Thursday
May172012

Founders: Am I a Founder?


The things that can make a great founder may seem irrational, illogical and even sometimes ridiculous, but are nonetheless true.

I am currently the founder of famo.us

I have no way of telling you whether or not you are a founder. But I can share with you the traits I have noticed over the years. They are as follows:

  • deep, hard fought confidence that can express itself in a range anywhere from quiet confidence to complete dickishness. I think in some super weird way, that there’s nothing wrong with being cocky ---> as long as you deserve it ;
  • self-reliant to the point of masochistic behavior - I like people who like to learn about everything by doing, by trying it themselves and not only don’t need other people’s help, but can even scoff at the very thought of it;
  • someone who, by default, challenges all thinking - I want the person that when they were a kid, they would say “Why, why, why, why” I can tell you this: when I have a kid and they begin asking why, they are in for a big shock and a very long conversation about everything;
  • someone who has overcome their own worst fears - Every single person on earth is faced with their own difficult challenges. Whether you were beaten as a child, or you’ve been discriminated against or just that you never fit in at all - if you’ve overcome your own greatest fears you’re my kind of person, because compared to facing your own worst fears, startups are a cakewalk;
  • not enchanted by other humansI have very few people that I actually admire. I have found that people who are easily impressed or are affected by a lot of “mentors” or “heros” generally never become impressive people themselves;
  • justifiably not easy to convince of anything - I like people who are not pushovers, who have a belief system, a credo of their own and ideas that they truly do believe because they can back them up with reasoning;
  • paranoid, questioning themselves but malleable - in what may seem as direct opposition to what I just said above, I also want someone that’s malleable, who can listen to advice, who does question themselves and understands that as smart as they are, they can be 10 times smarter if they surround themselves with other people who’ve been down the road they are going;
  • reality distortion field - Steve Jobs had it. The ability to make people believe in the impossible. It’s what can make a good employee a great one, a good product a superior one and an idea into an idea that changes the world;
  • the JFK effect - to convince people to leave a perfectly good job to join you is difficult, to convince people to give you money is difficult, to see all of the possible moves you could take and make the right ones, the ones that make you a great company, takes someone who can move mountains;
  • a killer inside. whenever I talk to a 18-20 year old founder who looks at me like they want to eat me, I get excited. In my very first interview ever, the CEO of the company asked me where I saw myself in five years and I said “taking over your job” He hired me on the spot;
  • unafraid and in some cases even excited about failure. If you truly believe there is a way to success, then it is really only a matter of time. If you try all alternatives, then eventually you will reach the one that succeeds. Every failure is simply an elimination of one more alternative - which actually is one step closer to success;
  • young enough to take the risks necessary to build a billion dollar company - I do not like old people, except for myself - and even then I question myself about that one sometimes. It takes a special kind of crazy to build a billion dollar company and most people lose that crazy over time. Fortunately, I’m as nut-balls as ever;
  • a coder, or better yet an engineer - not being able to code in today’s world and trying to be founder is like trying to be an author without knowing how to read. No excuses;
  • anal, with incredibly high standards - one of the best ways in the world to see how a company is going to do is look how they keep their office, look at their first people they hire, look at how they hold themselves against normal standards;
  • the joy of being a complete spaz - I like to jam with someone and completely spaz out with them. It is the most raw and true form of passion there is;
  • addiction - I like founders who aren’t even for a moment questioning their path. I want people who are addicted to startups and cannot even imagine getting a j.o.b.;
  • weirdly divorced from money - great founders don’t even care about how poor they are now and don’t let short term personal finance situations affect their decisions. A great founder must believe, naturally, that they will be rich, that it is a foregone conclusion and therefore is not part of the decision making process at all;
  • wizardry, apotheosis and the Jesus complex - a small, but palpable belief that either 1) you have the ability to move things with your mind and one day it will be discovered that you are a wizard, or 2) you will live forever, or at least you will participate in figuring out how to do so, or 3) you will die before the age of 40.  ...or any combination of these three things.

 

Sunday
Jun262011

Founders: ff, super f and plain old f'd


Prior to 2005, deciding on the capital structure of a startup was a very simple affair.  Most capital structure included 80% common stock for founders, 20% for the employee stock options pool (ESOP) and then investors got preferred stock which diluted common and ESOP equivalently.  But today, founders have more options including having Series FF Class Preferred, which allows you to sell a portion of your founder shares at an institutional round without causing a tax effect on common and Super F shares which gives founder shares expanded voting power.  

So what are these new semi-exotic shares and how do you decide when to use them and when not to?  Could choosing the wrong structure accidentally just get you F'd?

Some History.  In 2005-2006, my company, Powerset, helped create the Series FF class preferred share structure along with Orrick, the law firm and Peter Thiel, Luke Nosek and Sean Parker.  I was, for better or for worse, the first person in the United States to ever have Series FF class preferred and to sell it.  So with those bonafides, here's the justification behind FF from my perspective (although I urge you to talk with others because there are widely varying opinions when it comes to of FF).

The Need.  Although it seems antithetical for investors to support a founder ever cashing out prior to making the company a success, there are legitimate circumstances where investors would and should support such a move.  These cases almost always involve a circumstance where personal financial pressures are either distracting a founder or potentially causing them to make irrational or unwise decisions.  Sometimes it may be an older founder who is feeling financial pressure because they have a mortgage eating away their savings and thus they decide to position the startup to sell earlier than they should.  Sometimes it may be a younger founder whose loses their sanity after prolonged periods of too much angst associated with overly complex and retarded strategies to simultaneously change the world, get rich and somehow get laid all while juggling credit cards just to maintain a lifestyle of sleeping on a futon, eating pho and drinking Rock Star energy drinks.  However it happens, the logic of why an investor would support a founder cashing out a small equity stake is the same... if doing so eliminates all distractions from a founder's personal life so that they can be 100% focused on the startup while maintaining enough of an equity stake to be hungry, then it's simply a good investment strategy.  

