Last year I wrote a post about WSGR's new term sheet generator and how that was part of an overall trend to "open source" the legal industry. Open source is the wrong term though; instead is probably better to say automate since LegalZoom and others are doing the same thing but commercially. I think this is great for end users both personal and professional, but I think it is going to seriously erode legal industry revenue in the long term. It's silly to pay by the hour to have the same documents generated over and over.
Another great example is a new tool I learned about today. It's a Terms of Service and Privacy Policy generator by Legal River. This is great for micro ISVs or small organizations that don't want or need to pay hundreds of dollars in legal fees to get a basic agreement in place. It's fast and easy to use and generates easy to use, copy-paste HTML. All you have to do is answer some basic questions and then voila, you have your nicely formatted agreement (which you can obviously edit if you like). It looks like a great service. It's free and I'm sure I'll use it in the future.
Because it's that season (bonus season, not holiday season) I've been getting questions about executive compensation from friends. But today I got an interesting question the answer I wanted to share here. The question was something along the lines of, "Well, I know the on-target bonus numbers I want to recommend, but how should I link pay to performance?"
Well, there are basically three ways you can link pay to performance (in startups):
Discretionary (i.e. it's up to the Board or CEO)
One or more financial metrics
Balanced scorecard
For very early stage startups (e.g. pre-revenue and maybe even pre-product), I recommend a discretionary plan, particularly when you're dealing with annual plans. It is just too hard to see out 12+ months with any certainty to be able to pick meaningful metrics. What's more, there is probably little money in the company so to promise cash payments based on metrics without knowing the ability to pay is a bad idea.
As a company matures, it makes sense to introduce some certainty into the pay for performance plan. By this point, your sales team and hopefully your head of sales are already on commission plans (or at least partially so). You probably have operating budgets for each department. If you're seeing somewhat predictable financial results (even if they're not moving in a way you'd like them to!) and you have the reporting in place (dashboards) to track them, then it makes sense to introduce one or more financial metrics to your pay plan. Make sure you don't introduce metrics too early; for example, before you have a robust financial reporting system/process in place.
And finally, once the business has achieved greater scale and size (50+ people, $10MM+ revenue, etc.) then you can start to think about a balanced scorecard approach to your pay plan. A lot of ink (and electrons) have been spilled defining a balanced score card, but the way I think about it is that it includes some financial metrics as well as other important non-financial metrics that can and must be tailored to your firm. If you have an important software release coming up, that could be included. Or perhaps you want to have internal performance reviews or customer satisfaction included. Whatever is important to you business and for which you have a way to track, you can include it.
Something to keep in mind, even in the case of a discretionary pay plan, you want to have your plan documented, approved and shared with the appropriate folks. It should be concise and important terms should be defined. For example, if you're going to tie some pay to revenue, then be very clear about what "revenue" means.
Also, set up quarterly reviews with each executive to talk about progress. Set the expectation up front that you'll do these reviews and you may mutually agree to change the metrics or other bits of the plan. You should build flexibility into the system, but rarely if ever use it.
Anyway, below is a template for MBOs that I've used in the past with some success. It's by no means perfect and I'm sure there are other templates out there (post in the comments here and I'll update with the best).
Note that the scorecards are only 1 or 2 pages per executive. You want to include both high level strategic goals as well as tactical / tangible milestones. And most importantly, you want to give specifics about relative priority and how you're connecting these performance metrics to pay. Remember that you almost certainly won't get this right the first time but that each year you will get close and closer to a predictable system.
Lastly, once you have this framework in place, make sure to benchmark your salary, bonus and equity for each position in your company using CompStudy data which allows you to narrowly focus on companies that meet your profile and the executive position in question.
This Thursday, December 3rd, the results of the 2009 executive compensation survey will be detailed and broken down in two 90-minute webinars (one each for Life Sciences and Technology). Over 700 companies in the US participated this year (the highest participation by a long shot in the 10-year history of the survey). Companies that participated in the survey have already received the results and this is the public unveiling to the rest of the world.
For technology companies (nearly 500 in total participated) about 50% described themselves as primarily in the "software" industry while 10% described themselves as in the "cleantech" industry. The latter is a dramatic jump from last year when just 5 or 6 percent identified themselves as cleantech firms.
As you would expect, there are a number of dramatic changes from previous years. For one, the base salaries and total compensation for non-founder executives, which had grown at a 5% CAGR for the past 9 years, screeched to a halt and had nearly zero growth (for Tech companies). Below is another interesting chart on founder equity for tech companies.
I've always found this chart amazing to me. Basically it says that "all founders are not created equal." If you're the CEO and a founder, then you median equity holding is 21%, whereas if you're CTO that number drops to 9%.
The 2009 CompStudy website has lots of little gems like this one. The new site is interactive and allows you filter and sort the results of the survey to get valuable cuts on the data (like show me founder CTO compensation in California for Series B, software companies with 40 employees and <$5 million in revenue.
Lastly, let me finish where I started. This Thursday there are two free webinars that detail the results of the survey which you can sign up for here. The webinar for technology companies is here and the one for life sciences companies is here.
Once again, here is a list of some of the more popular posts on this blog. The two most popular posts remain this one onterm sheet negotiationand this one onventure debt, although this one on convertible debt
is giving them a run for their money. I'd like to take this
opportunity to thank all of my readers, particularly those who have
voted, commented or contacted me about this blog...your interest is my
motivation!
I'm preparing for a presentation in about a month at the University of Michigan. It's a speech on entrepreneurship to a few hundred students, faculty and others. As part of my research I'm going back and reading the boxes and boxes of notes and pictures from my time at Michigan, particularly my time on the solar car team.
I was struck by one sheet of paper. You can see it below. It has no title and it's just there in a stack of papers with some bullet points:
The journey is the reward
When they said I had big shoes to fill--I said "don't worry" I brought my own
What goes right is the result of teamwork, what goes wrong is my fault
Don't give people goals--give them direction
The best way to predict the future is to invent it
If you're not making some mistakes, you're not taking enough chances
I must have wrote this in 1991 or 1992 when I was team leader of the University of Michigan solar car team. I love all of my "advice" except maybe point #4. I'm still on the fence on that one and frankly am impressed that I had a point of view some 20 years ago.
UPDATE: Just to be clear, these are just quotes I no doubt copied from others. I know the first one is the title of Steve Jobs book published in the late 80s (in fact, you can see that I even attributed it to Jobs before scratching it out! The quote about inventing the future is by Alan Kay, one of the early guys at Xerox PARC. I don't remember writing this list or what I used it for, if anything, but they must have caught my attention then and all these years later I still think they're great.
I've posted a couple of times on CompStudy, the annual survey of executive compensation in private / startup companies. If you haven't heard about the survey before I encourage you to check out my earlier posts (use either the previous link or click on "compensation study" in the popular searches above and to the right).
I won't rehash why CompStudy is so cool; instead, I'd like to share two things that are new.
First, as the post title suggests, the 2009 survey will close on July 15th for Canada and the US. There are close to 800 companies that have already completed the survey in North America which is by far the largest participation in the 10 year history of the survey. The survey also covers China, India, Israel and the UK and will remain open for a few more weeks for those countries.
Secondly, I wanted to point out that starting this year, the results will be published online at CompStudy. This means that you will be able to view and filter the data with a lot more precision. The graphic at right is a preview showing some of the controls...trust me they're pretty cool! Think Kayak for startup executive compenation. These aren't finalized yet, but you get the idea.
The other implication of publishing survey results online is that only participtants in the survey can get access to results. If you've seen the survey in the past, you know that the PDFs and hard copy reports were passed around quite a bit, but now those will not be available. The only way to get the report is to take the survey (or for VCs, to get your portfolio companies to take it and mention you).
It's free to participate in the survey so there really is no reason not to do it.
[UPDATE] The 2009 CompStudy survey results are now published here.
I've mentioned this survey several times before, but this time I bring news of the 2009 survey opening to participants.
This year the survey covers five countries (China, India, Israel, UK
and US) in two industries (technology and life sciences). If you are
CEO or CFO of a startup company in any of these countries/industries
then I encourage you to participate
in the survey. It doesn't cost anything to participate (other than the
30-60 minutes it takes to complete the survey) and the benefit is that
you get the full results once they are published.
In years past,
the results were published in a PDF and a hardcopy book, but starting
in 2009 the results will be published online via a password protected,
members-only site (so participating is really the only way you can get
the results). I think the 2009 data will be very interesting as it
will reflect the effects of the overall economy as well as provide
global comparisons. Don't miss the opportunity to get the 2009 data...take the survey now!
If
you haven't seen the results of this survey before, I'm including both
of last year's unabridged reports results below. It's actually pretty
simple, yet since the data is otherwise so hard to find it's pretty
powerful. Basically the survey collects salary, cash bonus and equity
information for the top executives in private companies (mostly
venture- and preventure-backed companies). The survey also collects
information about the background of the executives and of the company
(like location, size, funding, industry, etc.). The report is then
able to give ranges of compensation based on these attributes.
First, there is the 2008 report for the technology industry focused on the following positions:
Technology
CEO
President / COO
CFO
CTO
Head of Engineering
Head of Sales
Head of Marketing
Head of Business Development
Head of HR
Head of Professional Services
Board of Directors
And here is the full 2008 report for the life sciences industry focused on the following positions:
Life Sciences
CEO
President / COO
CFO
Chief Scientific Officer / Head of R&D
Chief Business Officer / Head of Biz Dev
Head of Clinical Research
Head of Regulatory Affairs
Head of Manufacturing
Head of Sales (& Marketing)
Head of Marketing
CTO
Head of Engineering
Head of HR
Board of Directors
There
are some things that immediately jump out of the data. One is that
company founders have a significant discount in terms of cash
compensation (but obviously a premium in equity). Another point is
that the equivalent role in a technology company is compensated at a
lower level than in life sciences.
So if you are a startup CEO of CFO (whether you have venture backing or not) please take the time to go complete the survey and
you'll get the 2009 results for free. And also you can do a friend a
favor and forward this post to them so they can fill out the survey as
well.
No, this isn't a recessionary move to give away unbilled lawyer time nor is it some sort of shift to being a pro-bono only firm. Today, Wilson Sonsini announced the launch of a "term sheet generator." It's basically a web tool that creates draft preferred financing term sheets for startups. I got a preview of it a couple of weeks ago and my review is that it is really impressive!
The way the tool works is that you answer a bunch of questions (north of 100) and then when you are complete it gives you a perfectly formatted Word file term sheet. Most of the questions are structured as "select from" several options often with an optional to "write your own." The beauty of having the option to select from "standard" options is that WSGR has included some market data, e.g. what percent of term sheets in up rounds in 2008 included this term. Last year, I spent a lot of time attempting to reverse engineer this data based on a small personal sample size. Obviously, WSGR has a much larger sample size and the fact that they make it public (in aggregate) is impressive.
The Term Sheet Generator originated as an internal tool for WSGR attorneys to rapidly generate draft term sheets which they would polish up and then deliver to their clients. Not surprisingly, WSGR Partner Yokum Taku, who I've previously written about, is the key co-conspirator behind making this tool public. I exchanged email with Yokum about this tool and I wanted to excerpt a few take aways from that conversation:
Apparently this is the first of many online document generator tools that WSGR intends to make publicly available on the web. There are three categories (startup, equity financing and bridge loans) so we can expect more to come.
