Friday, February 28, 2014

Angel Etiquette

Below is a brief set of rules to follow that will help you be a great angel.  Let me know if I missed any on Twitter!

1. Always put the startup first.
This seems like a "no duh" statement but there will be times when your interests as an angel diverge from the startups interests.  If a conflict of interest arises (between yourself and the startup and other thirds parties - e.g. VCs, other startups, potential acquirers etc.) always err on the side of doing the right thing for the startup.

Examples include:

  • Decreasing your own investment in a startup's round to make room for another investor who will help the company.
  • Helping a startup get acquired if it is the founders' wishes even if it does not serve your economic interest.
  • Supporting the company's interests against the VCs interests [0].

Intriguingly, it turns out that in the long run what is best for the startup is also best for you.  As your reputation grows, so to do the set of entrepreneurs who want to work with you.  

2. Be up front about conflicts of interest.
If you have a conflict of interest (e.g. are an investor in something the entrepreneur deems could be competitive) be up front about it as soon as you can with the entrepreneur.  Sometimes it is hard to tell before meeting live as an introductory email will not cover future paths or other details.

Sometimes conflicts of interest emerge over time and are impossible to avoid - e.g. one company may pivot into another company's market.  Other times, two companies are truly directly competitive.  But most times, entrepreneurs may be overly sensitive to potential future conflicts of interest [1].  Be up front about the potential conflict and talk it through or clear it with companies you are already involved with.

If you get a pitch deck out of the blue with detailed proprietary information, and the company asking you to meet is competitive with one of your portfolio companies - do *not* forward it on to the company you are involved with.  The entrepreneur reached out to you in good faith and using this against them is in poor taste.

3. Don't demand updates - ask how you can help.  
As an entrepreneur you should find a handful of investors to update regularly.  If you have raised a series A, your board member(s) will serve this function.  But pre-series A the forcing function of regular updates to a select group helps keep you on a cadence and clear path as a company.  It also means there is a set of people who are familiar with your business and more able to be helpful.

As an angel, leave it up to the entrepreneur how they want to update their investors.  Do not demand detailed updates from entrepreneurs simply for the sake of wanting to know what is going on.  Instead, ask how you can help and an update usually naturally follows.  Else you are just wasting the founders time - time that is better spent iterating on product, writing code, or closing sales.

Many founders get stuck in a "work cocoon" and forget to reach out to their investors for help.  Sometimes this help can save the founders a lot of time or make them change direction.  By proactively asking how you can help, you may save the entrepreneurs a lot of grief without wasting their time asking for a detailed snapshot of their metrics.

If a startup asks for help, follow up quickly and make what they request happen.  This may include closing a candidate, chasing down a sales lead, or providing feedback on a term sheet.  Whatever it may be, do it fast.

4. Sign documents (and generally follow up) quickly.
Turn any deal documents (investments, M&A, etc.) within 24 hours.  This will reduce stress for entrepreneurs.  (I have been guilty of violating this one lately as my own startup takes up crazy amount of time.)

5. Don't nickel and dime the startup.  Be gracious during acquisitions.
Some of the worst angel behavior [2] (and founder behavior[3]) I have seen has cropped up during small acquisitions.  During an acquihire, the entrepreneur and team are committing the next 4 years of their lives to the company buying them.  The angel will at best make their money back or 2X their money.  I have seen brand name professional angels push and browbeat entrepreneurs to go to a worse company to get slightly more money for themselves.  While this incremental return does not really impact their portfolio's returns, it means the entrepreneur gets stuck working somewhere crappy for multiple years.

Acquisitions are times of high stress for founders.  This is the worst possible time for an angel to be a jerk, but some angels push for more upside for themselves at this moment.  This does not mean angels should allow themselves to get screwed during an acquisition (this can happen too).  It just means you should keep clear headed and focused on what is fair and then communicate what you think to the stressed out entrepreneur.

6. If needed, be a psychiatrist.
Startups are hard.  Sometimes founders just need to vent.  Or co-founders need someone to help mediate.  Some of the best investors can help founders during this time of trouble.  Michael Dearing is a great example of an amazing startup whisperer.

7. Be honest.
Entrepreneurs sometimes need blunt and up front advice.  For example, as a first time manager entrepreneurs may make a mistake in how they are dealing with an employee issue.  Or, maybe the VC who is courting them is not trustworthy and the entrepreneur should know about it.   Blunt and honest opinions can go a long way in these moments.