The Problem.  The ginormous problem that existed prior to Series FF was that if a founder always got common and if they ever sold common, say at Series A, at a price higher than their strike price of common when they got it, then all sort of tax implications rain down on other common stock holders, typically employees, causing a shit-storm to fall on the founder's head - and rightfully so.  Basically the end of the story here is that there really wasn't any real option for founders to eliminate their personal burdens while operating their startup.

The Solution.  Enter Peter Theil, Sean Parker and Luke Nosek from FoundersFund (that's the FF in Series FF class stock) and three wide eyed idiots crazy enough to be willing test subjects, i.e. me, Barney and Lorenzo - the founders of Powerset.  While we were developing the idea of this stock, we jokingly referred to it as Purgatory stock because it was neither preferred stock (heaven) or common stock (hell), but rather sat in a gray area between (purgatory).  The idea was that this special stock could only be given to Founders at the founding of the company.  It it had the magical property where if it was sold at Series A, it went to heaven and became Preferred Stock at the preferred strike price of that round and if it was not sold as Series A, the idea was that it would fall to hell and it would become common stock and was valued the same as other common, thus it would therefore not cause any nasty tax effects for common stock holders.  

The Weirdness and the Benefit.  I still remember the day we told Charles Moldow at Foundation Capital that we had invented a new class of shares that we called Series FF shares and that we intended to use them at Powerset - the look on his face was worth the $7M we were asking him to give us for our Series A.   Looking back on it now, it seemed a bit crazy to introduce such an obvious flag in the middle of our fund raising process.  But I guess inventing a new type of stock really didn't add any more craziness than the already ridiculous notion that we were asking for a $40 million+ valuation and we were taking on Google head to head... so why not?  My top secret strategy was to take Charles out for milk shakes at the Creamery in PA every Tuesday for what seemed like the entire summer of 2006 to get him used to the idea (and of course I made him pay for my shake too).  Eventually, Charles finally agreed to do the round with FF intact.  I must say I'm still a little shocked that we got our round done with FF, but once the word about this magical new type of stock got out, it immediately launched a wave of companies who wanted to copy what we had done.  

The numbers.  At Series A, I was the first person to sell Series FF preferred and I sold $xxxK to xxxxx xxxxx, which, I think, represented something less than 5% of my stock (I can't quite remember).  I used the money to reduce the loan on my house, which reduced my money salary requirements to startup levels.  For me, it truly did have the intended affect... it made me more settled, more confident and more patient.  In essence, Peter had created a "safe zone" for me to operate so that I could make his investment more valuable.  It was a valuable lesson for me that I experienced first hand.

Since its inception, FF has gone through a roller coaster experience.  I've heard some VCs scoff at it as if it were pure evil thought up by VC haters.  I've heard lawyers refer to it as a shady way of contemplating capital structures and I've seen founders abuse it benefits to actually cash themselves out for reasons that I have thought were a bit questionable.  However, I think FF is beginning to settle out a bit.  Today, Series FF is widely understood by most law firms and it has matured in it's structure quite a bit from the Powerset days.  At the end of the day my opinion is that Series FF, if properly implemented, is a valuable tool in the tool belt of both founders and investors.  I think that Series FF is definitely NOT the norm and NEVER will be. Rather it is and will always be the exception - but a valuable one.  

Super F.  Super F is yet another semi-exotic class of shares where founders shares have more voting power.  In terms of my background with Super F, I have never had it in any of my companies, so because I believe that people should only talk about things they have experience first hand, I've decided that I 'll let someone else discuss Super F in detail.

Decisions.  So how do you decide whether or not to use Series FF in your company?  Here are the factors I would consider:

  • With Series FF: Do you need to reduce some financial pressure in your life as a founder and would reducing that pressure massively amplify you as a founder?  Are all founders in this position, or just one?  If your founding team members are all 18 and you're living in a shit house, FF may be right for you.  If you are an old fart, (meaning older than 30) and you are leaving a job that's paying you more than $200K and you've built your life on having that level of income, then FF may be right for you.  If you want FF just because you want to upgrade your honda civic to a BMW, then FF is not the right instrument and I would call you a second-hander poser want-a-be and you don't deserve to be a founder.
  • For both Series FF and Super F: they are DEFINITELY a red flags for many VCs, so beware that you are creating a flagg-able item which could make you less attractive for investors.  So consider, the current economic climate and how hot you are as a startup.  Generally VCs are more likely to be ok with Series FF in a founder friendly environment or when they are dealing with a super hot deal.  If fund raising is tight or you are a struggling startup and you really just want to make sure you close you round, don't expect Series FF to be something that is easy to get passed a VC.  I wish some website would do the homework of interviewing every VC to find out their opinion of Series FF and Super F - it would make our lives a lot easier.
  • For Series FF and Super F:  Are there other options? - lately some law firms are claiming that you can, in fact, sell common without a tax affect.  This is a phenomenon that I don't quite understand, but this is something that I would follow closely.  In terms of maintaining control, Super F is only one of many tools in the tool belt.  If I thought I could get Super F, I might just take it, but if I thought it would put my round at risk, I would focus more effort on the negotiations revolving around the "investor rights" which is in my opinion one of the most important and definitely the most under discussed part of the negotiations when it comes to raising a round of money.

Whether you decide to use these semi-exotic classes of shares, make sure you do so wisely because if you are not careful, they could F you in the end.

Disclosure.  Since Powerset I have not had Series FF in any of my companies, but I have supported their use in some of my portfolio companies from my personal fund.

/steve.

Thursday
May172012

founders: rules for giving advice


So, I should warn you, I'm about to release a new short form essay called "Galapicon Valley and the Rise of Black Frankenstein" in about a week or so (it's currently under draft review).  Some people have asked for early access, so if you want to get early access you can do it here.  This essay is part one of a five part compilation of essays which together represent a kind of state of the union'ish essay that may just end up being the longest blog post in the history of the Internet.  I really don't know if anyone will read it, but I didn't think anyone would read the Cult Creation essay either and it now has over 40,000 views.

But before I post my next essay, I thought I would share my thinking on how I came up with the rules that I try to follow for writing any essay.  I'm interested in what you think, or if they can be improved.

Please step forward and enter my mind - A Founder's Contract

When I sat down to write the Black Frankenstein Essay I realized I needed a basic construct to refer back to when deciding what to say and what not to say in my essay.  I tried to remember what it felt like when I was 19 years old which is when I started my career as an entrepreneurs placing 2nd in my school’s business plan competition (mainly as a result of wearing my hair in a Samurai Warrior hairdo during the final presentation). 

I thought about what I would have wanted some old fart like me to tell the younger me. 

So even though I risk the ridicule of my friends for writing a short essay where I get into an argument with myself, I sat down and transported myself back to that time in my life and became my younger self.  Then I imagined that I had the license to ask my older self to agree to some basic constructs before advising me - The things that many first time entrepreneurs wish they could say to their mentors, but don’t because it’s too awkward to say.  But since I am me and I’m fine with offending me, I’ll say the things to my older self I wish I had said back then to my mentors. 

  1. Skip the obvious pieces of advice and share the most hard fought, most valued lessons that you’ve learned over the years.  Act as if I’m a new soldier coming in to serve my first tour of duty and your a seasoned warrior that’s been on the ground for many tours.  Tell me where the land mines are, help me survive, help me win the battlefield; 
  2. Hey me, do not bullshit me.  Do not augment your stories or re-write history in subtle ways that make yourself look good and will make me screw up; 
  3. Give me actionable advice, not funny little stories that prove how cool you are and that you hang out with all of the other cool entrepreneurs; 
  4. Remember where I am in my life - I have no money, no track record, a resume that couldn’t fill a page and an investor network that couldn’t fund a pizza party.  Don’t give me advice that you can do because you’re you.  Tell me things I can actually act upon; 
  5. Please give me advice that is actually relevant to now.  If you go rambling on about how back in the day you could buy a snickers bar for twenty five cents, how your girlfriend wore leg warmers and how you used to break dance for money, I’m going to commit suicide and I’m taking you with me.  Don’t tell me how to raise money in the 80’s, 90’s, in the dot com boom or even how to raise it last year.  Tell me how to raise it now; 
  6. Your legacy is me.  I know you think you're rich and accomplished and everything, but let’s be clear about one thing.  You’re an old fart and you can’t escape that fact.  I’m twice as smart as you, I have 3 times the energy and I work at 4 times the speed.  I want to suck your brain dry and then replace you.  If you really are a true entrepreneur, then you should respect my intentions, tell me what I want to know and accept your inevitable fate with dignity; 
  7. Be clear and be complete.  I want everything.  Don’t leave out important connectors, precedents or the little things that make a big difference.  Don’t give me the stuff I could read in a book.  Give me the stuff that would never go in a book; 
  8. Help me navigate the drama.  There’s a lot of stuff going on in the Valley.  There’s Y-Combinator, the Super Angels, the Investeratzi who just seem to follow the Super Angels, and the VCs.  It seems like we, as entrepreneurs, have to navigate pretty tricky waters.  Help me understand what’s real about my options and the pain/benefit of each.  I really want someone to help me cut through all of the over-dramatic bullshit that’s out there. 
  9. Help my company, not yours.  Don’t give me advice that was only relevant to the companies that you created.  I don't give a flying hoot how cool it was to bookmark something for the first time.  Take the time to extract the concrete lessons that allow you to build up constructive, actionable nuggets that are abstracted away from your specifics. 
  10. Understand the weight of your responsibility.  Remember, you’re not recommending a golf club to me, or a video game.  You’re giving me advice on the most important thing to me in the world right now.  I may actually do many of the things that you tell me, so please think through the things you say to me because I need to find people to trust, to believe in; and right now, you’re it.

Doing this made me remember what a cocky turd-ball I was when I was younger.  But are young entrepreneurs any different today?  In the end, it doesn't really matter how insensitive my 19 year old self was to my older self of today - if you can strip out the 'tude, you'll see that by following my younger self's request, real value would be created.  

And so even though I'm sorely tempted to kick my own self's ass, I promise to do my best to follow these principles.  I truly believe that by doing so, it ultimately provides more value and what's more, it keeps me on my toes and challenges me to keep in good enough brain shape to stay at the top of my game as an active founder.  

Steve.

Thursday
May172012

hiring: 4:20



4:20 - (principle: transparency)


It's called many things in many of the companies I have influenced.  Powerset called it "4:20" or "Beer:20;” Virgance, Carrotmob and 1BOG call it "naked lunch;” Serious Business called it "beer Fridays;" and I think Crowdflower calls it "demo Fridays".  

At Powerset, where I started it, it went something like this.  

We initially tried to have it at 4pm, but for some reason the Data Center team and the Tools team needed 20 minutes to "prepare" uhm hmmm... then once everyone was "prepared" we would generally herd them into the game room and give them some beers.  Chris Van Pelt, now founder at Crowdflower, would often start the meeting off with a magic show.  Yes, a real magic show.  Generally he would try to involve some small explosion or two.  Then with the crowd warmed up, one of our employees would demo something awesome that they worked on that week - sometimes it was technical, sometimes it was just talking about whether or not we were looking at an east coast “Tornado” style foosball table or a west coast table.  

Once the demos were done and the the applause stopped, I would sit down on what was called the hot seat.  It was a sort of red stool thing.  

During this time, there were only two rules: 

  1. Anyone could ask any question.
  2. I had to answer.  

And let me tell you, they would unleash on me.  Some of the questions were stupid at first, like "when was the last time you cried?" or "how much money is in your bank account?" or even "when did you lose your virginity?" to which my responses were 1) I had to admit that sometime a really good dish of heuvos rancheros made me tear up, 2) I didn't know because my wife takes care of that stuff and 3) HR VIOLATION!...  

But after the initial silliness was done, we would really get into it and everyone from the most senior engineer to the most junior office manager piped in.  The point of 4:20 was that it was a time for us to share our successes through our demos and to maintain and sometimes strengthen the bond between me and everyone else in the company.  

In order to succeed, you need to build an incredibly tight unit.  There will be times when you will need to ask each and every person on your team to make sacrifices, whether the sacrifice be time at work as opposed to time at home, or helping another engineer whose code blew up the data center and accidentally launched a Russian nuke into orbit or even asking your team to build something over from scratch because you, late last night, decided to completely change direction.  

The degree to which your team is willing to respond to your call affects your ability to succeed perhaps more than any other factor in a startup. If these folks are going to follow you, then you must serve them well.  The best way to do that is to understand that while you are their leader and you will ultimately make all of the tough choices, you are not above questioning.  In fact, you should go into it with the perspective that you deserve and demand to be questioned.  

It will make you stronger because you will know that you have to prepare.  It will make you team stronger too, because it will give them a real sense that the company is theirs as much as it is yours.  Lastly, it will make the whole company stronger as a unit, as a cult, because you will no longer have any sense of "management," of "them" or of "they" to blame.  Your cult's battle cry should embody the sense that you and your team are one and that your success or failure is completely owned by all.  

Your battle cry: "We are They.  They are We. And We Will Conquer."  

(note: you may also shout “We Are Sparta!” during any battle cry, as it is always considered appropriate to do so).

Thursday
May172012

hiring: creating market share



Create a Dominant Market Share - one of the things that I took notice of was Google's move to develop a lot of their tools in Python.  


Curious, I thought.  Why would they do that?  At the time Python was a new(ish) language, although growing quickly in popularity.  Then it hit me.  They were going for a dominant market share in a specific talent pool. If you can get in on a new talent pool trend, the benefits can come back ten-fold.  

Here’s the strategy.  Get the first luminaries in the field, then as that language grows in popularity you are labeled as the de facto place to go if you want to code in that language.  Then hiring get 10 times easier.  

Brilliant.  

In 2005, when we founded Powerset, we realized Ruby was the new Python, so we went after some A-level people in the Ruby community.  The top two we went after were first, Kevin Clark (a 20 year-old wiz-kid who we were trying to convince to quit school) and second Tom Preston Werner (now the founder of GitHub).  

We got both of them, and within a matter of months, we had one of the largest Ruby teams on the planet.

Anyone who wanted to code in Ruby knew about Powerset simply from the Ruby meetups which were dominated by either Powerset or Twitter people.  

We then did the same thing in the field of computational linguistics.  At one point we estimated that of the 200 or so people that really understood computational linguistics in the world, we had about 40 of them.  

What’s the benefit?  Once we knew we had this level of talent market share penetration, we had almost a guaranteed worst case scenario that most startups would dream about.  We knew that our talent pool was so strong, that even in the event that we just ran out of money, one of the big three search engines would simply buy us for our team.  

At that time we knew that a talented engineer in a tough to get tech was worth about $1.5 million per head.  Thus, I knew with relative assurance that since we were going to hire at least 70 people with our Series A money, that our worst case scenario was about a $100 million exit.

If anyone is paying attention, you are now saying, wait a minute!  Didn't Powerset sell for $100 million to MSFT?  .... Yup, we nailed our worse case scenario!

Thursday
May172012

hiring: creating ownership



Your Team Must Have Ownership - from seeing the Powerset cult form in front of me.  


As smart as you may think you are, the best way to ensure that you have a high quality team is NOT by micro-managing the situation.  Your job is to instill good hiring principles and practices into your team and let them build the team from there.  

The easiest way to do that is simply only hire super-A’s A-level people, and then let them have control over who is invited to join your cult.  What you will find is that they will be potentially even more strict about who can join.  The way you know your processes are working is when you overhear employee number 5 saying, “thank God I got a job early on in this company, because there’s no way I could get one now.” 

That would even potentially include you - the founder.  The reality of the situation is that the cult is never really yours, it's your team's cult.  They will create it, they will tell you who they want in it.  What's more is that they will be right.  You will have a shit ton of things on your mind as you build your company.  Trust your people and they will build your cult for you.

Thursday
May172012

hiring: double unanimous



Double Unanimous (principle: team ownership)


Although many confuse this with the founder’s veto practice, it isn't the same.  

It's the inverse.  

Not getting a veto is a passive event, getting a unanimous "yes" is an active event.  Thus, in order to get an employment offer a candidate must actually not only not get a veto, but also get a double unanimous "yes" vote.   

The reason I recommend this is that the motivation for vetoing and the motivation for actively saying "yes" is different.   

Giving veto rights is equivalent to giving protective rights to existing employees.   

Making them all say "yes" gives them responsibility and ownership over the decision to add a new person to the team.  If the person winds up not fitting in or not being competent, then everyone takes responsibility.  Thus when mistakes happen, which they will, the entire team takes ownership and the team gets stronger as a result.  

Beyond the impacts to the team, there is a dramatic impact on the candidate.  Imagine what it feels like for them.  They interview for a week, to get to TBYB and then have to work for a month to get employment.  At first blush it looks like a great way to not get people applying to work for you, but the effect is actually the opposite.  If you were an A-level player and you knew the process involved in joining was this difficult, then you would have a high degree of confidence that the people who made it through this process were rockstars and thus you would want to work with them.  If you ask most rockstar engineers what they worry about most when joining a company, the answer is consistent, they want to work with other rockstars on really interesting projects.  B-Level engineers generally have the exact opposite reaction - complaining about how difficult the interview process is.  They generally shy away from companies with strict hiring policies.  Let them - you will benefit more.  Now imagine what C-level people think of it.

Finally, imagine what it feels like once a person makes it through TBYB and gets an offer for employment.  Double Unanimous is a right of passage and every person that gets an offer to become an employee is aware what got them there.  For any person that makes it to this point, it creates an incredible sense of empowerment and affirmation that they are the best in their class.  

The last effect that it has is that it changes the dynamic between you and the candidate when it comes to the all important founder/candidate meeting.  In short it makes your job much easier.

They are on top of the world because they just made it through their right of passage and passed.  It is and should be one of the highlights of their career to have made it.  So who is going to say no to an employment offer at that point?

The end result is that the acceptance rate to employment offers is incredibly high when using this technique.  It makes your budgeting and HR spreadsheets much more predictable, thus making you look good, but more importantly it makes you look like a brilliant rockstar cult leader. The truth is that by installing this process, you ensure victory.  It reduces the dependency of the cult of your individual founder cult of personality and utilizes the power of your team - the real cult of personality.

Thursday
May172012

hiring: engineers hate/suck at negotiating



Engineers Suck at Negotiating, so Don’t Negotiate, Be Fair - from me, after being pissed off about hiring practices I experienced from bad founders.  


Over the years, I have noticed  some sort of weird inverse correlation between the talent an engineer has for coding and their ability to negotiate. I’ve seen people that could have hacked into NSA suddenly shit twinkies the second I bring up the topic of their salary.  I don’t exactly get it, but it’s there. 

Founders, on the other hand, are almost by nature programmed to negotiate everything.  In some cases, I have seen founders take advantage of engineers who don’t negotiate well, or who simply hate to negotiate so much that it’s a near-phobic experience.  

DO NOT DO THIS! If you do, you’re an ass-hat.

Besides being unfair and a dick move, it is also stupid and even worse yet in my book - it’s illogical.  

What inevitably happens is that the engineers, who all have different deals, get drunk one night.  Then the shit hits the fan when they tell each other what they all make and what equity they got.  Come Monday morning, every engineer’s password is “my_founder_is_a_dick,” several viruses and backdoors are suddenly installed into the code base, and the founder gets the silent treatment - none the wiser of his impending doom.  Way to go ass-hat!

If you can’t tell, this one pushes my buttons.  I don't give a frog's fat ass how good a negotiator an engineer is when I'm interviewing them.  I want them to have such pristine code that it makes my other engineers cry.  I want them to have a beautiful mind that can use logic and reason to solve the engineering challenges that I hand them.  It is completely irrelevant how good they are at negotiating.  

 

No Negotiation - (principles: hire for talent, not negotiating skills; be transparent)  


One of the things that is incredibly important for a founder in today's engineering world is to create a logical and rational hiring plan with salaries and equities mapped out.  

  1. Outline 10 levels of competency per talent type; i.e. one for each type of engineer, one for designers, one for product people and so on.  
  2. Create your high and low salary bookends for each competency, which may be unique depending on your industry.
  3. Then create 10 levels of salary for each competency: Junior 1-3, Mid 1-3, Senior 1-3, and a VP. Then all Junior 2 engineers would have identical salaries, as would all senior 3 engineers, etc.
  4. For your ESOP pool, you will have a specific number of shares to allocate - usually around 20% at or just before Series A.  With your VC develop a timeline of how long that pool should last.  If you are planning to raise several rounds of financing, plan out how much ESOP should be left right before each round of financing, keeping in mind, new investors typically apply pressure for the the past investors and existing employees to take the dilution needed to shore up the ESOP pool.  
  5. Once you have your pool targets, then work with your board to create a general plan of how many employees, and of what type, you want right before each round.  
  6. Then back into how much equity each competency level gets using the following methodology.  Start off by using relatively standard equity disbursals for each type of role - VCs can help, they have many, many stat sheets on this one.  
  7. Then, after you have your beginning equity allotments per strata, take the remaining equity to be allocated in your ESOP and dole that out to each strata based on your hiring plan.  Remember to reduce the amount of equity each strata gets over time by the proportion by which you believe your total company value will grow; i.e. make it so that while your ESOP stock's estimated stock price is going up over time, you are reducing the amount of shares you are giving out.

Therefore, if you gave employee A, who is a junior 1, 10 shares at angel funding and you estimate your stock price at .01 and you are hiring employee B who is also a junior 1 at Series A, when common stock is value at 10 cents, you would give that employee one tenth the stock.  The point is, you're giving the same or less starting cash equivalent to both people because people that joined earlier took more risk and therefore should get more reward.  There are many ways to do this, but it is important that you reduce the amount of stock issued over time so that earlier employees get equivalent or better value.  

It is important that you do this in a systematic and rational way so that you can show it to your employees and new candidates.  Once you have the spreadsheet developed, follow it as best you can.  Be strict on following the salary amounts and do your best on the equity.  If you need some sort of sweeteners to get someone on board, do your best not to budge on the core compensation.  

Sometimes you can hold 83b elections as a benefit, or an offer of RSP instead of ISOs, but never adjust someone's salary within a level to get them on board - the other engineers will know you did so and kill you.  One of the big benefits of using this strategy to hire people is that engineering candidates on whole have a very positive reaction to hearing that there is no negotiation.  

  1. Engineers generally hate negotiating anyway and if there was one word I would use to describe their general reaction, it would be "relief" on the candidates part.  
  2. Engineers are highly logical people and if you email them your spreadsheet and explain that you negotiate with no one and that their peers in the company determine their skill sets and thus their strata, not HR, then all that's really left is for them to check your logic in your spreadsheet.  If it is sound, then I have found it removes perhaps the most awkward and stressful part of the hiring process and turns it into a logical and rational process - which engineers like.
  
  3. Further, you will like it as well, it will help prevent you from doing stupid things that you regret and get bitten in the ass for later anyway.  
  4. It will also enable you to have a very different conversation when the candidate gets to you.  Instead of this part of the process being confrontational, where you are the opposition, there is no opposition.  You and the candidate can simply talk about what's really important.  Them interviewing you.
Thursday
May172012

hiring: founders get interviewed



Founders Don’t Interview Candidates, it’s the Other Way Around - me, after an interview with Chad Walters lasted 8 months (I’m not kidding).  


As a founder, you need to come to grips that killer engineers are people who are not easily convinced.  Especially of you.  As I mentioned before, put your team in control over who gets invited to join the cult.  If you do, then you'll realize that by the time the person gets to you, they know and you know that you want to hire them.  If that's true, then you'll find the candidate will want to interview you.

Let them.  

Remember, you are a founder, which takes a special kind of risk-blindness crazy - it's what is different between the DNA of a founder and the DNA of employee #1 and onward.  

Killer engineers are going to be cautious, and rightfully so.  Go into the interview and remember that this person has an entirely different risk profile than you, that they will have other options if they are truly talented and that they are looking to see if you are the real deal, not a poser.  For you, you have already made the decision to risk everything to do your idea; for them, this is your idea and you are asking them to risk their career for you.  

So many founders get so caught up in the frenzy of creating their dream that they fail to take a moment to recognize and accept the weight and responsibility of asking others to join them on what may be a ludicrous endeavor.  Be the one that sees the situation through the eyes of the person you are hiring.  Listen to them, to their concerns.  Don't be a cocky dick to them, it's not the right time or the right thing to do.  In this situation, you are subservient to them, you are there to answer their questions.  Show them you have really thought through their concerns, that you have used rational thinking and logic.  Show them that you have more than just a great speech and a good TechCrunch article to back your claims up(most really good engineers have their prove-it-to-me-radar on full-tilt if you hype yourself up too much - a lesson I’m sure my co-founder at Powerset has learned). Show them you have a plan that is well-thought-through, and does not rely on luck, or hope.  Show them you are the real deal or they will walk.

Thursday
May172012

hiring: full-time equity only



Full-time, Equity-only Commitments are a Key Sign of Strength  - from Peter Thiel.  


The best way to prove to yourself, potential investors and to any potential future employees that you have a killer idea, is to get a number of A-level engineers to join full-time with equity-only deals.  

The reason is simple.  While investors, including angels and venture capitalists, are good at picking which markets to go after, they are more often than not in an incredibly poor position to determine whether or not a founder is the real deal, whether the idea is technically doable and whether the founder involved could build the team necessary to succeed.  

A-level engineers, on the other hand, are in a great position to know whether the founder is a bullshitter or not, whether the technology is real or not and how doable the whole thing is.  If I see A-level engineers joining any company, I stand up and pay attention - because I know that A-level engineers, unlike founders and many investors, are very risk intolerant and skeptical people by nature.  Investors only have to risk capital and a little bit of time, but engineers considering to join as employees have a much higher threshold to cross.  They are risking their livelihoods, their reputations and will be the ones  committed to endless hours of working on the thing.  

When a founder convinces A-level engineers to quit and join them full time with equity deals, it is a major indication of the strength of the founder, the technology and of the idea.

Thursday
May172012

hiring: hire slowly fire quickly



Hire Slowly, Fire Quickly - from Peter Thiel.  


Never, ever make it easy to join your team.  In fact, make it very hard to join your team.  More talented people will respect this and be excited that it's hard to join your company.  It is very important to A-level people that they work with other A-level people.  Publicly letting the world know that you have a very difficult hiring process will generally attract more A-level people and will scare off B-level people and below - making your job that much easier.  

In terms of firing, remember, if you have 10 people on your team and you have 1 bad team member it can affect your company in many ways - not just because they represent a significant percentage of your company’s work capacity.   

  1. If they suck, then their work with suck.
  2. It will bum out all of the A-level people that they have to work with a B-level person.
  3. It will reduce your credibility with your people if you don't deal with it fast; often times it is painfully obvious to your team that one person needs to go well before you know it.  Make sure you stay close to your super stars so that you can act quickly. Staying in touch with your people, acting quickly and acting decisively will improve morale and increase your reputation as a deserving leader.
  4. Firing quickly can often times dramatically improve morale and bring a renewed sense of confidence; I even got applause once for firing someone.
  5. This is a big one.  If you have someone that needs to go and everyone knows it but you, or you don't act quickly, they may actually refer someone to become an employee and that person may actually get in.  Chances are, if that happens, now you have two problems.
Thursday
May172012

hiring: hiring super A 



Super A = a(a), a=a, super B=c(c), b=c and c=0 - Various sources but probably mostly Peter Thiel and a little bit of Luke Nosek.  


Super A = a(a) - Uber-connected leaders are super A’s.  Get one of those and 10 A-level people will join.  

a=a. A-level people that aren’t super-connected will at least recruit one other A-level person.

super B=c(c)  Super-connected B-level people, “super Bs,” are the most dangerous of all for 2 reasons.  People who are B-level know it and therefore often refer C-level people to join so that they end up looking good when compared relative to their co-workers (i.e. b=c).  Therefore Super-Bs will invite 10 C-levels to join, which is a total disaster.  

c=0  In an effort to improve the gene pool, C-level people should simply be killed, (metaphorically speaking, of course) or at least kept as far away as possible from your company.  

