Business 16 Stanford Department of Continuing Education Class # 6, 11/2/09

1. Business 16Stanford Department of Continuing EducationClass # 6, 11/2/09 Hiring, Firing, Business Development

2. Hiring • Probably the single most important function of a CEO/Founder • Your first hires will set the culture of the company • Once done, it is nearly impossible to change • Make sure you are doing it right • Bad culture is like cancer • Always takes more time than anticipated • Figure at least 6 months for key positions • Many other things will go unattended while you interview and hire; welcome to the NFL • Always more expensive than anticipated • You get what you pay for

3. Who Do I Hire? • You need to start with a key hire, like a CEO • Pay attention to goal alignment, team dynamics • It is like a marriage • Complement what you have • Beware of “superstars” who are not team players • Be aware of ego issues and ability to delegate • Always hire people smarter than you are • Always hire people excited by your vision • Don’t hire people who are just in it for the money

4. Hardest Hires • VP of Marketing • Most really good marketing people are looking for CEO gigs • The best ones are very analytical, quantitative, relationship oriented, politically sensitive • VP of Sales • See VP of Marketing • Some sales guys are like drug addicts; it is all they want to do • The best ones like to measure and be measured; weak ones are afraid • CFO • With Sarbanes-Oxley, CFOs are in high demand, especially with public company experience • Often the most under-appreciated position • Should be thought of as a backup CEO • Medical Directors • Often make more than anyone else at the company • Usually management “challenges” • Usually poor managers • Usually have giant egos

5. Hiring: 4 Schools • School #1: Hire the smartest, most energetic guys you can find, no matter what their background, and they will adapt • Smart people will think out of the box • Energetic people will work tirelessly until they solve your problems • Smart, energetic people don’t take “no” for an answer • Unfortunately, • Smart people may be really smart, but they may be learning on your nickel • Energetic people may not be the most efficient

6. Hiring: 4 Schools • School #2: Hire experienced guys who have done it before • These guys are incredibly efficient • Lots of contacts • They have scar tissue from getting beaten up for being smart and energetic for somebody else’s firm • They can be pretty cynical and rational • Unfortunately, • They may not be interested in “doing it again” at a small firm • They may expect big company perks and staff • They may expect more compensation than you can afford

7. Hiring: 4 Schools • School #3: Hire guys who have tried and failed, because they have seen it all before • They are more heavily motivated because they don’t want to be seen as losers • They know what doesn’t work • Unfortunately, • They may not know what does work • They may just be losers • When things get wiggly, they may be the first to bail out

8. Hiring: 4 Schools • School #4: Hire the #2 guy at an organization who can’t move up and has to leave to make his mark • Many of these people are actually doing the work of the #1 guy, but not getting any of the glory • They have not only the drive, but the ability to succeed • They are looking for a platform to gain visibility in success • Unfortunately, • They may be human, which may be their only drawback

9. How do I hire? • You can hire a search firm • They usually specialize in one kind of search (CEO, CFO, senior people, technical staff) • Usually require a sum equal to 1/3 the first year’s pay in three installments • They help you write a spec • They show you resumes of people that meet your spec, who they have had a chance to interview • You pay to fly them out • The firm does initial reference checking • You need to do the real references

10. How do I hire? • Get to know the partners involved • They are unique people • They love the thrill of the chase, travel, meeting new people and getting them to do something new • Many recruiters have long relationships with entire management teams in many companies • They have short attention spans • They don’t really understand your business • But they don’t have to • They know the type • No matter how good looking the junior associate (male or female), don’t let that influence your decision • It is the partner and his/her relationships that make all the difference • If something goes wrong, and the guy you hired leaves, you need to know that the freebie is worth it

11. Search Firms • However, • If they can’t find somebody right away, and you’ve already paid them their money, the are less incentivized • If you only demand schlocky people, you will only get schlocky people • They can’t help you find good people for a dumb business • Lots of people say they do searches, but only a few are any good at it • Don Valentine was asked “who is your favorite search firm?” to which he replied “whoever I haven’t worked with in the last 6 months”

12. Doing your own search • Use your board • VCs love to gossip about who is leaving • Yet another reason to have outside industry leaders on your board • Like duck hunting: go where the ducks are • Have your stuff together (business plan, etc.) • Network at a high level, and try to understand the local politics in an organization • Find out who is thinking about leaving or big events that are going to take place (mergers, etc.) • Network, network, network

13. Closing the Big Kahuna • Consider the human factors • Your candidate’s spouse may be a big reason they want to leave • It may have nothing to do with money • Dinners, several, with your family and theirs are often helpful • Make sure you like them

14. Closing the Big Kahuna • Compensation • Salary + equity (+ bonus?): Surveys • Usually try to keep him even with his current salary unless he can afford less • Make sure they understand the trade-off between precious cash and stock • Prepare two offers

15. Closing the Big Kahuna • Make sure you check their references • Ask every reference for additional references • Always explicitly ask about sexual harrassment, criminal activity and integrity • Ask references for specific bad points • Don’t make the first question about their smoking crack; build trust • Ask previous investors, board members • Always keep several candidates on the line, so you don’t freak out if your first choice says “no”

16. The smaller kahunae • Hire according to plan • Remember, hiring is easier than firing • There is no worse feeling than laying somebody off • Hire only the best • If you are complaining that you are interviewing too many people, you are probably doing a good job • All employees look at the senior guys to see what perks they have • This is why employment contracts, parachutes, etc. are a bad idea • Insurance; COBRA works for a while, but you will have to set up a plan • Ditto for option plan

