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

Hiring, Firing,

Business Development

Hiringo Probably the single most important function of a CEO/Founder

o Your first hires will set the culture of the companyo Once done, it is nearly impossible to changeo Make sure you are doing it righto Bad culture is like cancer

o Always takes more time than anticipatedo Figure at least 6 months for key positions

o Many other things will go unattended while you interview and hire; welcome to the NFL

o Always more expensive than anticipatedo You get what you pay for

Who Do I Hire?

o You need to start with a key hire, like a CEOo Pay attention to goal alignment, team dynamics

o It is like a marriageo Complement what you haveo Beware of “superstars” who are not team playerso Be aware of ego issues and ability to delegateo Always hire people smarter than you areo Always hire people excited by your visiono Don’t hire people who are just in it for the money

Hardest Hires

o VP of Marketingo Most really good marketing people are looking for

CEO gigso The best ones are very analytical, quantitative,

relationship oriented, politically sensitiveo VP of Sales

o See VP of Marketingo Some sales guys are like drug addicts; it is all

they want to doo The best ones like to measure and be measured;

weak ones are afraido CFO

o With Sarbanes-Oxley, CFOs are in high demand, especially with public company experience

o Often the most under-appreciated positiono Should be thought of as a backup CEO

o Medical Directorso Often make more than anyone else at the companyo Usually management “challenges”o Usually poor managerso Usually have giant egos

Hiring: 4 Schools

o School #1: Hire the smartest, most energetic guys you can find, no matter what their background, and they will adapt

o Smart people will think out of the boxo Energetic people will work tirelessly until they solve your problems

o Smart, energetic people don’t take “no” for an answer

o Unfortunately,o Smart people may be really smart, but they may be learning on your nickel

o Energetic people may not be the most efficient

Hiring: 4 Schools

o School #2: Hire experienced guys who have done it before

o These guys are incredibly efficiento Lots of contactso They have scar tissue from getting beaten up for being smart and energetic for somebody else’s firm

o They can be pretty cynical and rationalo Unfortunately,

o They may not be interested in “doing it again” at a small firm

o They may expect big company perks and staffo They may expect more compensation than you can afford

Hiring: 4 Schools

o School #3: Hire guys who have tried and failed, because they have seen it all before

o They are more heavily motivated because they don’t want to be seen as losers

o They know what doesn’t worko Unfortunately,

o They may not know what does worko They may just be loserso When things get wiggly, they may be the first to bail out

Hiring: 4 Schools

o School #4: Hire the #2 guy at an organization who can’t move up and has to leave to make his mark

o Many of these people are actually doing the work of the #1 guy, but not getting any of the glory

o They have not only the drive, but the ability to succeed

o They are looking for a platform to gain visibility in success

o Unfortunately,o They may be human, which may be their only drawback

How do I hire?

o You can hire a search firmo They usually specialize in one kind of search (CEO, CFO, senior people, technical staff)

o Usually require a sum equal to 1/3 the first year’s pay in three installments

o They help you write a speco They show you resumes of people that meet your spec, who they have had a chance to interview

o You pay to fly them outo The firm does initial reference checkingo You need to do the real references

How do I hire?

o Get to know the partners involvedo They are unique people

o They love the thrill of the chase, travel, meeting new people and getting them to do something new

o Many recruiters have long relationships with entire management teams in many companies

o They have short attention spanso They don’t really understand your business

o But they don’t have too They know the type

o No matter how good looking the junior associate (male or female), don’t let that influence your decisiono It is the partner and his/her relationships that make all the difference

o If something goes wrong, and the guy you hired leaves, you need to know that the freebie is worth it

Search Firms

o However,o If they can’t find somebody right away, and you’ve already paid them their money, the are less incentivized

o If you only demand schlocky people, you will only get schlocky people

o They can’t help you find good people for a dumb business

o Lots of people say they do searches, but only a few are any good at it

o 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”

Doing your own search

o Use your boardo VCs love to gossip about who is leavingo Yet another reason to have outside industry

leaders on your boardo Like duck hunting: go where the ducks are

o Have your stuff together (business plan, etc.)

o Network at a high level, and try to understand the local politics in an organization

o Find out who is thinking about leaving or big events that are going to take place (mergers, etc.)

o Network, network, network

Closing the Big Kahuna

o Consider the human factorso Your candidate’s spouse may be a big reason they want to leave

o It may have nothing to do with moneyo Dinners, several, with your family and theirs are often helpful

o Make sure you like them

Closing the Big Kahuna

o Compensationo Salary + equity (+ bonus?): Surveyso Usually try to keep him even with his current salary unless he can afford less

o Make sure they understand the trade-off between precious cash and stock

o Prepare two offers

Closing the Big Kahuna

o Make sure you check their referenceso Ask every reference for additional references

o Always explicitly ask about sexual harrassment, criminal activity and integrity

o Ask references for specific bad pointso Don’t make the first question about their smoking crack; build trust

o Ask previous investors, board memberso Always keep several candidates on the line, so you don’t freak out if your first choice says “no”

The smaller kahunae

o Hire according to plano Remember, hiring is easier than firingo There is no worse feeling than laying somebody off

o Hire only the besto If you are complaining that you are interviewing too many people, you are probably doing a good job

o All employees look at the senior guys to see what perks they haveo This is why employment contracts, parachutes, etc. are a bad idea

o Insurance; COBRA works for a while, but you will have to set up a plan

o Ditto for option plan

Firing

o Most entrepreneurs do not fire fast enougho The more senior the position, the less evidence it should takeo In retrospect, most people knew that they should have fired a CEO because they had a suspicion

o At the end, they waited 6 months, and then just wished they had fired him 6 months earlier

o Bad CEOs are also busy hiring bad employeeso You are better off firing too much than not firing enough

o Plan a turnover target. If you are underfiring, you may not be asking enough of your employees

Firing

o Remember, you don’t really need a reasono You are not condemning an innocent mano You don’t need to build a case; you don’t have time

o Your employees should be justifying their existence every dayo You should be asking “Why haven’t I fired that guy yet?”

o Make it a habit to meet/interview people all the timeo People’s lives change, and people move on

o Visit with recruiters regularlyo Ask them who’s available

o Have board members do exit interviews; they will hear things you won’t

Oh, no!I’m not going to have enough money to meet

payroll

o Revenues did not meet plano The market changedo Personality conflict with investors/loss of confidence

o The bank is calling your loan…

Reorganizing

o Banks: you can negotiate spreading out your payments

o But you will have to give up somethingo Lien on IPo Equity

o You are not going to change principal owed

o Landlord: you can usually renegotiateo They may ask for a longer lease, equity, or

some kind of lieno IRS: if you do not pay your taxes, the

directors and management of the company are personally responsibleo Always always always accrue taxeso You can go to jailo They don’t like negotiating

Reorganizingo Suppliers: you can lengthen payables

o It won’t hurt your relationships if it is temporaryo If you are going to stay in the business, do not screw over your supplierso They never forget

o Employeeso You can ask them to go part time, take mandatory unpaid leave, pay cuts

o You cannot ask them to work for freeo They need to understand that there will be some kind of catch-up if they get you out of this jam

o IRS: if you do not pay your taxes, the directors and management of the company are personally responsibleo Always always always accrue taxeso You can go to jailo They don’t like negotiating

Bankruptcy/Liquidationo Types of bankruptcy:

o Chapter 7: Liquidationo Where the company will no longer be an ongoing

entity, and a sale of the assets is required to pay back creditors

o Alternative to Chapter 7: Assignment for the Benefit of Creditors (ABC)

o Allows the company to choose an assignee to sell the assets

o Faster than Chapter 7o May provide a better price than a creditor who

doesn’t understand the businesso Chapter 11: Reorganization

o Where the company will be on ongoing operation under the supervision of the court

o Requires the consent of a majority of the creditors

o Debt is restructured, and in some cases, forgiven

Oh, no!I’m not going to have enough money to meet

payrollo You need to take decisive actiono When you decide to do a layoff, you need to consider several factorso How do I keep my key employees?o Timing?o Will we be seen as damaged goods?o Perception of investorso Liabilityo Ethicso Minimizing pain

The Layoffo Like everything else, you will need to

develop a tactical plano The deer hunter: a single shoto Isolate and stabilize the survivorso Have final paychecks, info packets ready to hand out

o Get the victims out of the building ASAPo Avoid leaks at all costs before the evento Do it all in a humane way because you want people to speak well of you when you start hiring again

Business Development/Growing your

Companyo You can do it through revenues and VC (the old fashioned way)

o You can do it through acquisitionso Hire an entire team instead of having to build it yourself

o Can save time and moneyo Can be totally pathologicalo You may be able to eliminate a competitor while giving yourself additional strategic resources en masse

o Critical mass/scaleo Additional products

o May be taken more seriously

Business Development/Growing your

Companyo You can do it through revenues and VC (the old fashioned way)

o You can do it through acquisitionso Hire an entire team instead of having to build it yourself

o Can save time and moneyo Can be totally pathologicalo You may be able to eliminate a competitor while giving yourself additional strategic resources en masse

o Critical mass/scaleo Additional products

o May be taken more seriously

Growing your Company

o Financing an acquisitiono Can raise VCo May require some casho Can promise target money (a note) to be paid at a future date

o Can pay with your stock at a higher price than a VC may be willing to pay

o 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

o Sometimes, banks like SVB may be willing to help

Business Development/Distribution

Partnerso Strategic distribution arrangements can be very valuableo Allow you to sell more product than you could afford

too Lets you sell into markets that you have no interest

ino Lets you sell to customers you have no access too Lets a potential acquirer “try before they buy”o They can give you a lot of credibilityo They help you develop customer feedback,

relationships, and model how a real sales force works o They can also hurt

o Deals get signed, but sometimes little incentive for a partner to sell your product

o Your product may be used in bundling you have no control over

o There may be partner politics you may not understand

Business Development/Distribution

Partnerso You need to understand how a partner’s sales force is being compensated

o You need to understand who is responsible for what

o You need to craft an agreement that minimizes rights conflicts

o Channel development is expensive, which creates issueso A partner may want you to pay for thato A partner may not want to give you an “out”

o However, you may need an out if you want to be acquired by somebody else

o You need to be able to audit resultso You should have performance milestones, with

rights flowing back if they are not meto You have little control apart from that

Business Development/Strategic

Investorso Strategic investors can be very valuableo Can give you insight into the thinking of

potential acquirerso You can find out what they don’t care abouto More than one can set up a bidding war later ono They can give you a lot of credibility

o They can also hurto If they stop participating, people will want to

know whyo Some buyers may be turned off o If you bring one in too early, you may give too

much away

o You need to understand who your relationship is with, and what value it is