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.

Board compensation

Recently I got a call from a CEO who asked me a question about options for a Board member.  This got me thinking about some of my build-stage company experiences in the world of Board compensation.

Generally, build stage companies do not compensate their Board members who represent the early investors.  These directors usually represent their general partnership’s interest on the Board so their compensation comes indirectly that way.  Or, if they are Board observers, they had to negotiate for that right and so winning the right also to be compensated for it would have been pretty challenging.

They will all almost always have their travel reimbursed.  I have seen this run the gamut, from very successful senior partners at top firms who fly inexpensively and try to split the costs among portfolio companies, to Board observers who appear allergic to any hotel other than the Four Seasons.  Ironically, these are often the ones who want startups to remain “scrappy”, meaning cheap.

I’m making a joke, but they are onto something – build stage companies don’t have a lot of resources.  This also goes for options, for which there is a fixed pool.  Occasionally, I’ve seen a Board member who spends a lot of his or her time actively helping the company receive an options grant.  Unfortunately it happens more when the Board tends to be “clubbier”, meaning the investors all know each other.  Or, it happens more with first-time CEOs, and/or management doesn’t feel it has clout to push back.

Usually these grants top out around 0.5%, although more often I have seen closer to 0.25%, which is about where many advisory board members’ grants land.  Startups have a limited option pool and granting them to a Board member who is there to represent his or her fund’s interests takes those options out of circulation for others.

It is not the end of the world, but once this cycle starts, it is hard to stop.  Better not to start it at all.  If you do, try to signal that this is going to be rare.  I usually recommend a polite, professional and protracted discussion that is not over in an afternoon.

I also recommend that instead of doing one grant for X% that vests over 4 years, do it as a smaller grant of (X/4)% that vests in a year.  Continued service is a requirement for continued vesting.  The signaling of this is important — plus, it is nearly impossible to shut off vesting for someone on your Board even if that person is missing most meetings and falling asleep in the others.

I’ve seen options grants for Board members that vest in 3 years instead of the more standard 4, so in this case, just divide by 3.  Close enough.

One final note: outside Board members, on the other hand, usually do receive some compensation in the form of a monthly stipend.  Usually this is on the other of $1,000 per month in the build stage.  An options grant on the order of 0.25% usually accompanies this.  By the time an independent Board member is added, the company is usually closer to “scale” mode,  0.25% is a more significant grant than it was a short time ago in the company’s life.   Which, despite how much this might hurt, is a sign of success.  Enjoy the high class problems when you have them.