How employees get screwed in private equity deals

learned a hard lesson from working with a bunch of rat bastards leading private equity firm, Silver Lake.  I joined Skype after the company was spun out of eBay  by SilverLake in deal valued at $2.7B and was recruited to help accelerate the pace of product development and make the Skype app more web-oriented.  I was at the company for just over a year in a product management role and felt like my team accomplished some important things along the way, including reduction of software development cycles from months down to 2-weeks and delivery of a whole new advertising revenue stream to the company.   It was a fun and challenging job, involving tons of international travel and I met some amazing people along the way.

Now despite the fact that Skype has a Palo Alto office and kind of seems like it would fit right in with Silicon Valley tech companies, it turns out that the employment terms for a Silver Lake company are *very* different from what most Valley high-tech employees are used to.  Here are three important things to watch out for if you’re thinking about joining a company that is being managed by a private equity firm or if your company gets taken over by a PE bank.

1. Lawyer Up

(image credit:

The most important lesson I learned from Skype was that compensation and stock policies in PE-owned firms can be very heavily tilted in the owners’ favor and against the employees.  Skype employees have 5-year vesting of stock options, for example, not the usual 4 year schedule that most Valley firms have.  Even worse, Skype’s stock option agreement had special clauses that the Board had slipped in that gives them the right to “repurchase” any vested shares for anyone who leaves the company voluntarily or is terminated with cause — effectively taking “vested” shares and making them worthless.  Here’s a nice letter I got from the Associate General Counsel of Skype that points out exactly how my stock options have “no financial value.”  (see lee.pdf).  Gee, thanks.

Now, I’ve seen my share of legal documents for tech companies.  I’ve worked in Valley tech companies for over 15 years, have founded startups, done VC financings, and invested in companies.  None of that prepared me for the kinds of legal shenanigans that the PE guys at Silver Lake pulled because I had never come across those kinds of terms before, let alone the fact that these clauses were hidden as one-liners in otherwise pretty standard-looking documents.  (see Stock Option Grant Agreement for Kuo-Yee Lee – signed)

So my first point of advice to anyone considering working for a PE-lead firm is to LAWYER UP — it’ll be worth your while to get an attorney to carefully review all employment documents so that you know what you’re really getting into.

2. The Bobs

Working with Silver Lake was my first opportunity to witness up-close-and-personal how a PE firm does its business of restructuring a company that they’ve just taken over.  And it was breath-taking.  The firm inserted itself into every level of the company.  At one point in my tenure at Skype, Silver Lake had representatives or consultants on the Board, in C-level executive roles, in technical leadership and operating roles, and all the way on thru the organization to the person actually running our software deployment schedule…   So Silver Lake put its fingers really deeply into Skype’s pie and they started rearranging things.

You can agree or disagree with the practice of re-organization, but I personally had never been part of a restructuring that ran so deep in a company.  During the year I was at Skype, the company:

  • hired and fired a CFO
  • gained a CEO, CMO, CIO, and CDO
  • created an entirely new product development org structure
  • eliminated every Project Manager role
  • fired, re-interviewed,  and re-hired Product Managers
  • created a two new business units
  • combined two business units into one
  • dissolved one business unit
  • opened a new office and hired several hundred people
  • the list goes on…
I mean, these are crazy changes for any company to go through over the course of years.  To have that all happen within a short number of months was staggering.  The conventional wisdom in Silicon Valley is that good engineers and product designers will always have job security.  Still, there were times at Skype when even really solid engineers and designers were asking me if their jobs were going to be safe from all the changes going on.
So, second major lesson learned: prepare your resume and get ready to re-interview for your job (or a different one) because organizational change is a major part of the private-equity-lead restructuring of a company!

3. It Ain’t Over ’til It’s Over

Even if an employee of a PE-owned company has avoided the legal beartraps and weathered the re-org’ing, they’re still not safe.  Even as Skypers were celebrating the huge potential of the Microsoft deal, the PE bankers were sharpening their knives and plotting which employees to fire in order to maximize profits and minimize payouts to non-owners.   Seriously, how greedy do you need to be to make $5B and still try to screw the people who made that value possible?  I mean, Silver Lake is trying to hyper-optimize their returns to the point that they’re trying to deny employee payouts that amount to less than 0.3% of the returns that they’ll get from the deal.  Srsly.  Really?