Thursday
May172012

hiring: interviewing doesn't work



Interviewing is Not Good Enough - from hiring really important roles too quickly and then regretting my decision one month after I hired the person.    


I do not believe in interviewing as a sole means to evaluate the hiring of someone for several reasons.   

  1. No matter who you are interviewing or what questions you ask (even if they were developed by a PHD psychologist, or Google), I have found that you can't tell how that person is going to gel, or not gel, with other members of your team.
  2. Product managers in particular are bitches to hire.  They are all but impossible to evaluate in an interview because there is no real test for competence.  I have never been able to hire a “good” product person without them going through some trial period.
  3. I have found that some people are awesome at interviews but are horrible as employees.
  4. I have found some people who are horrible at interviewing have turned out to the be the best employees (note: this is generally because many engineers are uncomfortable in social situations).
  5. You can never allow everyone that needs to, or even wants to, to interview every candidate - it would simply take too much time out of the day and be too disruptive.
  6. Hiring an employee is a pretty permanent thing.  It's very hard to fire a person in the U.S. and firing an employee is often a moral shitter for the company because it means you invited someone into the team that didn't fit. That makes it look like the hiring process should have filtered out this person, but didn’t. Ultimately whenever you have to fire someone, employees will almost always feel that you, as the founder, should have divined that this person was an asshole or was unskilled.  Everything will always be your fault, so own it.
Thursday
May172012

hiring: never let go



Never Let Go - If you find a person you want to join your team, then never let go.  


It doesn't matter what it takes.  Those that know me, or have been at the 3rd Street Grill in Soma (where I do a lot of my hiring), know that I am an animal when it comes to hiring.  I don't beat around the bush, I tell them that I want them to join and that I am willing to do whatever it takes to get them.  

I have been interviewed by candidates' wives, husbands, girlfriends and even moms in order to go over all of their concerns.  I have  brought in a shaman monk to bless a desk and even tried to get someone that red swingline stapler from “Office Space” to get them to join. 

I just don't let people go away.  In the entire time I was trying to hire people at Powerset I can only remember losing two guys once they got to the final round with me.

When you are building your team, be relentless, be a hiring monster and never let go of someone once you know you want them.

Thursday
May172012

hiring: renting gold



Why Buy Silver, when you can Rent Gold - from realizing it was the only way I was going to hire people at Powerset.  


When I am hiring A-level people, I go into the process knowing that I won't be keeping them forever.  In fact, whenever I ask an engineer where they see themselves in 5 years, I often hear them say that they want to start their own company. 

 

Rather than avoiding this during the interview process, I recommend you hit it head on and embrace it.  Talk about it openly and honestly during the interview process and you’ll find that not only will you increase the respect the candidate has for you by having the balls to bring it up, but you’ll actually increase your chances of getting that person to join you.

I can't tell you how many people I interviewed at Powerset who told me they really didn't want to join because they wanted to startup their own company.  Whenever anyone told me that, I would go in for the kill and not let them leave until they agreed to join.  My pitch to them was simple.  "Let me rent you for 6 months.  You'll learn an insane amount about building a startup from me that will help you prepare to start up your first company.  You'll have the pedigree of Powerset standing behind you; and you'll have some cash in your pocket."  

This worked incredibly well, and when those people went to create their own companies (including Serious Business, GitHub, Crowdflower, InfoAxe and others), they were that much more prepared.  I found that by allowing the superstar to know that I was willing to not only let them go, but I was willing to help them go, it made a big difference.  

I don't think we could have created our team without this one principle working.

Thursday
May172012

hiring: the best worst case scenario effect



Know Your Worst Case Scenario - (principle: you are being interviewed)


By the time any candidate gets to you, they are going to have lots of questions.  One of them is going to be "what's the worst case scenario?"  

DO NOT MESS THIS UP!

You need to demonstrate that you have taken a realistic, rational and logical look at this case.  For many engineers at Powerset, they would actually make me walk them through blow by blow what the worst case would look like, and to describe the financial implications, reputation implications and technology usage implications as it related to them.  On many occasions this even involved building a spreadsheet with them and walking through my logic, it sometimes even involved providing proof of things such as "each engineering head was worth $1 to $2 million."  

Many of the engineers at Powerset still probably remember my worst case with them, because I often used it as my primary selling point when I went to hire them.  I built my worst case scenario based on simple and logical truths that had been constructed purposely from the very outset of the company.  Here it is:  "the worst case scenario of Powerset is better than the middle case, and in some cases the best case, scenario of the other startups that are trying to hire you.  Because: 

  1. We have a killer team, that team has intrinsic value no matter what, and the network of relationships you will build in this company will last you a lifetime
  2. You will enjoy working with our team because we only hire A-level engineers like you, and you know how hard it is to get a gig here
  3. The technology we are building is novel: we are building a search engine from scratch and the problems we face will challenge your engineering skills more than any company that is trying to hire you.
  4. If you join us, you will have a very real impact on something important; we are not some web 2.0 Rackojoo company flipping bits for ad sales.
  5. The worst case scenario financially is that we simply run out of money (which by the way will take 2 years at least based on what we have already raised) so the worst case is that for two years you get all of the above and then we sell for about $100 million which would mean every person in the company could put a down payment on a new house
  6. From a reputation standpoint, the worst case is that you are here for two years, getting a full salary and then you will a) have the pedigree of being part of a well-known startup and b) you will be one of the most sought after engineers on the planet because you will have had experience in either Search, Ruby or Computational Linguistics which are going to be skills nearly every company in the world will be seeking in two years or less.  

