Good Hygiene (employment edition)

I’m spending a lot of time with offer letters these days.  In the very early stages of a company, in “prove” mode, these tend to be loosely written.  In particular, bonuses are unspecified, benefit aren’t mentioned, and key requirements are left unwritten.  It’s not ideal but perfectly understandable.

Fast-forward to “build mode”, though, and this won’t work anymore.  One primary concern is intellectual property, and in particular that created by developers or people who interact with a company’s customers, operations or sales process – that is, everyone.  Another is that people who are pretty intelligent become mysteriously confused once they quit about being paid bonuses for things that might have happened had they stayed.  The list goes on.

When times are good, this is a headache.  When times turn bad, it could be the end of your company.  WeWork is about to get tested for how their offer letters were written.  My membership lapsed over a year ago and I still have a membership card that works anywhere in the world, so I’m guessing their operations overall are pretty sloppy.  They are about to find out what happens when you terminate thousands of employees who have unclear and unrealistic expectations.

To execute on this appropriately, I implement a checklist for my companies that includes the following:

  • Offer letters that specify that we will need to check citizenship (I’m in the middle of one of these right now – it’s amazing that in this environment that people don’t take this more seriously) and require you to sign a form NDA and assignment of inventions. Yes, the offer letter is in part sales document, which is appropriate.  It is also a document that you might need to rely upon someday.
  • Bonus templates that very clearly specify conditions under which bonuses are paid, when they are paid (pro tip: don’t promise them in the first payroll of the next month if you pay biweekly) and exactly how they are calculated. If you want to force adherence to a particular policy (example – keep Salesforce updated), this is the place to do it.
  • NDAs that are straightforward and to the point
  • Assignments of Inventions that ask employees if they’ve brought anything with them and make clear that what they develop on your payroll belongs to you. This is going to feel like overkill and could save your company one day.  VC’s in particular want to see this before they write a 7 or 8 figure check
  • Handbooks that lay out vacation and other benefits, but also are your opportunity to make your anti-discrimination, harassment and other policies crystal clear.  You won’t want to need them, but someday, you will.  Then you’ll want to stick to what they say.

 These are the basics.  As you move into scale mode, the compliance headaches will multiply.  Even more reason for good employment hygiene while you are in build mode.

2 kinds of people, analyst edition

In an earlier post, I suggested that there are 2 kinds of people in business, those who have the money and those who need the money. I stand by this oversimplification. To it, I added another about accounting people vs. finance people.  I stand by this one too.

Let me add another: analysts and operators.

Generally, operators make things happen in the present, and analysts look at the past in an effort to predict the future.  Analysts often say they are really “operators at heart”, which might be true, but they almost never are operators in practice.  Operators know how to get sales comp plans published, manage a hiring funnel, place ads on the MBTA, use LTV/CAC to make marketing decisions today, implement a travel policy, blow out a pipeline to make a quarter when it’s desperately needed, perfect a cash conversion cycle, time product introductions, make a hire when no one else can recruit… you name it.

Analysts can’t do many of these things.  What they can do is look at a dizzying array of data on the business and figure out what is really going on, and what that suggests about what might happen in the future.  Most importantly, they how to tell the story, and because they are not in the weeds about, say, comp plans, they can stay big picture and compare the right broad metrics across companies, or industries.  The part they play is not more important – but as a company gets bigger, it becomes at least as important.  It is challenging to be a very effective operator and a good analyst at the same time.

Over a drink many years ago, a colleague I respect suggested that I had to choose between being an analyst (which I think I was then) and an operator (which I think I am now).  I like to work with build stage companies where making things happen is valued over broad-based analytics, so this suits me well.  In raising money, you need just enough analyst so that you can point to broad metrics, but much of attracting and closing captial is about managing a process and a pipeline.  I still have some of this DNA as well even if I don’t work these muscles as often as I could.

In a few of the companies I work with, I collaborate with Board members or advisors.  In almost all cases, they like to say that they are entrepreneurs or operators at heart.  (Note: maybe they are, but if you’re a venture capitalist and not a founder of your firm, almost by definition you are not an operator.  Self-awareness is important).  The best ones collaborate by providing a view across similar businesses or industries using data that the management team already has.

Put another way: effective (and self-aware) analysts paired with effective (and self-aware) operators make a great combination.

The WeWork ‘Chapter’

I’m starting this blog back up after what I’ll just call a sabbatical.  Much respect for busy professionals who manage to write regularly and work it into their daily/weekly routines.  It is not easy.
Onto the writing…
There have many busted WeWork IPO posts written, many dripping with schadenfreude (look it up).  Adam Neumann may or may not deserve the bad press – it’s hard to know what’s really behind someone’s motivations – but it is pretty striking how quickly the press and investors switched from adulation to tar-and-feather mode.  It reminds me of Elizabeth Holmes and Theranos.
Mostly, I wanted to write about them because their situation reminds me of the WeWork of the 1990’s: Exodus Communications.
I used to work at Exodus, which was a data center/co-location business back when that was a thing.  It has so much in common with WeWork that I’m surprised more people haven’t drawn the analogy.  Here’s a partial list:
  • A real estate business with long-term capital obligations and short-term client contracts
  • Decidedly *not* a tech company, but valued like one
  • Management making a lot of money through side deals
  • Also decidedly not a marketplace, but tried to present themselves like one
  • Huge debt load
  • Bankers who talked the company and employees into irrational deals (JPMorgan in WeWork’s case, Morgan Stanley in ours)
  • Insane growth (40% quarter over quarter for years) that could only happen by not worrying about running a tight ship – someone wise there told me that 40% QoQ growth meant that of 10 people you met in the hall, 4 just started, 4 had been there less than a year, and of the 2 that were left, only 1 was any good and that’s if you were lucky.  WeWork grew so fast that they had many of the same problems, I’m sure.
I could go on, and maybe I will in a future blog post, but you get the idea.  Exodus has the distinction of being one of the few large public companies to go Chapter 22.  First it went Chapter 11 on its own.  Then Cable and Wireless USA bought them, and they too went Chapter 11.  Then when Savvis bought the assets out of bankruptcy and rationalized the footprint and cost structure, they were able to execute a business with solid return on assets.
Buried within WeWork, there is a business with legs.  The question is how many Chapters, so to speak, have to be written before we find them.

What to include (and leave out) in Board financials

Many a post has been written about rules of thumb for holding effective Board meetings.  People should be present, meaning actually focused on the meeting and not doing other work (this one from Brad Feld at Foundry).   There should be an Executive Session scheduled with plenty of time for it (this one via Fred Wilson of USV).  I’m going to focus in particular how presenting financials can be done in order to maximize value and keep things focused on what is really important.
First of all, whatever you present as the CFO, it needs to be distributed ahead of time, preferably at least 72 hours.  This is one hard and fast rule that I try not to violate whenever possible.  There is nothing worse as the CFO than numbers that go out the night before an 8am meeting.  It’s not just Board members that hate this.  It invites scrutiny and questions, and is a signal – I am big on signaling – that management doesn’t quite have its act together.
What should be in the package?  Here are the things I minimally include in businesses that have a meaningful monthly cadence – which most build stage companies do.  For some it’s weekly; an example is an app where week-over-week growth is a meaningful metric.
  • Last month’s P&L vs. original forecast, and YTD vs. forecast
  • Last month’s P&L vs. prior month – dollars view
  • Last month’s P&L vs. prior month – unit economics view (meaning, take your P&L, and divide everything by the unit that’s most important in your business.  Could be square feet, available days for appointments, hours sold, hats – you name it)
  • Meaningful YoY stats by product line, location, or some other way to give investors an idea of where growth is (or is not coming from)
  • Headcount summary – by department, where are we against plan?  For many startups, this is where cash either gets burned (hiring too fast) or revenue growth is thwarted (because you can’t find the right head of marketing and while this saves you money in the short run, it means you are not driving top line in the medium-term)
  • Rolling forecast vs. original projection – meaning, if I re-forecast the business for the rest of the year (which you should be doing on an almost constant basis), where am I going to end up
  • Cash projection
If you have these ready to go 3 days ahead of time in well-formatted slides with pithy color commentary, you’ll serve everyone well.  You might need to add a few more based the particular business that you’re in, but this should get everyone grounded in the results and communicate how things are going.  Investors will have the opportunity to look through the numbers and draw some initial conclusions, which will make the financials review section of the meeting much smoother.
Your goal as the CFO is to let the strategic discussion take center stage and let the numbers support that discussion.
Caveat: sometimes you will have Board members/observers who do not read numbers early no matter how early you provide them, and are going to ask nitpick questions about one obscure figure that you know is not vital to anything.  Take a deep breath and go with it.  It’s not constructive behavior, and with any luck, the other Board members will talk to this person offline about expectations.  Your role is to set them high, and keep them there.

