I 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: http://weheartit.com/entry/5625871)
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:
- lost a CEO
- hired and fired a CTO
- 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…
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.
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(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.
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.
- 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
- 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
- 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.
- 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.
- 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!
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: