How to Start a Startup: Ben Horowitz Shares Management Advice

“You have to be able … to see [managing] decisions through the eyes of the company as a whole. It’s a hard thing to do because at the point when you are making a decision, you’re often under a great deal of pressure.”

Ben Horowitz, founder of Andreessen Horowitz, has been in these high-pressure situations many times before, so he’s come up with processes and strategies to best manage a team in the times when it may be the toughest.

In his lecture on “How to Manage” as part of  Y Combinator president Sam Altman’s How to Start a Startup series at Stanford University, Horowitz went straight for the tough stuff with advice on how to help you manage in the most fair and respectful way.

(For more startup advice, check out How to Start a Startup: The Book. It’s the ultimate reference guide to creating a successful tech startup.)

The Brass “Tax” of Employee Equity

Before getting into the economics of hiring, firing, and promoting, Horowitz shared some information regarding equity in startups that may need a bit of clarification because it can get confusing if you’re not familiar with the concepts.

But it’s worth sticking this part out to get you set up for the rest of his presentation. In fact, this part of Horowitz’s talk was a response to a blog post by Sam Altman. Here’s the issue Altman brought up in his post:

“Most employees only have 90 days after they leave a job to exercise their options. Unfortunately, this requires money to cover the strike price and the tax bill due for the year of exercise …  This is often more cash than an employee has and so the employee often has to choose between walking away from vested options he or she can’t afford to exercise or being locked into staying at the company.”

This basically means that, if you leave a company, for $10 million in equity, you could have to pay over $2 million to get your money. If you don’t have the $2 million, you can’t get the $10 million. To Altman, this is a really archaic model and an unjust position in which to put a former employee. He offers a solution that he heard from Adam D’Angelo at Quora:

“Grant options … are exercisable for 10 years from the grant date, which should cover nearly all cases (i.e. the company will probably either go public, get acquired, or die in that time frame, and so either the employee will have the liquidity to exercise or it won’t matter.)”

Altman admits that this plan has some tricky aspects, but all in all is a better solution than what’s currently offered. In fact, with things being so progressive in the startup climate, why is something as important as equity still so difficult to navigate? Horowitz said it actually used to be worse.

Before 2004, the law was “If you gave somebody 10 years to exercise their options, you would never have been able to go public and you would never have been able to be acquired because you were taking an expense that was tied to your stock price.”

Since 2004, though, Horowitz said you have to consider this: “You have to think about the people who are staying and you want to reward the people who are staying … One thing that they’re going to ask themselves is, look they’re leaving and every time anybody leaves it’s like, was that smart?”

If we’re being honest, Horowitz says that losing all of your stock is good enough reason to stay, even if most other factors have you looking the other direction. “That could be good news or bad news. It could be good news in that you get to keep somebody you might have lost.”

To balance your evils, here are the two alternative options Horowitz proposes:

1. “We treat new employees with the utmost straight-forwardness and fairness and we will … give you 10 years to exercise your stock if you quit or are fired.”

2. “We’ll tell you up front: You are guaranteed to get your salary. For your stock to be meaningful, you must (a) vest, (b) stay until we exit or have the cash to exercise, (c) make the company worth something. We do this because we massively value those who see it through and will minimize the dilutive cost of those who leave.”

Horowitz said, when choosing one of these two options, you have to decide how you want to run your culture. “It’s critical to think it through from everybody’s perspective because when push comes to shove … that’s going to change the outcome of your company.”

In fact, that’s the very mentality you have to keep in mind while making all big management decisions for your company.

When to Demote and When to Fire Execs

When managing a startup, there are going to be problems that pop up that maybe you didn’t cover in business school and you didn’t learn from pitching to investors, building a product or gaining PR. One of them is having an upper level employee who works hard, but just isn’t great at his job. How do you decide whether to demote or fire him?

Here’s the scenario Horowitz laid out: 

An executive has worked really hard for your company, and the team likes him. All in all he is a great asset to the company culture. But he’s not exemplary when it comes to the job you need him to be doing.

It’s a really hard decision to make and to make things even more complex, Horowitz says that you have to consider the perspective of everyone involved: the CEO, the executive and the rest of the team.

CEO’s Perspective: Demotion is ideal because you can keep the employee and harness his skills in a position that’s better suited for him. Not to mention, you don’t create a hole in the culture by letting him go.

Executive’s Perspective: He doesn’t want a demotion, but it gives another option to termination. Also, it’s much easier to explain (and/or sugarcoat) a demotion to a future employer rather than explaining being fired.

Company Culture: If you do demote a person, how are the other people on the team going to treat him? What shifts is this going to cause in the company’s dynamics?

The Solution

At the end of the day, the decision you’re making doesn’t just affect one person, and the results last longer than one day or one week.

Horowitz said, “What you are really doing is saying, what does it mean to fail on the job? Particularly the highest paid, the highest compensated job in the company … Is it good enough to put in an effort or do you have to get a result?” After you’ve carefully considered the repercussions of either choice from all angles (including equity), you’ll be able to balance the options.

Horowitz says to keep in mind that if you’re firing someone, it’s a failure: “You failed on hiring. You failed on integrating. They failed at their job … The reason they fail on the job is you made some mistake in the hiring process and you didn’t match them to the needs of your company accurately enough.”

Raising the Bar on Raises

If you’ve ever asked for a raise, you know that it can be really intimidating and it seems like each time you do it, it’s unfamiliar territory. But as the person in charge, again you have to consider many factors beyond the person who’s asking for a raise and ultimately make it a consistent process that your employees can feel confident about.

Here’s Horowitz scenario:

An excellent employee asks you for a raise.

CEO’s Perspective: You want to keep this person around because she’s done great work. You want to give her what she’s asking for to make her happy and, of course, to gain some cool points.

Employee’s Perspective: Horowitz said, “This is something they’ve thought about a lot. They’ve compared their other options. They may have an offer from another company … It’s a serious thing.”

Company Culture: So, as great as the employee asking for a raise is, what about all of your other employees? Horowitz said, if you give the person a raise who’s asking for it, other people in your team may be wondering “Okay, so I didn’t ask for a raise and I didn’t get a raise. They asked for a raise and they got a raise. What does that mean?”

This may lead people to believe that you as a CEO aren’t really evaluating performance, but instead are just rewarding a one-time initiative. Other employees may not be “that person” who asks for a raise, but instead are people who expect to work for companies who notice and reward their efforts as is. This will undoubtedly lead to some team turbulence.

“The cultural conclusion is that everybody in your company is going to feel that they now have a fiduciary responsibility to their family to ask for a raise all the time because if they don’t, they may be missing out on a raise that they would have otherwise gotten.”

This will lead to a bunch of people asking for raises all the time — something Horowitz says is called “encouraging behavior.”

The Solution

You have to be formal to save your own culture,” and this doesn’t just apply to more established startups. Even if you have beanbag chairs, happy hour and Pac Man in the lobby, regulating the raise process and making it clear to your entire team will make you and them more accountable for their performance.

Horowitz says that, with his proposed process, after someone has come to you with a proposal for a raise, you should then evaluate their work for one quarter or six months. At the end of your evaluation, you tell them what their raise is — simple as that.

After that, there is no further discussion as you’ve heard their input as well as the input of their team during the evaluation. This is the best way to make the process fair and consistent. “It means you’re understanding what everyone thinks and how this is going to impact them and the culture of your company,” said Horowitz.

Learning from History’s Greatest Practitioner

Horowitz really looks up to Toussaint L’Ouverture for inspiration on how to best make decisions that have an efficient, positive impact on your entire team. L’Ouverture was a slave during one of the most brutal reigns of slavery in Haiti (then the colony of Santo Domingo). He had a vision to end slavery, take control of Haiti, and make it a first-class country.

In accomplishing the only successful slave rebellion in history, every decision he made benefited the entirety of his mission, even at times when most people would have opted for revenge against a heinous rule.

For example, after he defeated the locals, he had to decide what to do with the conquered soldiers. Rather than imprison or kill them, he considered the leaders of his opposition and the resulting culture he was working toward.

Horowitz explained, “When he conquered an army, he would take the best people from the opponent and make them generals in his army … He wanted the expertise and to bring the culture up to a higher level.”

“This is the power of looking at a situation not just from your point of view, but from the point of view of all the constituents. Even the people you hate, which is hard to do when you are a CEO and harder to do when you are leading the revolution.”

Knowing that the Haitian economy depended almost solely on sugar cane, which was previously a slave economy, L’Ouverture had to then decide how to manage the acres and acres of sugar cane he’d acquired as a result of his successes.

He didn’t know enough about the industry to take it in the direction he wanted it to go, so instead of killing the slave owners, he let them keep their land and run the sugar cane plantations, but they had to pay their workers, thereby abolishing slavery. Horowitz said that under L’Ouverture’s rule, “Haiti had more export income than the U.S.”

Take-Home Message

By taking inspiration from L’Ouverture and considering all parties involved in each decision you make in the management of your company, you’ll be able to have your eye on the long view and set yourself up for long-term success. Horowitz said,

“The most important thing that you can learn, and one of the hardest things to do, is you have to discipline yourself to see your company through the eyes of the employees, through the eyes of your partners, through the eyes of the people you are not talking to and who are not in the room.”

Next Steps

You can watch the video and read a full transcript of Horowitz’s lecture here.

Also, if you enjoyed this post, be sure to check out How to Start a Startup: The Book. It’s the ultimate reference guide to creating a successful tech startup.

How to Start a Startup: The Book

Featured image was taken from the video of Ben Horowitz’s lecture at Stanford.

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