17. Firing • Most entrepreneurs do not fire fast enough • The more senior the position, the less evidence it should take • In retrospect, most people knew that they should have fired a CEO because they had a suspicion • At the end, they waited 6 months, and then just wished they had fired him 6 months earlier • Bad CEOs are also busy hiring bad employees • You are better off firing too much than not firing enough • Plan a turnover target. If you are underfiring, you may not be asking enough of your employees

18. Firing • Remember, you don’t really need a reason • You are not condemning an innocent man • You don’t need to build a case; you don’t have time • Your employees should be justifying their existence every day • You should be asking “Why haven’t I fired that guy yet?” • Make it a habit to meet/interview people all the time • People’s lives change, and people move on • Visit with recruiters regularly • Ask them who’s available • Have board members do exit interviews; they will hear things you won’t

19. Oh, no!I’m not going to have enough money to meet payroll • Revenues did not meet plan • The market changed • Personality conflict with investors/loss of confidence • The bank is calling your loan…

20. Reorganizing • Banks: you can negotiate spreading out your payments • But you will have to give up something • Lien on IP • Equity • You are not going to change principal owed • Landlord: you can usually renegotiate • They may ask for a longer lease, equity, or some kind of lien • IRS: if you do not pay your taxes, the directors and management of the company are personally responsible • Always always always accrue taxes • You can go to jail • They don’t like negotiating

21. Reorganizing • Suppliers: you can lengthen payables • It won’t hurt your relationships if it is temporary • If you are going to stay in the business, do not screw over your suppliers • They never forget • Employees • You can ask them to go part time, take mandatory unpaid leave, pay cuts • You cannot ask them to work for free • They need to understand that there will be some kind of catch-up if they get you out of this jam • IRS: if you do not pay your taxes, the directors and management of the company are personally responsible • Always always always accrue taxes • You can go to jail • They don’t like negotiating

22. Bankruptcy/Liquidation • Types of bankruptcy: • Chapter 7: Liquidation • Where the company will no longer be an ongoing entity, and a sale of the assets is required to pay back creditors • Alternative to Chapter 7: Assignment for the Benefit of Creditors (ABC) • Allows the company to choose an assignee to sell the assets • Faster than Chapter 7 • May provide a better price than a creditor who doesn’t understand the business • Chapter 11: Reorganization • Where the company will be on ongoing operation under the supervision of the court • Requires the consent of a majority of the creditors • Debt is restructured, and in some cases, forgiven

23. Oh, no!I’m not going to have enough money to meet payroll • You need to take decisive action • When you decide to do a layoff, you need to consider several factors • How do I keep my key employees? • Timing? • Will we be seen as damaged goods? • Perception of investors • Liability • Ethics • Minimizing pain

24. The Layoff • Like everything else, you will need to develop a tactical plan • The deer hunter: a single shot • Isolate and stabilize the survivors • Have final paychecks, info packets ready to hand out • Get the victims out of the building ASAP • Avoid leaks at all costs before the event • Do it all in a humane way because you want people to speak well of you when you start hiring again

25. Business Development/Growing your Company • You can do it through revenues and VC (the old fashioned way) • You can do it through acquisitions • Hire an entire team instead of having to build it yourself • Can save time and money • Can be totally pathological • You may be able to eliminate a competitor while giving yourself additional strategic resources en masse • Critical mass/scale • Additional products • May be taken more seriously

26. Business Development/Growing your Company • You can do it through revenues and VC (the old fashioned way) • You can do it through acquisitions • Hire an entire team instead of having to build it yourself • Can save time and money • Can be totally pathological • You may be able to eliminate a competitor while giving yourself additional strategic resources en masse • Critical mass/scale • Additional products • May be taken more seriously

27. Growing your Company • Financing an acquisition • Can raise VC • May require some cash • Can promise target money (a note) to be paid at a future date • Can pay with your stock at a higher price than a VC may be willing to pay • May be able to get a better deal if you promise more on the backend, but commit to milestones, with rights falling back upon failure • Sometimes, banks like SVB may be willing to help

28. Business Development/Distribution Partners • Strategic distribution arrangements can be very valuable • Allow you to sell more product than you could afford to • Lets you sell into markets that you have no interest in • Lets you sell to customers you have no access to • Lets a potential acquirer “try before they buy” • They can give you a lot of credibility • They help you develop customer feedback, relationships, and model how a real sales force works • They can also hurt • Deals get signed, but sometimes little incentive for a partner to sell your product • Your product may be used in bundling you have no control over • There may be partner politics you may not understand

29. Business Development/Distribution Partners • You need to understand how a partner’s sales force is being compensated • You need to understand who is responsible for what • You need to craft an agreement that minimizes rights conflicts • Channel development is expensive, which creates issues • A partner may want you to pay for that • A partner may not want to give you an “out” • However, you may need an out if you want to be acquired by somebody else • You need to be able to audit results • You should have performance milestones, with rights flowing back if they are not met • You have little control apart from that

30. Business Development/Strategic Investors • Strategic investors can be very valuable • Can give you insight into the thinking of potential acquirers • You can find out what they don’t care about • More than one can set up a bidding war later on • They can give you a lot of credibility • They can also hurt • If they stop participating, people will want to know why • Some buyers may be turned off • If you bring one in too early, you may give too much away • You need to understand who your relationship is with, and what value it is