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Ben Horowitz on “How to Manage”

HIPLegal is hosting a brown-bag lunch series for entrepreneurs, to watch and discuss videos of an exciting educational series, “How to Start a Startup.”  Sam Altman, President of Y Combinator, is teaching this series as a class at Stanford this fall and is making the classes available online. Along with guest lecturers like Marissa Mayer, Peter Thiel, and Ben Horowitz, he will be covering the fundamentals: how to come up with ideas and evaluate them, how to get users and grow, how to do sales and marketing, how to hire, how to raise money, company culture, operations and management, business strategy, and more.

HIPLegal is holding a weekly brownbag lunch to view and discuss each session on Wednesdays from 4:00-5:30 pm at our office (20195 Stevens Creek Blvd., Suite 250, Cupertino).  We watch one video per week (50 minutes) and then hold a discussion for about 40 minutes.  We brainstorm ideas, bounce them off each other, and refine them over the course of the series.  This is a 20 session program that should be a great program for anyone who is in the process of starting a company or is thinking about one day diving into entrepreneurship.  The full curriculum and the videos to date are here.

Session 15, Ben Horowitz, Founder, Andreessen Horowitz, and Founder, and Opsware, “How to Manage.”

Takeaways:

There are many management rules … too many.  This one is the most important, and one of the most difficult to consider on an on-going basis:  Critical management decisions should be made with all impacted perspectives in mind. 

In a start-up, these perspectives include the person making the decision (founder), the person(s) directly impacted by the decision (employee), the other people in the company (other employees, investors, potential future employees), the company culture, and potentially the external world. The impact of your decisions on all of these disparate groups should be considered.  In the following examples, walk through each affected person’s or group’s perspective, and then develop a strategy that considers the impacts of each:

  1. Demote or fire someone who is not performing: executive perspective (tough to fire a hard-working employee, need to move non-performing employee either out of the company or into a more appropriate role but then what to do about compensation and equity), employee’s perspective (some job is better than no job, but humiliating to stay and be demoted), the cultural (rest of the office) perspective (is my relative compensation fair?, what performance is required to keep equity, what does it mean to fail on the job, and will I respect a manager who is demoted).  This decision doesn’t have a clear answer, because it depends on whether the employee was promoted past competency, brought in as an executive, own a significant slice of equity, and other considerations.  But realize that the first time you make this decision, you are affecting the culture of the company as well.
  2. Excellent employee asks for a raise: executive perspective (want to be fair, reward employee, but not trigger requests by all employees or get off-schedule), employee (wants to be fairly compensated, has fiduciary obligation to family to ask for raise), cultural perspective (everyone will ask for a raise if given on request, and people will resent unfair relative compensation). In view of these perspectives, establish a formal process for compensation review and salary increases and stick to that process – no exceptions.
  3. Sam’s blog post: How do you treat an employee who leaves (voluntary or involuntary) in terms of stock option packages: stock vests over time, when you leave, you need to buy the stock at that time or you lose it.  In a start-up that has gone through a few rounds of funding this may require the employee to come up with tens of thousands of dollars, with very little notice.  In the old days, options agreements encouraged long vesting, and permitted paying these costs over time, which made it hard for the startup to make financial forecasts, among other issues.  Since the 80’s, typically agreements have been written allowing 90 days in which to buy or lose stock.  Executive perspective (want to be fair, reward people who stay, don’t want people who don’t want to be there to be handcuffed, unpurchased options come back to the pool and reduce dilution), employee perspective (Where’s my pay? Am I getting screwed by the fine print? May affect reputation of company – will tell the world they got screwed), other employees’ perspective (should I stay or go? Are my colleagues being treated fairly?)  There are two alternative approaches to this, both of which are reasonable, and you should pick based on your company culture.  The first option is to give people 10 years to execute their stock options, whether or not they are with the company.  This is straight-forward, and fair.  The second alternative is to make it clear up-front that you value those who stay, and if someone leaves before the company is really successful they will get screwed. The message is that the options are for those who go through the entire process making the company successful and not for those that leave early so that we value those who stay.
  4. History’s Greatest Practitioner:  Toussaint L’Overture was born a slave in one of the most brutal slave cultures in the world, in the sugar plantations of what is now Haiti.  He was also a visionary and leader.  His vision was to end slavery, take over the country, and create a first-class country.  When he conquered the enemy (locals, owners and imperialist army), he had to determine:

a.      What to let the soldiers do.  Soldiers like to pillage, and rape, and generally destroy things.  And of course he needed their loyalty.  On the other hand, the effect of rape and pillage on everyone else is huge.  He prohibited pillaging and raping. He even prohibited affairs by married officers.

b.      What to do with those he captured.  He considered the perspective of his soldiers (kill the enemy!), the enemy (impressed that he did not kill, rape, pillage), and the culture he was trying to create (1st class – how would they treat their captured?). Since he did not kill those he captured, he had to determine what to do with them.  He took the best people and made them generals in his army.  They had expertise he could use, and they became loyal to him because he treated them well (and didn’t kill them).

c.       What to do with the slave owners.  The slaves wanted him to kill the owners and take their land.  Toussaint knew that sugar was important to the economy, and the slave owners were the only ones with the expertise, connections, and the land.  The slave owners knew that the cost structure for the sugar economy depended on slave labor – they also paid for the slaves and the land and knew nothing but the sugarcane industry.  He let the former slave owners keep the land, made them pay the workers, and lowered their taxes so it was economically feasible to continue to farm with the new cost structure.

Conclusion: When managing, there is power in looking at a problem from all perspectives, even the perspective of people that you don’t know, and even those that you hate.  Considering the perspective of all those affected is how you build a culture in which people thrive.