Venture Beyond with Trevor Loy

I just got a chance to view the incredible “Culture Deck” that Netflix uses to articulate its corporate culture to new employees.  They’ve used a version of this since 2002 and it appears to have been leaked publicly about a year ago, but I just stumbled across it a couple weeks ago.  

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It is the single best articulation of culture in a high-performance startup or technology environment that I have ever seen.  It’s that good.

That is not to say that I fully buy into, or endorse, every single aspect of this approach.  I do believe that the vast majority of the content is spot on in its relevance for the startups I invest in.  My favorite one is that successful high-performance organizations are a team, and NOT a family.  I’ve seen a large number of startups fail because the founders and management team - working from a base of values that makes them individually great humans - articulates “family” instead of “team” as the metaphor for the culture.  Doing so feels good for the first few months and years, but my experience is that it creates a barrier to effectively replacing employees (and management team members) with higher-performing people.  At a minimum, it creates a much longer delay in making a needed change in the team, and produces a lot more resentment in the departing employee (“I thought we were a FAMILY!”).  These kinds of delays, and cultural rifts, can and do skill startups all the time.

Putting aside the other great content of this presentation, its more important aspect is that it implements, in a better manner than any other articulation I’ve seen, the most important part of organizational culture, which is that it be specific, unique, clear, and differentiating.  Reasonable people can, and do, disagree about whether it is the “right way” to build a high performance culture.  That makes it effective in filtering the right people from the beginning, because potential employees who view this will self-select and “opt in” to the culture from the beginning.  Many talented employees would not want to work in a company that says it does not value loyalty, satisfactory performance, or stability; as a result, people who place a high value on those cultural values don’t end up even applying for jobs at Netflix.  But who would ever “opt out” of a company that says it values “integrity?”

Guy Kawasaki once said to me something profound, which I’ll paraphrase.  He said that corporate values or culture statements are only valuable and effective if reasonable people can argue both for and against the value/statement.  If it’s something that every reasonable human believes in (e.g., “honesty” or “integrity”), then it is of no use, because it doesn’t tell anybody what makes your culture _different_ than other cultures.  It becomes a platitude that nobody really follows in any specific way, and it loses the ability to provide the context for how employees should make decisions and set priorities, which is where culture is most effective as a company grows.

(As an aside, one of the very first slides in the Netflix Culture Deck points out that the four corporate values of Enron posted in their lobby were Integrity, Communication, Respect, and Excellence).

Kawasaki’s point was that it is only in telling people what makes _your_ company’s culture different from the culture of _other_ reasonable and successful companies that turns culture into an effective motivational tool for alignment and cohesion.  I’ve always respected that about the much-vaunted Zappos corporate culture, which despite the inclusion of many platitudes, clearly and always puts customer service as the #1 priority, ahead of all other aspects of the company.  Reasonable people and companies can legitimately disagree about that - other retailers (e.g. WalMart) say that low price is the most important thing; many other ecommerce companies say that design or fulfillment triumph; and many tech companies put product ahead of service.

Coming back to the Netflix Culture Deck, what makes it so powerful in my view is that reasonable people and companies can disagree.  Netflix does not believe in giving employees incentive stock options, and it believes that if an employee’s performance is merely satisfactory, they should be terminated (with generous severance).  Netflix doesn’t believe the company should track vacation time, or have an expense-reimbursement policy, or set travel budgets.  Most interestingly, and insightful, is the Netflix observation that the obsession around quality is of most relevance to manufacturing, medical and other “life and death” environments; at creative companies like Netflix, it’s actually better to encourage lots of mistakes, because it’s cheaper to fix the mistakes after they’ve been identified than it is to over-invest in quality (and the process and bureaucracy that comes with it) in order to prevent mistakes from happening in the first place.

Thoughts?

My colleague David Jargiello gave an excellent overview today to our 2011 Flywheel Fellows on the topic of legal and structural issues that can harm, or kill, start-up company success.

His takeaway was that there are only 3 areas of true existential risk, where legal/structural issues can end up directly causing the company to fail.  These are:

1. 1. Disputed rights to ownership of IP and other company assets between founders and previous employers.
2. 2. Disputes over ownership and structure among and between company founders that end up causing irreparable dysfunction and damage to trust.
3. 3. Disputes over ownership and structure among and between company investors and founders that end up causing irreparable and dysfunction damage to trust.

Everything else, more or less, can be fixed with money — although sometimes the amount of money required for the fix is substantial.  As a result, you’re better off getting the structural and legal issues right from the beginning.  Along those lines, here are a few additional lessons:

• As soon as you realize you have problems with one or more founders or early employees, deal with those problems fairly and immediately.  Don’t put it off, and don’t get clever.  Take the high road in treating them fairly and honestly, even if that isn’t how you believe they would have treated you in the same situation.
• Establish your corporate and equity structures using plain-vanilla, Silicon Valley-accepted norms.  For USA startups, that means Delaware C-corps; common stock with standard employee stock option plans; and plain vanilla preferred stock classes for investors.  Entrepreneurs who enjoy upending the status quo in their target markets are sometimes tempted to similarly upend the norms of company structure.  Even if it works, it requires potential investors, employees, and other stakeholders to expend extra energy understanding the differences, and this detracts directly from them expending that energy understanding what makes your startup company different in its value proposition to customers and other areas that matter.
• Startup founders often misuse legal counsel in one of two ways.  Either they underuse counsel, trying to do things “on the cheap” by themselves, in which case they end up paying a lot more to fix things later; or they overuse counsel, issuing a barrage of vague, unproductive requests to lawyers the end up churning legal fees, time and focus.  The latter issue is often more common among founders who mean well but aren’t experienced in interacting with lawyers.  This disorganized and inefficient use of counsel is often a symptom of a broader dysfunction in the management of the startup, and may indicate that *all* the startup’s business decisions are being made with similar inefficiency and lack of focus.
• When negotiating investment terms, if you are fortunate enough to be able to choose among many offers, always choose (at the early-stage) the offer that comes from the investors you think will bring the most additional value to the company, as long as their terms are reasonable.  Picking the best terms from sub-optimal investors at the early stages of a company often leads to being forced - at best - into a later-stage situation where you have less attractive terms, and often the only investors who will be interested at all will be the existing investors.
• Many start-ups raise their initial financing from multiple individual investors with varying degrees of sophistication.  Particularly when there are lots of less-sophisticated individual investors who don’t all have prior relationships with the company’s founders, a de facto “finder” may be operating in the shadows, even without necessarily realizing it.  Unregistered “finders” can create immediate risks of securities laws compliance, and more commonly, create downstream risks if things don’t go well.  For example, if a financing round can later be shown to have involved a de facto “finder” or unregistered broker/dealer, *all* of the investors in that round are entitled to a right of recession with respect to that financing.
• On a more practical level, the use of “finders” was more common in past decades when investors were difficult to identify.  In today’s world of AngelList, Open Angel Forum, Facebook, LinkedIn, Twitter, Tumblr, and numerous angel and VC blogs, it is quite straight forward to identify potential investors and even to get a referral to them via a trusted set of intermediary relationships.  In today’s environment, if startup company founders need to pay a finder to make those introductions - whether the finder is appropriately registered or not - the odds are that the startup company lacks the necessary sales and relationship skills that will be needed for the company to be successful, even if they end up getting the investment capital raised.
• One of the most common mistakes made by founders and early employees of startups is failing to file their own personal 83(b) elections with the IRS.  This *MUST* be done within 30 days of receiving stock option grants and there is no resolution if the deadline is missed.  The potential tax consequences can be catastrophic, for without 83(b), founders can end up owing significant amounts of personal ordinary income tax on “deemed” or “phantom” income as their options vest, but before those options are liquid and can be turned into cash to pay the tax owed.  While this may seem an issue that applies to the employees individual, from practical experience, once this issue arises for anyone on a startup company’s management team, the efforts to try to find a solution quickly consume most of the focus and energy of the entire management team and board.
• In the end, the legal paperwork that governs the relationships among and between company founders, management, early employees, and investors is important and necessary, but not sufficient.  More important than the paperwork itself is maintaining a solid foundation of trust between and among founders, management, employees, and investors.  Most important of all is keeping in mind that as long as you are perceived to be essential to the future creation of value for everyone else, you will effectively be “in charge” of your destiny, no matter what the documents say.  However, if you are not perceived to be essential to the future creation of value for others, you will not remain “in charge” for much longer, also regardless of what the documents say.  Learn to separate your contractual interests, your economic interests, and your psychological “control” issues.  The more you do this, ironically, the better decisions you will make and the less likely you will be to encounter conflicts among those interests.