If you analyze my worst case scenario, you'll notice that in most of it I simply restate what the candidate already knew in their mind.  Really the only new piece of information in the whole statement was the estimate for how much we would go for if we sold the company and that was simply based on an estimate that any engineer could derive simply by doing a Google search on the value per engineering head in an acquisition.  

In short, I made sure that while my statements were bold, and perhaps may seem cocky, they really weren't.  They were logical and rational conclusions based on simple and well-backed assertions.  I will have to say that not all engineers agreed with me, but every single person appreciated that I didn't say something stupid like "trust me.... it's going to be awesome.... I swear."  

No matter what your response is to this question, you need to be able to nail it.  While you may be less inclined to be as bold as I was in my statement, my point is separate.  Take the time to come up with an answer you believe in.  I believed in mine and I think it showed through when people talked to me, and that made all of the difference in the world.

Thursday
May172012

hiring: the founder's veto



Founder's Veto - (principle: team ownership)  


When building a team, the pathway to TBYB and ultimately employment should be simple.  Up until about 50 employees, all employees must be voted into both TBYB and employment without any vetos.  

  1. By giving everyone who interviews before and during TBYB the same founder's right to veto, you are empowering them with a sense of ownership in the company.  What you will find is that your A-level employees will be twice as hard to convince as you for new employees and when someone does get voted in, the level of excitement is high and stays high for that individual.  
  2. Giving the founder's veto right will not only ensure the competence of each employee, it will enable you to protect your culture with an iron fist.  In fact, of the times I've personally implemented TBYB, the most common reason why people don't make it through is actually not competence, it's culture. Weeding out people who are not a cultural fit is equally important to maintaining A-level competency.  
  3. It protects against founders making stupid decisions.  One time, not me, but another founder in one of my companies, thought it would be a good idea for one of his direct family members to interview. Now that’s fine in most cases, but what was interesting was that my personal opinion was that this person was nowhere near qualified, but I let them go into the process anyway.

I wanted to see if what I thought was a clear veto would occur.  It did, but that’s not why I bring it up.  The person that pulled the veto was our most junior engineer at the time.  It was one of the proudest moments I had during the process of building my team.  In the face of the power of a founder, I had created a process that made a junior employee not only feel like they had a right to stand up against a founder, but that I actually gave them that power and they used it - ultimately to protect the team.  That one moment let other junior engineers and even non-technical employees know that when it came to adding a new person to the team, they had the power, the same exact power as a founder, to protect their team.  Other instances followed and I can say with certainty that the veto was never a bad decision.
Thursday
May172012

hiring: the one mile rule



One Mile Rule - (principles: try new shit all of the time)


While at Powerset, we had heard Facebook was paying people more if they lived within one mile of the office.  So we did it too, just to see what would happen.  

All I can say is WOW!  

We paid people on average about $1,500 more per month.  What happened was the people that moved: 

  1. No longer had a commute, so
each person captured hours back for their life
  2. They were happier because they had less road rage and less drama in their lives
  3. The spouses, girlfriends, boyfriends and pets were much happier
  4. They stayed longer at the office because they knew they could always just run home
  5. They were much more productive
  6. Once some people did it, other copied and
  7. We got way more value each month than the $1,500 per person we paid.  

The way it made the team gel, the productivity gains and just the sense that everyone was kind of living the same life mattered.  It had a much larger impact that I initially thought.  You could implement this anyway you want, but I always recommend it.  If you don't have money, offer equity, hell offer bigger monitors.  Make the benefit real, but make it attractive for everyone to live nearby.

Thursday
May172012

hiring: the Peter Thiel Deal



Offer them the Peter Thiel Deal (principle: try new shit all the time)


I remember at a board meeting at Powerset Peter Thiel asked us how the morale of the company was going.  Like all founders at board meetings, we said it was going great.

Peter said “let’s prove it.”

What we did is offer the following: 

  1. Anyone can voluntarily, permanently reduce their salary by one or more strata levels,
  2. For each competency level forfeited you get XX,XXX more ESOP shares.

By doing this we hypothesized that we could actually measure the excitement in the company by how many people took us up on the offer. To our great relief, a lot of people did.  The company benefited by getting an improved information state at a critical moment in the company (like right before you ask them to walk into fire) and we also got to save cash flow.  The employees benefited in that those that volunteered to do this got a lot of extra stock.  Stock they may have either never gotten or would have had to wait years for as they moved up the ladder.  We even had some employees attempt to give up their entire salary - we had to tell them that legally we had to pay them minimum wage - so that's what they did.  It really felt good to have these types of problems.

Thursday
May172012

hiring: the role of the press



Role of the Press - I'm still figuring this one out.  


I can't argue with the fact that a good TechCrunch article can help attract a lot of applicants, but I'm not convinced that it is anything other than filling your own affirmation cup.  When Powerset first announced itself, I admit that I was very happy to see how much VB and TC hyped us up.  It got us a lot of attention and a lot of people applying to the company - plus it felt really good.  

After our first TC article we were getting almost 1,000 people a week applying.  However, as time went on, I found myself hating the press we were getting, and we were getting a lot.  It ended up really just screwing up my interviewing process.  Engineers are by nature skeptical people.  All of the press hype actually only made convincing them harder to do... there's some sort of weird anti-correlation between press hype and ease of convincing an A-level engineer that your technology is real.

I do have to admit I did support our hyped up press strategy in the beginning, but after a year of it, it ended up being a huge pain in the ass.  

I think there is just too much hype in the world.  The press, who needs to get page views to make money, is forced to sensationalize their stories.  It's easy for founders to take advantage of this and too often I see founders fall into the trap of going after glory, fame and power rather than going after what they should - which is simply building something awesome.  

While I think that TC and VB can be used to attract talent, be wary of this tactic as it can often be the crutch of the second-hander.  (re. Ayn Rand)