So, just be warned: Silicon Valley startup folks may think we’ve had hard dealings with venture capitalists…  But in my opinion, VC greed pales in comparison to the level of greed exhibited by the Silver Lake private equity firm.

And there you have it, my top three lessons learned from being raked over the coals by a PE firm.

Have your own story?  Leave a link or comment below!

How Facebook Ships Code

I’m fascinated by the way Facebook operates.  It’s a very unique environment, not easily replicated (nor would their system work for all companies, even if they tried).  These are notes gathered from talking with many friends at Facebook about how the company develops and releases software.

Seems like others are also interested in Facebook…   The company’s developer-driven culture is coming under greater public scrutiny and other companies are grappling with if/how to implement developer-driven culture.   The company is pretty secretive about its internal processes, though.  Facebook’s Engineering team releases public Notes on new features and some internal systems, but these are mostly “what” kinds of articles, not “how”…  So it’s not easy for outsiders to see how Facebook is able to innovate and optimize their service so much more effectively than other companies.  In my own attempt as an outsider to understand more about how Facebook operates, I assembled these observations over a period of months.  Out of respect for the privacy of my sources, I’ve removed all names and mention of specific features/products.  And I’ve also waited for over six months to publish these notes, so they’re surely a bit out-of-date.   I hope that releasing these notes will help shed some light on how Facebook has managed to push decision-making “down” in its organization without descending into chaos…  It’s hard to argue with Facebook’s results or the coherence of Facebook’s product offerings.  I think and hope that many consumer internet companies can learn from Facebook’s example.

HUGE thanks to the many folks who helped put together this view inside of Facebook.   Thanks are also due to folks like epriest and fryfrog who have written up corrections and edits.


  • as of June 2010, the company has nearly 2000 employees, up from roughly 1100 employees 10 months ago.  Nearly doubling staff in under a year!
  • the two largest teams are Engineering and Ops, with roughly 400-500 team members each.  Between the two they make up about 50% of the company.
  • product manager to engineer ratio is roughly 1-to-7 or 1-to-10
  • all engineers go through 4 to 6 week “Boot Camp” training where they learn the Facebook system by fixing bugs and listening to lectures given by more senior/tenured engineers.  estimate 10% of each boot camp’s trainee class don’t make it and are counseled out of the organization.
  • after boot camp, all engineers get access to live DB (comes with standard lecture about “with great power comes great responsibility” and a clear list of “fire-able offenses”, e.g., sharing private user data)
  • [EDIT thx fryfrog] “There are also very good safe guards in place to prevent anyone at the company from doing the horrible sorts of things you can imagine people have the power to do being on the inside. If you have to “become” someone who is asking for support, this is logged along with a reason and closely reviewed. Straying here is not tolerated, period.”
  • any engineer can modify any part of FB’s code base and check-in at-will
  • very engineering driven culture.  “product managers are essentially useless here.” is a quote from an engineer.  engineers can modify specs mid-process, re-order work projects, and inject new feature ideas anytime.  [EDITORIAL] The author of this blog post is a product manager, so this sentiment really caught my attention.  As you’ll see in the rest of these notes, though, it’s apparent that Facebook’s culture has really embraced product management practices so it’s not as though the role of product management is somehow ignored or omitted.  Rather, the culture of the company seems to be set so that *everyone* feels responsibility for the product.
  • during monthly cross-team meetings, the engineers are the ones who present progress reports.  product marketing and product management attend these meetings, but if they are particularly outspoken, there is actually feedback to the leadership that “product spoke too much at the last meeting.”  they really want engineers to publicly own products and be the main point of contact for the things they built.
  • resourcing for projects is purely voluntary.Engineers decide which ones sound interesting to work on.  a PM lobbies group of engineers, tries to get them excited about their ideas.  Engineer talks to their manager, says “I’d like to work on these 5 things this week.”  Engineering Manager mostly leaves engineers’ preferences alone, may sometimes ask that certain tasks get done first.
  • Engineers handle entire feature themselves — front end javascript, backend database code, and everything in between.  If they want help from a Designer (there are a limited staff of dedicated designers available), they need to get a Designer interested enough in their project to take it on.  Same for Architect help.  But in general, expectation is that engineers will handle everything they need themselves.
  • arguments about whether or not a feature idea is worth doing or not generally get resolved by just spending a week implementing it and then testing it on a sample of users, e.g., 1% of Nevada users.
  • engineers generally want to work on infrastructure, scalability and “hard problems” — that’s where all the prestige is.  can be hard to get engineers excited about working on front-end projects and user interfaces.  this is the opposite of what you find in some consumer businesses where everyone wants to work on stuff that customers touch so you can point to a particular user experience and say “I built that.”  At facebook, the back-end stuff like news feed algorithms, ad-targeting algorithms, memcache optimizations, etc. are the juicy projects that engineers want.
  • commits that affect certain high-priority features (e.g., news feed) get code reviewed before merge. News Feed is important enough that Zuckerberg reviews any changes to it, but that’s an exceptional case.
  • [CORRECTION — thx epriest] “There is mandatory code review for all changes (i.e., by one or more engineers). I think the article is just saying that Zuck doesn’t look at every change personally.”
  • [CORRECTION thx fryfrog] “All changes are reviewed by at least one person, and the system is easy for anyone else to look at and review your code even if you don’t invite them to. It would take intentionally malicious behavior to get un-reviewed code in.”
  • no QA at all, zero.  engineers responsible for testing, bug fixes, and post-launch maintenance of their own work.  there are some unit-testing and integration-testing frameworks available, but only sporadically used.
  • [CORRECTION thx fryfrog] “I would also add that we do have QA, just not an official QA group. Every employee at an office or connected via VPN is using a version of the site that includes all the changes that are next in line to go out. This version is updated frequently and is usually 1-12 hours ahead of what the world sees. All employees are strongly encouraged to report any bugs they see and these are very quickly actioned upon.”
  • re: surprise at lack of QA or automated unit tests — “most engineers are capable of writing bug-free code.  it’s just that they don’t have an incentive to do so at most companies.  when there’s a QA department, it’s easy to just throw it over to them to find the errors.”  [EDIT: please note that this was subjective opinion, I chose to include it in this post because of the stark contrast that this draws with standard development practice at other companies]
  • [CORRECTION thx epriest] “We have automated testing, including “push-blocking” tests which must pass before the release goes out. We absolutely do not believe “most engineers are capable of writing bug-free code”, much less that this is a reasonable notion to base a business upon.”
  • re: surprise at lack of PM influence/control — product managers have a lot of independence and freedom.  The key to being influential is to have really good relationships with engineering managers.  Need to be technical enough not to suggest stupid ideas.  Aside from that, there’s no need to ask for any permission or pass any reviews when establishing roadmaps/backlogs.  There are relatively few PMs, but they all feel like they have responsibility for a really important and personally-interesting area of the company.
  • by default all code commits get packaged into weekly releases (tuesdays)
  • with extra effort, changes can go out same day
  • tuesday code releases require all engineers who committed code in that week’s release candidate to be on-site
  • engineers must be present in a specific IRC channel for “roll call” before the release begins or else suffer a public “shaming”
  • ops team runs code releases by gradually rolling code outthere are 9 concentric levels for rolling out new code
  • facebook has around 60,000 servers
  • [CORRECTION thx epriest] “The nine push phases are not concentric. There are three concentric phases (p1 = internal release, p2 = small external release, p3 = full external release). The other six phases are auxiliary tiers like our internal tools, video upload hosts, etc.”
  • the smallest level is only 6 servers
  • e.g., new tuesday release is rolled out to 6 servers (level 1), ops team then observes those 6 servers and make sure that they are behaving correctly before rolling forward to the next level.
  • if a release is causing any issues (e.g., throwing errors, etc.) then push is halted.  the engineer who committed the offending changeset is paged to fix the problem.  and then the release starts over again at level 1.
  • so a release may go thru levels repeatedly:  1-2-3-fix. back to 1. 1-2-3-4-5-fix.  back to 1.  1-2-3-4-5-6-7-8-9.
  • ops team is really well-trained, well-respected, and very business-aware.  their server metrics go beyond the usual error logs, load & memory utilization stats — also include user behavior.  E.g., if a new release changes the percentage of users who engage with Facebook features, the ops team will see that in their metrics and may stop a release for that reason so they can investigate.
  • during the release process, ops team uses an IRC-based paging system that can ping individual engineers via Facebook, email, IRC, IM, and SMS if needed to get their attention.  not responding to ops team results in public shaming.
  • once code has rolled out to level 9 and is stable, then done with weekly push.
  • if a feature doesn’t get coded in time for a particular weekly push, it’s not that big a deal (unless there are hard external dependencies) — features will just generally get shipped whenever they’re completed.
  • getting svn-blamed, publicly shamed, or slipping projects too often will result in an engineer getting fired.  “it’s a very high performance culture”.  people that aren’t productive or aren’t super talented really stick out.  Managers will literally take poor performers aside within 6 months of hiring and say “this just isn’t working out, you’re not a good culture fit”.  this actually applies at every level of the company, even C-level and VP-level hires have been quickly dismissed if they aren’t super productive.
  • [CORRECTION, thx epriest]  “People do not get called out for introducing bugs. They only get called out if they ask for changes to go out with the release but aren’t around to support them in case something goes wrong (and haven’t found someone to cover for you).”
  • [CORRECTION, thx epriest] “Getting blamed will NOT get you fired. We are extremely forgiving in this respect, and most of the senior engineers have pushed at least one horrible thing, myself included. As far as I know, no one has ever been fired for making mistakes of this nature.”
  • [CORRECTION, thx fryfrog] “I also don’t know of anyone who has been fired for making mistakes like are mentioned in the article. I know of people who have inadvertently taken down the site. They work hard to fix what ever caused the problem and everyone learns from it. The public shaming is far more effective than fear of being fired, in my opinion.”

