in the area. I was just surprised to learn that employees of Legent Corporation, which he created in the late ’80s by merging his firm with another then sold to Computer Associates (now CA) in 1995 for nearly $2B, never received options. I remember hearing from former employees, “It wasn’t unusual for the area. It’s fine. Mario paid really well, and had great benefits.”
M’kay. Again, money talks. Especially these days. Still, I was surprised to learn from the CEO of a local startup that’s able to pay all his employees that he doesn’t give stock either. “They don’t seem interested in it.” (I think they might regret that, if the company were acquired.)
To me, although the main thing is that people feel they’re treated fairly, ownership in the company is still important. If you’re successful, the day will come when they’ll realize the value of their stock . . . and what you did for them. (Still, see #4.)
4. DC ain’t Silicon Valley. Unfortunately, the cultural differences are working against us. Folks here are just more conservative. As Scott Rothrock, CTO at The HealthCentral Network pointed out to me in the course of trying (vainly) to recruit a programmer from a big company: “People here seem desperately afraid of joining a startup that might fail; in SF, they wear their failures as a badge of honor.” And the irony is, THCN is probably the most solidly-backed ‘startup’ in the area.
5. Programmers and Engineers have a particular motivation. Never underestimate the attraction of working on cool things with cool people. I found out a long time ago that no amount of options will get technical people as excited as working on the bleeding edge. The fact is, the kind of people you want in your startup would never work at Initech in a 9-5 job (unless it was to support their off-hours startup dream). Any programmer worth his/her salt knows that you can lose your ‘chops’ — get stale — quickly if you’re not pushing yourself to learn and grow. Location-aware mobile applications? 3D gaming? Where do I sign up? And, they want to work alongside people who are smarter than them. If your venture doesn’t have some kind of sizzle, some real technical challenges, maybe offshore is a better way to get it built.
6. Hold regular meetings and reviews. In any event, never forget that things need to be monitored — regularly. You’ve gotten your team, they’re pretty pumped up, and off and running. Initial progress looks great. But over time, enthusiasm wanes, knotty problems come up, and all you need are a few demotivators — changing features, which means re-work, is a killer — and pretty soon productivity is way down. While you can’t avoid all the pitfalls, regular meetings (as in, every other Monday, if not weekly) can help keep things on track . . . and will also provide insight into who’s still emotionally engaged. That guy who’s missed the last two meetings — not engaged.
7. Hold 1:1s with your team. Distinctly different from group meetings. You need to know each person’s perspective and situation — especially if you’re not paying them. There may be personal issues that they wouldn’t bring up in a group. The point is, if you start holding regular 1:1 meetings, you find out about things before they implode. If you haven’t done it yet, start now. Maybe employee #3 and #5 just can’t work together. Chemistry, or something. You’re the CEO, and you’ll have to do something about it. But first, you need to find out about it, and find out early. Otherwise, you’ll find yourself changing jockeys two weeks before launch.
8. Celebrate — even little successes. Finally, more than one attendee at the BarCamp session made the point: even minor motivators (pizza and beer, a movie premiere, shirts/hats) can make a difference. They work a heck of a lot better than punitive measures (“Your stock option will be decreased by 100 shares for every day past the deadline”).
And for God’s sake, throw a party at launch!
Editorial Update: Specifics regarding a conversation at BarCamp DC were removed as potentially inaccurate and detrimental.