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.
Have your own story? Leave a link or comment below!
(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:
See my last post for context: https://framethink.wordpress.com/2009/08/08/what-does-an-eir-do/
There are some really great benefits that come from being associated with a venture fund as an entrepreneur-in-residence (EIR).
EIRs have a unique position that makes it easier to launch a company. In some ways, being an EIR actually inverts the typical resource-gathering exercise that most entrepreneurs go through — the partners at a venture firm will often pitch ideas to their EIR’s and they continuously introduce their EIR’s to interesting and talented people who could be potential co-founders or business partners. The first time that happened to me as an EIR, I was completely bowled over by the fact that a venture capitalist was actually pitching me on an idea instead of the other way around — it’s an interesting role reversal to say the least!
EIR roles are also fantastic for research. EIR’s get direct access to their firm’s partners for feedback, advice, and brainstorming. They get to sit in on business pitches and help evaluate them from the VC’s perspective. Participating in pitches and listening to how your venture firms partners think about companies is a truly precious learning experience… Think about how many VC pitches you might be involved with directly as an entrepreneur — through the span of an entire career, how many VC pitches do you think might give? Ten? Twenty? An EIR might get to see that many pitches within a few weeks if they wanted to. Getting exposure to that volume of pitches in a compressed time frame really helps an EIR develop a comparative study of business pitches and gives you an opportunity to see what happens when teams come in to pitch in various states of preparedness & maturity, with varying styles, and different team compositions. With full advantage of those learnings and direct access to their firm’s partners, an EIR should end up with a very good understanding of what pitches will work for their firm (and which ones won’t).
And let’s not forget the great fringe benefits of being at a venture fund! Most VC’s have very nice office buildings that are quiet, secure, ergonomic places to work (much nicer than trying to do conference calls while hunched over a noisy cafe table). Firms always have free snacks, coffee, and sodas to power you through long days. Plus they have comfy couches to crash on after that all-nighter.
It’s not all sugar and spice, though — there are serious downsides to being an EIR, too…
It’s seductively easy to hang out in a swanky office, sit in on meetings all day long, listen to other entrepreneurs pitch, and dispense your opinions. It’s fun to play “the connector” role — introducing that entrepreneur you met at a conference to the firm’s partners. The partners appreciate it. The entrepreneur who is raising a round really appreciates it. And you get to give your ego a smug pat on the back for being so smart and well-connected. All of that is so fun and easy that an EIR might literally spend entire days taking calls, doing meetings, vetting ideas, and introducing people (mea culpa). That may be fine if the EIR is trying to add value to the firm by essentially playing an associate’s role, but definitely is not helping the EIR directly learn about use-cases that a customer would actually pay for or launch a new company per se. So there is this unfortunate but very real tension between spending time helping the firm vs. working on launching a new venture.
This notion of the balance between an EIR’s firm vs. an EIR’s startup leads me to the The One Big Risk for EIRs…
The tension between firm vs. EIR becomes most apparent if/when the entrepreneur seeks financing for their new startup. VentureHacks would tell you (and I would agree) that the key to closing a financing quickly with favorable terms is to have a strong BATNA. But an EIR is at a fundamental disadvantage in getting their company favorable financing terms relative to a non-EIR making the exact same pitch… because EIRs have a harder time creating strong BATNAs. Why? There is a fundamental information asymmetry between an EIR’s host firm and other venture firms. Whether or not the EIR’s host firm actually does know more about the EIR and her/his company, they appear to have access to much deeper information about the EIR’s deal than other venture firms do. So, as such, if an EIR’s firm does not participate in an EIR’s deal, then you can imagine the partners at other firms wondering: “What does this EIR’s host firm know that we don’t know?” , “There’s got to be something wrong with this deal…” or “Maybe there’s something wrong with the EIR her/himself!” This information asymmetry gives an EIR’s host firm a strong upper-hand in financing negotiations. That dynamic can prevent other investors from participating in what otherwise would have been a “fundable” deal or cause them to come in with reduced commitment at lower pre-money valuations. Every EIR I’ve spoken with has said that their firm brought them in with a promise of “no strings attached, you can work with whomever you want” — but when it was fundraising time, everyone felt palpable pressure to do the deal with their host firm. Usurious firms can take advantage of an EIR’s lack of negotiating leverage to drive down pre-money valuation and thereby inflate their post-money stake in the firm. Even well-meaning firms that have great relationships with their EIRs may cause an EIR’s company to accept sub-optimal valuations if the EIR fails to create a market for their shares as aggressively as a typical (non-EIR) entrepreneur would have done.
This is the biggest pitfall for an EIR and potentially a dire/fatal situation for a hatchling startup… If a startup’s cap table becomes too tilted towards investors in Series A, then the founder(s) may give up control of their company too quickly, or become too diluted to make the startup worthwhile to pursue. Obviously, everyone loses when a startup gets pushed to the point that the founders are demotivated. But that’s a very fuzzy boundary and EIRs seem more prone than non-EIRs to end up pushing that boundary in a bad way.
So, is being an EIR the right thing to do? Depends on your goals and how you manage the risks mentioned above. I’ll wrap up this series on EIRs in my next post with a list of venture hacks for EIRs to mitigate these risks.
I’m back after a looooong blogging hiatus. Yay, glad to be getting back into the swing of things.
So, @vijayv recently asked me:
Would you be able to tell me more about being an eir? Mainly Interested in role specifics/responsibility
I’ve had the honor of being an entrepreneur-in-residence (EIR) with two VC firms, Venrock and Matrix Partners. And through those programs, I’ve been lucky to have met and learned from many other entrepreneurs who have had way more success and experience than me. And if there’s anything I’ve learned about the EIR role, it’s that there’s no such thing as a “standard” EIR program. It’s kind of a “make it up as you go along” role (and that actually suits entrepreneurs very well). Quite frankly, there aren’t that many EIRs running around Silicon Valley all the time because most venture firms do not support EIR positions at all. Those that do will customize the role on a case-by-case basis.
At the highest level, I think we could say that EIR programs involve:
- working with partners at a venture firm whom you’ve previously worked with or gotten to know very well
- researching existing startups to find promising ones that you’d like to personally join or introduce to the firm
- ideating and creating new businesses
- helping the firm vett business pitches
Within those general activities, roles do vary a lot depending on each individual’s prior experience and their goals. E.g., some EIR’s are seasoned executives who are specifically looking for teams that they can pair up with to launch a startup. Other EIR’s are product innovators who are trying to launch new companies while incubated at the VC firm. Still others are entrepreneurs who are considering switching to become investors and are using an EIR program as a way of getting to know a firm.
And the specific arrangements that an EIR has with their host firm will vary a lot, too. Some EIRs are actual employees of the firm, some are contractors/consultants, others have no contractual relationship with the firm at all other than coming by to use a spare desk every once in a while. Most, but not all, EIRs are compensated by their firms; and compensation levels seem to vary significantly from corporate-executive-equivalent to ramen-subsistence-stipend.
There are significant benefits and risks associated with being an EIR and I’ll talk about those more in my next post.