It’ll be super interesting to see how Facebook’s development culture evolves over time — and especially to see if the culture can continue scaling as the company grows into the thousands-of-employees.

What do you think?  Would “developer-driven culture” work at your company?

Four early-PayPal entrepreneurial culture norms

(in response to Quora question “Which strong beliefs on culture for entrepreneurialism did Peter / Max / David have at PayPal?“)

Four aspects of early PayPal culture really stood out to me when I joined as a product manager:
1) self-sufficiency — individuals and small teams were given fairly complex objectives and expected to figure out how to achieve them on their own.  If you needed to integrate with an outside vendor, you picked up the phone yourself and called; you didn’t wait for a BD person to become available.  You did (the first version of) mockups and wireframes yourself; you didn’t wait for a designer to become available.  You wrote (the first draft of) site copy yourself; you didn’t wait for a content writer.

2) extreme bias towards action — early PayPal was simply a really *productive* workplace.  This was partly driven by the culture of self-sufficiency.  PayPal is and was, after all, a web service; and the company managed to ship prodigious amounts of relatively high-quality web software for a lot of years in a row early on.  Yes, we had the usual politics between functional groups, but either individual heroes or small, high-trust teams more often than not found ways to deliver projects on-time.

3) data-driven decision making — PayPal was filled with smart, opinionated people who were often at logger-heads.  The way to win arguments was to bring data to bear.  So you never started a sentence like this “I feel like it’s a problem that our users can’t do X”, instead you’d do your homework first and then come to the table with “35% of our [insert some key metric here] are caused by the lack of X functionality…”

4) willingness to try — even in a data-driven culture, you’ll always run in to folks who either don’t believe you have collected the right supporting data for a given decision or who just aren’t comfortable when data contradicts their gut feeling.  In many companies, those individuals would be the death of decision-making.  At PayPal, I felt like you could almost always get someone to give it a *try* and then let performance data tell us whether to maintain the decision or rollback.