I would have thought that internally there would have been a debate about giving away for free what they used to charge for, but Yokum insists this did not come up.
The biggest challenge in building this tool is that each branch in the question tree is associated with unique verbiage. Building that must have been crazy.
So I think this is a brilliant step toward "open source law" which I've been advocating for a while. I am certain there will be hundreds (ne thousands) of lawyers who will use the WSGR Term Sheet Generator to create draft term sheets for use with their clients. In fact, I bet Google Analytics will quickly show Yokum and his colleagues at WSGR that his real userbase for this tool will be other attorneys both at firms and inhouse. What this tool really wants to evolve to is having an open, wiki-style back end where practitioners can change and comment on the myriad of options and verbiage which would keep the tool evergreen based on the best crowdsourced legal opinions.
In the meantime, I wouldn't be surprised to see some sort of watermarking of term sheets created by the tool that would allow WSGR to offer discounted legal fees if they created the draft term sheet using the tool. It would certainly reduce WSGR's time/costs as they would know the underlying terms
I mentioned in a previous post how I'm an adviser to the folks behind the annual survey of startup executive compensation and how this year the survey is expanding to include China, India, Israel and the UK. So for the past few weeks I've been talking to venture capitalists, entrepreneurs, CEOs and other industry participants in these countries and learning a ton about the local startup ecosystems.
One thing that has surprised me is how prevalent the "American" model of entrepreneurship and venture capital is in these countries. The notion of entrepreneurs starting companies and having substantial ownership then hiring employees who also have ownership in the company and then raising capital from outside investors is universal. Of course, when it comes to compensation there are always things unique to the local business culture. Some of the more interesting things I've learned include:
Salaries in Israel are described monthly. So instead of saying $120K per year, you'd say $10K per month (in Sheqels, of course). And it's not always clear whether it is gross or net of taxes (you have to ask).
In India and China there is no preferred stock. This one really surprised me but apparently in India and China VCs don't get a different class of stock with special rights and privileges. However, apparently it is not unusual for investors to demand side letters that confer much of the rights customary in a typical US preferred security, effectively creating a "synthetic preferred stock." I wonder if these have been tested in any courts...anyone had personal insight into that?
In India and the UK there seem to be two types of startups. There are the "Old School" type with a Managing Director and having limited equity ownership by management and employees and the "American style" startup run by a CEO and with compensation schemes that would be recognizable here in the US. I'm still a little hazy on how to tell one type from the other. Anyone have any color on this?
It will be really interesting to see how compensation compares across countries. That's not what the survey is intended to do, but we should be able to compare a few things (like equity ownership). I'm not aware of any comparable study like this in the US (let alone globally) so I suspect we'll learn a lot from the results. The CompStudy survey will open up sometime next month at http://www.compstudy.com/ and will include surveys for China, India, Israel, UK and US each in IT and life sciences. If you are interested in participating (or promoting) the survey please comment here or send me a private email.
For several years now you've heard me rave about the annual survey of executive compensation at venture backed startups done by J. Robert Scott, Ernst & Young, WilmerHale and HBS Professor Noam Wasserman. Well, I guess all that raving has gotten me a role in advising the backers of the survey on the next generation of the survey: CompStudy 2.0.
If you aren't familiar with it, the survey asks about 300 questions of around 1,000 startup companies. The questions focus on cash and equity compensation for executives (about 20 titles covered) and board members and then it looks at a bunch of attributes of the executives and the company. For example, founder vs non-founder status (big difference in comp), geographic location, headcount, funding, revenue, etc. The end result is that whether you are a hiring manager, investor or candidate the survey is a valuable tool to understand and negotiating compensation.
There are a lot of really exciting things about the upgraded study that I can't yet talk about (more on that later), but one of them is that the survey is going global. For the past 9 years, the study has covered the US only in two sectors (IT and life sciences). But in 2009, the survey is going to be expanded to China, India, Israel and the United Kingdom.
So I'd love a little help from my readers here. As part of tailoring the survey for each new country I'd like to be able to speak with several investors, CEOs and CFOs (or other folks knowledgeable about executive compensation) in each of China, India, Israel and the United Kingdom. I checked Google Analytics and there are quite a few visitors from these countries (okay, not so many from China...yet) so please comment here or reach out to me (fn@altgate.com) if you can help.
If you can help me out by answering a bunch of questions and helping tailor the survey I'll make sure that you get access to the survey results in exchange, not to mention being eternally grateful.
Failure seems to be the topic of today. Came across this gem of an interview with KPCB partner Randy Komisar. Before you poopoo Randy's advice because he's a VC, know that he's got quite the track record as an entrepreneur (including some impressive failures, most notably GO which is chronicled in Startup).
Anyway, there is a great quote toward the end of this interview where Randy says, "You can learn from someone else's failure, but the only way to really get your money's worth is to fail yourself."
Randy is an excellent speaker. The full interview is less than 10 minutes and is worth a view for entrepreneurs and investors alike (note this interview was done in 2004).
Men, it has been well said, think in herds ; it will be seen that they go mad in herds , while they only recover their senses slowly, and one by one!
- Charles MacKay, from EPD&MC
That's as true now as it was in 1841 when Charles MacKay published his tome.
The book is written as a series of stories in three categories: "National Delusions," "Peculiar Follies" and "Philosophical Delusions." Each little story is 10-50 pages in length and the entire book is nearly 3 inches thick. I confess that when I first bought the book in 1999, it took me a full year to read it as it sat in my "reading rack" in my bathroom.
Each of these bubbles was based on irrational exuberance driven by "new rules" and innovation in the absence of any oversight or regulation. And, of course, each bubble crashed leaving most people disillusioned and poor.
The true moral of the story is that if you don't know history you are doomed to repeat it.
But even that doesn't go far enough.
I read this book in 1999 at the height of the internet bubble and still wasn't smart enough to short the market in time. And then 5 years later, I bought a house at the height of the real estate bubble! I hear that I'm not alone. I guess some people never learn...
So as penance I'm going back and re-reading this great book and as part of my public service I want to ask you to also read this book. Recovery from a bubble is a very individual task (as opposed to the very public mania of how we got into this). Take this opportunity to reach out to someone you know who got caught up in the credit bubble and recommend this book.
Not much to learn here. That's actually about what I would have guessed had I not seen the Google Analytics numbers. Although in 2008 I did learn that this is called a "sneeze page." Who knew?
Last December I wrote a post about how December is the time of year when a lot of startup Boards decide to make management (read CEO) changes. I was reminded of this as I was reading a TechCrunch article about how Dan Nye is out as CEO of LinkedIN.
In this case the founding CEO Reid Hoffman is back as CEO (he had previously been kicked upstairs to Chairman). This is reminiscent of Yahoo bringing Jerry Yang back to be CEO (in that case they did it knowing that a potential sale was on the horizon). I wonder if LinkedIN is thinking the same thing? Or perhaps they're just kicking the ball down the field to see if another, more capable CEO candidate frees up next year as companies wind down and merge. Despite how high the bar is for M&A today, I think there is still a market for companies like LinkedIN (that generate cash) and there remain buyers on the sidelines with cash (like Microsoft and their $37 billion).
If you find yourself facing a similar situation, take heart. It's been almost 2 years since I walked out the door of my first founder/CEO gig and I have to say that "things appear a lot smaller in the rear view mirror" than they do in front of you.
A friend of mine, Marc Herson, recently started a blog called Riverture and I recommend it. Marc is currently an Executive-in-Residence at Softbank Capital (which, by the way, is what prompted me to start Altgate) and previously was a senior executive at Sony BMG Music and prior to that a lawyer in South Africa.
Marc is coming out swinging with posts like this one on whether or not you should raise cash now. Here is the RSS feed.
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