Feature It

Generally speaking, as a CFO you have 2 types of bad news to deliver.  The first type is where there’s a blip that you should report, but you and the CEO are pretty convinced that it’s not worth a long navel-gazing session with your investors.  A simple example that falls into this category is higher than expected G&A spending because your law firm forgot to invoice you for 3 months and you didn’t remember to accrue for this.  So, yes, it makes the numbers look worse than they really are, but if you can present the numbers in a way that doesn’t highlight this in bold underlines, that’s probably all for the best.
The other type of bad news is something that is impossible to hide.  Many CFOs are tempted to do this.  An example: new SaaS bookings are way behind even though the revenue curve for the current month or quarter is fine.  Quota deployed against bookings goals is way behind.  Hiring got away from you and you suddenly added 10 people when the budget called for 3.  You had projected cash lasting 18 months but now it sure looks more like 12.
If this happens, don’t hide it – feature it.
Meaning, present the financials as you normally do, but highlight the miss and make it front-page, bold-type, and unmissable.  Make the discussion about the bad news.  If you have conscientious investors who want to help you find solutions, they will.  In the closed-door executive session, they might have less-than-generous things to say about the company’s or management’s performance.  That’s fair.  Let them have that discussion instead of the one about why they had to uncover issues through forensic analysis because you tried to gloss over or hide it.
The same general rule of thumb goes for sharing numbers with your CEO.  Some bad news should be featured, early and often.

Bookings, cash and revenue

Frequently I find myself explaining accounting concepts to non-accountants.  It’s actually a part of what I do that I enjoy; I’ve taught courses as an adjunct in the past and the teaching was the fun part.  The rest of being an adjunct… well, the less said about that, the better.
One construct that seems to come up a lot, and can be confusing if you don’t spend all day thinking about this stuff like I do, is bookings vs revenue vs billings vs cash.
Bookings are closed orders.  Take the example of a subscription software business that sells a $10 per month service.  If you sell a 1 year subscription, that’s a $120 booking.  2 years, $240, and so on.  It is not revenue.
Revenue on this deal is $10 per month, recognized monthly, starting when the software was turned on for the customer.  Not when the deal is signed – when the service is turned on.  Similar concept in businesses that ship physical products.
This is different from cash.  You might get paid up front, in arrears, as you go, or 50/50 up front and at the end.  But when you collect the cash has no impact on revenue.  If you never collect the cash, this is bad debt expense (although if this happens a lot, you might need to adjust revenue).
I won’t get into the accounting debits and credits for all of these, but they can get complex quickly.  Imagine you have a subscription where the fee is $10 per month but you give away the first month for free.  The booking is $110, and the revenue is $9.17 per month over all 12 months.  From a revenue perspective, it’s the same as an 8.3333% discount.  Again, when you collect the cash for this is irrelevant.
This comes up a lot in membership based businesses where the first month can be free.  If there’s no term for the membership, then the revenue is just zero.  If there is a term, you recognize revenue ratably over the period.
The inverse of this is also true – if you sign a real estate lease with a rent-free period, your rent during the rent-free period isn’t zero.  For a 10 year lease with rent of $10 per month (just making the numbers easy), if you get the first six months free, your monthly rent expense is actually 10 * 114/120 = $9.50. The part you didn’t pay in cash for those 6 months gets carried on the balance sheet as an accrued liability. If you pay your rent late – which I don’t recommend – that doesn’t affect that rent is still an expense.  The total value of that lease is $1140 – it’s sort of the opposite of a booking from the company’s perspective.
Depending on your team, you too might find yourself explaining this frequently.  I have found certain board members in particular struggle to keep this straight.  It is the CFO’s job to make sure terms are clear and consistent, and as always, surprises are at a minimum.

Re-trading the job offer

In many of the companies I work with, I sign candidate offer letters.  This isn’t always something a CFO does, but if possible, I prefer that I (or the CEO) am the final check on this particular business process.  One obvious reason is that I know what’s in the budget for a given position.  One less obvious one is someone with a touch of OCD will find errors – incorrect years, language from an old template that doesn’t belong in this particular letter – that someone else might not.
Another reason is that recently for somewhat junior positions, I am seeing a lot of negotiating by candidates who have received a verbal offer, accepted it, and now wants to re-trade.  It’s hard for a hiring manager to resist this.  With rare exceptions, I always do.
A candidate who has accepted verbally a salary of $100, but then when they get the letter and ask for $105, is setting him or herself up for failure.  He’s now signaled that either (a) everything is going to be a negotiation, (b) I can’t necessarily trust him to keep commitments or (c) my offer is the stalking horse for another one.  In my experience, most often it is (c), but (a) and (b) do also come into play.
I have sales managers tell me that this is just someone who is valuable in the market negotiating hard for themselves.  I don’t see it that way.  Maybe I am biased because credibility is my only product.  In my view, once the parties agree, a negotiation is done.  If someone really is a superstar, we’re going to find that out and likely make an adjustment upward anyway.  Or if they have variable comp, they’re going to crush their numbers anyway so the base salary doesn’t really matter.  Needless to say, it’s nearly impossible to adjust down.
Because I work with build stage companies, the hiring managers often are young and haven’t had the scars yet of candidates re-trading their job offers because what they really want is more money to stay where they are. My advice is to resist.