3 posts categorized "people"

March 19, 2012

The Dark Arts: Defeating a Counter-Offer

Tomorrow, your great new hire is going to resign from their current job. Think about the risks: If you want grade-A talent, so does that other company. If you’re recruiting from an established company, they’ve probably got more cash, perks, and stability to offer than you do. And your new hire probably has a close personal tie with someone at their current company - maybe that’s how they ended up there in the first place. That means you’re vulnerable to a counter-offer from both a financial and an emotional standpoint.

But you’ve got one advantage - you know the counter-offer is coming, so you can work to lessen its impact.

The day before your new hire is going to quit, sit down with them. Reconfirm the elements of the opportunity that mean the most to them - the chance to make an impact, the exciting product you’re building, the technical challenge they’ve got to figure out -- and remind them how dedicated your organization is to seeing them succeed in this new role. Now get them ready for the conversation they’re about to have: Tell them that because they’re so talented and valued, they should expect to get a counter-offer from their current employer.

Create a mental anchor for the offer. Tell your new hire that most often, standard counter-offers involve a 10-20% bump in salary and a future title change promise, but since they are so highly valued their offer will most likely be X. Make X a high number. Then confirm the plan - ask the candidate what they’re going to do when they’re offered X. Before you leave the meeting, find out what time the following day they’re going to resign.

On the day itself, call your candidate before their resignation meeting. Ask them how they’re feeling. Empathize with what they’re about to do, and talk again about how excited you are for them to take this next step in their career. After the meeting, call them again to touch base. At the end of the day, meet with the candidate after work for a drink to start their transition.

Here’s what you’ve accomplished: First, you’ve undercut the other company’s financial advantage. By setting the candidate up to expect a counter-offer, you’ve reduced the natural tendency to feel flattered by the attention. Throwing out a big number means they’ve gone into their meeting expecting something that (if you’ve done this right) their current employer most likely won’t offer. When they hear something lower than X, they’ll be feeling less than loved. Plus, you’ve made it hard for them to justify to you that they’re sticking with their current job for anything less than X.

You’ve also undercut your rival’s emotional advantage. Reaching out during the resignation day helps the candidate get through a genuinely difficult thing - disappointing people. And meeting with them at the end of the day makes it hard for them to seriously consider a counter-offer because they know they’re going to be looking you in the eye a few hours later.

What other strategies have you seen to counter the counter-offer?

March 08, 2012

Stock Options: Avoiding Awkward Conversations

In a start-up, there are no secrets. Sooner or later, everybody knows everybody else’s business. For founders, that means your decisions about salary and stock options are inevitably going to be gossiped about.

And in a market where companies are fighting over the best talent, those conversations can get awkward, fast. Say you’re trying to hire a great new engineer, and you end up adding another fraction of a percent to her equity offer to close the deal. Now she’s got a little more of a stake in the company than other folks at her level. When the last engineer you hired finds out what her offer looked like, you’re going to be having a difficult conversation.

I recently worked with a company, OpenBook, that’s found a way to avoid this problem. The founders are two serial entrepreneurs, and in their first company they basically set up the equity structure for their own benefit. They’d grant just as much stock as they had to, and no more. That meant different employees ended up with very different kinds of deals.

As the company grew, the problem got worse. It wasn’t easy for the founders to go back and grant more equity to an employee who’d gotten short-changed when he was hired, because the Board of Directors wasn’t thrilled about the idea of shrinking the pool of options. And as we’ve seen with the recent legal actions at Zynga, taking away equity from people who were given too much doesn’t work out that well, either! In the case of these two entrepreneurs, some of the key employees started
to complain that their shares weren’t fair in relation to the founders’ shares.

So when these entrepreneurs founded OpenBook, they decided to never have this problem again. Here’s how they did it.

The first step was simple: Before granting any equity, they came up with a compensation plan organized by employees’ responsibility levels and join dates. And they followed it.

Now, after a new employee signs an offer but before they actually start work, one of the founders will sit down with that person and go through the entire company’s capitalization table, explaining who owns how much of a stake. They answer any and all questions. If necessary, they’re prepared to justify every single person’s compensation. (They’ll admit that this practice is brutal and time-consuming.)

They’re also granting larger equity packages than most start-ups, and reducing their own ownership. They believe that this will help them attract, retain, and motivate a better team, and that will grow the value of the entire company, actually making them more money in the end.

It’s working. They’ve got an all-star development team. A lot of their employees have been recruited by other team members. They’ve been able to build and launch a very strong product – and within a week of the launch, they’d already signed up more than 600 customers! And most importantly, you can just feel a difference when you walk into their office. Even I, as an outsider, could tell how happy the employees were to be working in a system they believed was truly fair, and how much that happiness fueled their creative energy.

January 18, 2012

Fire your customers and shut the doors… or be a services firm forever

I recently spent some time with a company that successfully overcame a huge challenge: Changing business models. ProdNotServ started out as an outsourced software development service company, run by a very talented small team – three engineers, a designer, and a product manager. For two years, things had been going great. They had more demand for their services than they could handle. They were working with big-name startups and celebrities. They were getting rave reviews
from clients.

So why make a change? They decided that because they weren’t building a product themselves, they were missing out on a chance to grow revenues faster than their billable hours and staff.

Sure, as a service company, they had some advantages. They had the engineering and design talent that so many early-stage companies need these days. There were startups flush with VC cash lining up to pay this team to help develop their products. Plus, they enjoyed steady cash flow, control over their own schedules, and minimal risk. Working with different clients added some variety to their days.

But if they successfully made their own product, they’d not only get the feeling of ownership that comes from creating something entirely new, they’d be giving themselves a chance to make a lot more money.

ProdNotServ was able to make this difficult transition because its CEO made two key decisions. First, he created a cash reserve by taking only his salary, instead of distributing the firm’s net earnings to himself and the other owners. Next, he led his team to shut their doors for a year – stop taking on new business, and just use the cash reserve they’d built up to keep paying everyone their current salaries. They’d spend the year they’d bought themselves brainstorming, designing, and perfecting a product they’d come up with as a group.

It’s also important to note what the CEO did not do. There were a few common mistakes he managed to avoid: He didn’t try to keep building the service business, just putting a fraction of the company’s time and money towards building the product. Instead, he focused all of his team’s energy on the new idea. He didn’t steal the best ideas from the product design process to drum up more easy cash from the services business. Instead, he stuck with his new vision for the company’s future. And he didn’t doubt himself or lose sight of that new vision when team members questioned his strategy, or when product development hit snags.

One year later, the team has just launched a third version of their product, and it’s selling pretty steadily. They’re about to close their first round of VC funding. In other words, they’ve done it.

You can’t develop a successful product part-time. Can anyone name a product launched by a company still mostly focused on services? What about one that doesn’t suck?

Alex Kinnier

Alex Kinnier is a Venture Captial Partner at NEA. He's an Xoogler, a passionate product developer (from ad servers to air conditioners to Febreze) and a fan of NYC pizza. He is a father of 2 angels.

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