Those four cultural attributes actually make up a lot of the attitudes and beliefs that you’d expect to see in great entrepreneurs — i.e., multi-disciplinary, self-sufficient, action-oriented, data-driven experimentalists.  So it’s no surprise to see the number of successful startup ventures founded by PayPal alums.  To be sure, PayPal is/was not unique — I would expect any company that established these kinds of cultural norms to produce a lot of entrepreneurs.

Five Points for Better Exec Summaries and Briefings

Here’s a quick five-point format for executive summary/briefing documents.  This is intended to be a short “get to know you” briefing for prospective investors.  It’s also supposed to be a scalable document — that is, you can expand it into a full business pitch deck by fleshing out each section more.  Or you can compress it all the way down into a single paragraph by just putting the punchlines together.

I’d recommend doing this in a single page (it’s good discipline to be brief).   The bullet points of each section should all build towards the punchline.
1) Team
  • Bullet points: Quick recap of team members’ experience
  • Punchline: why your team has the right experience and/or unique industry connections that give you an unfair advantage in this business
2) Market size
  • Bullet points: who are your paying customers?   who are your users (for ad/audience-driven businesses)?  what’s the overall industry size?  what specific segment (or sub-segment) of that industry are you going to dominate?  how big is that segment (e.g., how many customers/users are there in your target initial segment multiplied by your expected penetration of that segment multiplied by anticipated customer lifetime value)?
  • Punchline: there’s a believable path for the company to get to $100MM in annual revenue
3) Customer tests
  • Bullet points: if working alpha/beta product, then what are the customer/user activity stats like?  if no product yet, then what surveys, smoke tests, or mockup tests have you run?
  • Punchline: we’re not just sitting in an office making up a business plan; we’ve gone out to talk with real customers or users, lots of them.  We’ve tested working product or realistic mockups with customers/users and they like it.
4) Distribution strategy
  • Bullet points: how will your customers/users learn about your service?  how much do you need to pay per customer/user acquisition?  how will you drive a customer/user adoption curve that is doubling every month?
  • Punchline: we know how to reach customers/users.  we’re not gonna end up blowing your money on building something that it turns out we can’t sell.
5) Deal and Milestones
  • Bullet points: how much are you looking to raise?  what will that money be used for; e.g., what milestones will you hit?  what questions will you be able to answer with this investment?  which risks will be de-risked with this investment?  how long will these milestones take to achieve?
  • Punchline: your money is going to buy significant reductions in risk (and therefore significant increases in the next valuation)

Hope that’s helpful.  Did I miss anything?  Leave any questions or edits in the comments section…  Thanks!

Steve Blank explains the evolution of Customer Development

If you’re an entrepreneur or are thinking about starting a company, Steve Blank’s blog is must-read material.

Steve’s latest series of posts establishes the reasons why Customer Development and Lean Startup methodologies are so important (and why prior models of startup development often resulted in failure).  Read them in order:

The Leading Cause of Startup Death

Customer Development Manifesto Part I

Customer Development Manifesto Part II

Customer Development Manifesto Part III

Customer Development Manifesto Part IV

VMGOSPA – nested organizational objectives


I mentioned AlphaBlox in my last post and that made me think of something I learned from Michael Skok (CEO and Founder of AlphaBlox, now Partner at North Bridge Venture Partners).

Michael had a great framework for explaining how each person’s daily activities fit into the larger company objectives. He called it “VMGOSPA”, an acronym for the following framework:

Read the rest of this entry »

Avinash Kaushik’s Five Levels of “Web Analytics 2.0”

I had the pleasure of hearing Avinash Kaushik, Google’s analytics evangelist, speak when he came to our CS377W class at Stanford this quarter (the “Stanford Facebook class“).  He’s an amazing speaker, really breathing life and purpose into the too-often dry topic of web analytics.

He’s promoting a new way of looking at web analytics, what he calls “Web Analytics 2.0”.  Avinash’es central message is that analytics cannot stand alone as a decision driver in organizations; rather analytics need to be considered in the context of additional data (from customers, competitors, and other internal sources) in order to drive rational decisions.

Avinash has a brilliant decision framework, consisting of the five decision inputs that should be considered in order to gain insight into customer behavior and drive optimal decisions.   He calls this “The Five Pillars” and here’s the cliff’s notes summary:

Read the rest of this entry »