When giving feedback or advice, remind the entrepreneur you are just sharing your opinion based on experience - it is up to her to take the information you provide and decide for herself.  Generic startup advice is often wrong.  Don't be intellectually lazy and just pattern match - instead, try to understand the nuances of the founders' business and give advice based on context.  Be sure to explain the assumptions underlying your advice in case your assumptions are off.

8. Celebrate the founders.
Successes are hard to come by.  If the entrepreneurs hit a big milestone, offer to bring by a bottle of champagne or case of beer.  Or, organize a party or drinks for your portfolio if you have a large enough one.  Starting a company is hard - celebrate key moments with the entrepreneurs and their teams when you can.

Thanks to Sam Altman, Avichal GargHarj Taggar, for comments and feedback on this post.

[0] Angels (especially "professional" superangels) sometimes feel they owe VCs more then they owe entrepreneurs.  This is because they have a portfolio of startups the VC may invest in, or the VC may pull them into a hot series A, if the angel is properly supportive of the VC.  Angels should always chose to do what is right for the company over what is right for the VC, even though this may hurt their long term economic interests relative to the VC.

[1] Most "someday in the future" conflicts of interest never materialize.   Founders are often very ambitious and paranoid about where their business may wander.  99% of these paths do not materialize and perceived general conflicts tend not to play a big role in your business.

[2] I have one ex-investor who still complains to me that I sold my company to Twitter.  He was not a believer in Twitter and sold his shares in the company as soon as he could, and missed out on the more then 10X the stock has seen since then.  Not sure how this is my fault?

[3] One company I know of sold to another private company for $18M.  The entrepreneur negotiated ~$15M for himself in retention, a few million for the rest of a 15 person team (so they effectively got hiring packages at best) and gave a pittance back to the investors relative to the money invested.   Entrepreneurs should do what's right for themselves, but they also should do right by their team as well as investors who pitched in.  I would be surprised if the team members stick around given their low compensation.

[Side Note] No one is perfect, and all angels will make mistakes at one point or another (I know I have made a number of mistakes as both an entrepreneur and an angel).  So, the above is meant more as what I look for (as an entrepreneur) in my investors, as well as behavior I have respected in investors I admire.

Related Posts
How To Sell Secondary Stock
Bad Advice

Wednesday, February 12, 2014

6 Traits To Look For When Hiring Executives

Hiring executives (VPs, COO, etc.) is one of the harder things for an entrepreneur to learn to do.   Hiring the wrong person can cause a mini-disaster at the company.  It often takes longer to spot a bad executive hire.  During that time, the executive can mis-set direction and start to degrade the culture or output of an entire functional area of your company.  Selecting for a common set of traits can go a long way in minimizing the likelihood of a bad executive hire.

When hiring an executive, I would suggest optimizing for the following traits:

1. Functional area expert.
  • Do they understand the major issues and common failure points for their function?  E.g. where does customer ops often keel over with scale and how do you intervene early?
  • Do people in their org respect their opinion and feel they can learn from?
  • Are they the right person for the current scale & trajectory of your company?  You can over hire for a position as well as under hire given the phase your company is in.  E.g. do you really need to hire Patrick Pichette, Google's CFO, to manage the finances of your pre-revenue 10 person team?
2. Ability to build/recruit/manage a team for their area.
  • Can they recruit exceptional people for this function?  Can they build a recruiting culture within their team?
  • Do they know how to motivate people in their function?  The incentives for a sales person are different from those for a product manager.
  • Can they effectively manage people from their function?  E.g. managing designers may require a different mix of approaches versus managing a customer support team.
  • Do they understand how to build out an organization with multiple layers if needed?  How deep of an organization have they managed in the past and how does it fit your current needs[2]?  
3. Collegial.
  • Do they play well with other executives who are their peers?
  • Do they set a collegial, mutually supportive environment in place for the company as a whole as well as their function?
  • Do they try to do what is right for the company even if it is not in their own best interest?
4. Communication
  • Strong communication across the company
  • Ability to get other executives and the CEO or founders on board (exec-to-founder communication may be is its own magical art depending on how introverted the founder is)
  • Ability to understand the underlying issues and communicate them within their team.
  • Ability to communicate to the board, external partners or customers, and other major stakeholders.
  • Has "cross functional empathy" which allows them to work with, and communicate effectively to, other functions they work with closely.[3]
5. Owner.
  • Has ownership of their function and makes sure it is running smoothly and effectively.
  • Owns problems and solves them.  "Black box" abstraction of their function so CEO can engage on it, but does not need to be involved day to day.
  • Understands that as a company executive they should think like an owner [1].
  • Culture fit.  Each culture is unique and like all employees some executives fit a culture and some do not.
6. Strategic & Smart.
Many people don't realize that almost every function can act strategically.  It is a good exercise to ask yourself as CEO.  What does a strategic X org look like? (where X can be HR, Ops, Product, etc...)
  • Thinks strategically and holistically about their function.
  • Thinks about how their function can be a competitive advantage for the company.  Most companies are only good at one or two things.  This is often sufficient to allow them to be successful so they don't strive to get better where they are weak.  Companies that can tackle more then one thing well tend to outshine every one else (e.g. Apple with hardware design, supply chain, and marketing).
Pro Tips
If you have not hired an executive for a specific functional area before, you can do the following homework:

  • Find the best people in the industry for the position you are hiring, and ask them for the specific traits you should look for.  E.g. when hiring a CFO, ask the best regarded CFOs for their advice in what to look for in a CFO.
  • Talk to other CEOs who have recently made a similar executive hire.  How did they go about the process?
  • Engage a search firm.  Often a search firm will help you find a strong set of candidates for executive hires.
  • Ask your board members for help in terms of the job req, contacts to pursue, or interviewing the candidates for a function - especially if the board members has had past operating experience in the function, or has worked with an excellent set of executives for the function in the past.

Thanks to Ali Rowghani for early feedback on this post.

[1] Optimally this is true of all employees.  But for executives who set the tone of their entire organization, this is especially true.
[2] "Current needs" is usually the next 12-18 months for a high growth company.
[3] Thanks to Mark Williamson for the "cross functional empathy" point.

Related Posts
5 People Who Destroy Your Culture
Should You Hire A COO?
Reference Check Candidates
How To Hire Great Business Development People
How To Choose A Co-Founder
How To Choose A Board Member
When And How To Fire An Employee At An Early Stage Startup
How To Fire A Co-Founder

Sunday, February 2, 2014

The Acquisition Blues

Founders of a small company who are acquired by a larger company are often unhappy.  The first year is often the hardest:

1. You are no longer in charge (or even influential).
As the founder of a startup you have enormous say in what happens at your company.  When you get acquired, you are suddenly no longer part of the inner circle of decision making.  Founders often feel disenfranchised and disempowered in the acquiring company.

2. Culture fit feels off.
The founders and the early employees at a startup are the foundation for the company's culture.  When acquired you go into a pre-set culture that you can not impact much.  This may lead to a feeling of cultural dissonance.  Maybe you had a team of hipster engineers in skinny jeans and you are surrounded by algorithms alpha nerds.  Or your team was all about Woz-style nerdy practical jokes and the new culture is uptight and sales-y.  Feeling culturally and emotionally in tune with the mothership may be hard.

3. You have to deal with politics.
Suddenly some random 9 to 5 middle manager is getting in the way of a product launch, hiring decision, or other key action.  You have to navigate the internal politics and winds of an organization over which you have little real control or say when all you really want to do is ship something cool.

4. You don't have a real say in your boss.
Although who you report to is negotiated during the acquisition, things may change rapidly at the acquirer.  Suddenly you may find yourself working for someone you never anticipated.  This person may be amazing, or they may be a semi-incompetent early employee that the founder still trust years after that persons proper expiration date at the company.

5. You run into (unnecessary) process.
Part of being at a startup is the ability to be nimble, make decisions, and just do stuff.  At a larger company there may be endless launch reviews, design reviews, and review reviews.  This can be frustrating to someone used to moving fast.

How To Survive To Your Cliff (And Beyond?)

1. Realize that your feeling are normal.  
Most founders go through a period of adjustment when they are acquired.  The first year is typically the hardest part as you adjust to all the changes.  Realize and accept that this is normal.

2. Get engaged with the culture.
Join the acquiring companies running club or community service day.  Get to know other people at the company and encourage the people on your team to do the same.  As you make friends at the acquirer you will find your happiness increase.

3. Be patient with your career and influence.
As you get to know the executive team of the larger company your influence will grow.  Realize that people need to get to know you and trust your insights before asking for your opinion on key items.

4. Get a hobby.
Founders often throw themselves entirely into their work.  But at a slower moving company this is hard to do and you may find yourself with an excess of free time.  This is a good opportunity to get back in shape, take a class in something, fix your house, or otherwise get re-engaged with life while still doing a great job at the acquirer.

5. Enjoy the standard benefits.
Larger companies have much better benefits.  They also have more momentum, so they absence/presence of any one person matters much less.  Some acquired founders adapt quickly to the new cultural mores of long vacations or decide to have a child once they are acquired.  They have more free time, their day to day has less direct impact on company survival, and the benefits are much better.

Related Posts: