Performance-based Options Grants

I had a bunch of interesting comments on my recent post about company options programs – many very constructive. One of the things a number of people have asked was what I think is the right approach to performance-based options grants. I realized I referenced this in my original post but didn’t cover it in any detail.

Performance grants are important and provide an opportunity to describe a nuance that I didn’t do a very good job of outlining in my original article. For performance grants, I believe the right methodology is for the board and the management team to decide on a pool of options that is available in any given year for merit-based grants. I think it’s important that the company concentrate those grants on the absolute best performers in their business. I’m not a fan of a large percentage of employees getting performance-based grants nor am I a fan of grants being formulaic based on comp or similar factors (i.e.,not really based on performance). I believe that performance grants should be concentrated on the absolute top end of the business (the top 5%… maybe top 10% of the company). The point is to reward your absolute best performers, not to have your performance grant program work as a company-wide option top-up every year.  From my perspective, diluting their effect by giving them too far down the employee line is counterproductive.

The nuance that I didn’t describe in my last post is that it’s important to realize that you can deviate from the formula, up or down, based on your belief of the importance or the performance of the options recipient. In theory, if you’re doing a good job of performance grants, your absolute best performers will end up with more options than your average employee in the same role. Using the refresh formula I outlined in my previous post will provide them with incremental options in their refresh as well, as it should. That said, it’s important to take a look at the refresh amounts and do a sanity check to make sure that they map. I would not recommend varying widely from this but, as Chris Moody pushed on in one of the comments to that post, being a slave to a formula is rarely a good idea in anything you do in your business.

Ok – enough about options for now. Hopefully these posts have been interesting and helpful.

Options about your Options – How to think through your company’s option program

Quick break from Covid related topics for a moment to post something I’ve been intending to write about for a few months but haven’t had the chance to commit to paper. It’s perhaps a boring topic – Options and your company’s option program – but an important one.

Despite how much time companies talk about the importance of their employees and, in many cases, how every employee is also an “owner” of their business through their option program, most companies are pretty ad hoc (or down right sloppy) about how they plan for and execute their option program. My hope with this post is to push your thinking around options and encourage you to formalize what you’re doing into an actual option program.

Side note before we jump in. I’m not giving any tax or legal advice here. You have accountants and lawyers for that – be sure to check with them. I’m also not going to give option bands for various positions. The data change over time and, frankly, I’m less interested in debating what % grant your Director of Product Management should receive given your stage of company and capital raised, and more interested in the structure of your program.

Why have an option program to begin with? It strikes me that many founders never really consider this question. That’s a mistake because knowing what’s driving your desire to give out options will inform how you think about your option program. Many founders feel that it’s equitable to have everyone share in the upside and feel like owners. Some feel that, especially for early employees, options should act as a reward for taking startup risk. Many startups use option packages to compete with the larger current comp packages of bigger, more established businesses. Yet others try to use cash to minimize dilution for early employees and try to rapidly reduce their reliance on options. All good, but different philosophies (and different markets and market conditions) can lead to different initial option programs. One thing not always acknowledged is that often option programs are intended to be mercenary in nature – binding employees to the company through the disincentive of needing to exercise their options (and in some cases pay tax on the paper gain) if they leave. What your value system looks like and why you’re setting up an option program can and should have ramifications on how you set up your option program. No value judgments here – my goal for you is to be deliberate about why you’re giving employees options and to align the details of your program with what you’re trying to get out of it.

Should everyone in my company have options? The answer to this should follow from the answer to why you’re setting up an option program in the first place (and can potentially change over time as you grow your business). Many, but not all, Foundry companies give options to all their employees. Often this is due initially because founders feel that it’s “right” for all employees to have some ownership (or right to ownership) in the business. Others feel less strongly about it and either don’t distribute options below a certain level of employee (say manager level) or have programs where employees need to be at a business for a period of time before they earn the right to have an option grant. Obviously, there are competitive considerations to think about, but in some markets, options are either not well understood, aren’t expected as part of an employment package, or aren’t commonly given to employees below a certain level. Take a moment to decide whether you feel that everyone in your company should have the potential to be an owner and what’s driving your thinking about why.

Using options in lieu of compensation. It is very common for companies – especially companies early in their lifecycles – to try to use options to reduce the total cash outlay over time. That’s ok, but there are a few things to keep in mind if you’re doing to do this. The first is to be deliberate about it if you’re going to do it. By that I mean pick a “value” for each option and formulaically apply that to decrease comp. This option value can change over time (your company grows, raises more money, and reduces overall risk, etc.) but if you’re going to use options this way be methodical about it. We’re going to talk about setting deliberate option bands for various levels in your company in a second and the starting point for options should be those bands. From those your offer to an employee can methodically (meaning formulaically) reduce cash and add options. I’ve sometimes seen companies make offers with a range of salary and options – making explicit the trade-off they are offering between cash compensation and options. It’s important to recognize that not all employees will value options in the same way (or be in a position to trade cash comp for options). It’s also important not to go crazy with the trade-off. For starters, it can lead to inconsistencies in comp that are too large to sustain over time. But it will also change the nature of your workforce if you only hire employees that can work for well below market cash comp. Both of those things are not good for your business, so while it’s ok to offer some level of cash/equity trade-off, it shouldn’t be over-done. It’s also my experience that as companies grow they seek to normalize both cash and equity compensation over time, leading to some inconsistencies in how early employees are treated (cash comp tends to come up more quickly than equity comp so if you’re not careful you’ll further disadvantage early employees who took larger initial cash compensation – this is both not fair and can be discriminatory). So use this tool judiciously and over time as you have greater cash resources, it should be reduced or eliminated.

Create option “bands”. Every company should create a schedule of new hire grants for each level position in their business. This schedule should lay out the range of options that you’re targeting for each position in your business. This exercise should be done annually and reviewed with the board (and/or compensation committee of the board if you have one of those). This will help do a few important things including setting appropriate expectations with your board about equity comp, ensure that you’re not making ad hoc compensation decisions, avoid various forms of bias in the hiring process around granting equity and allow you to quickly and seamlessly get option approval from your board. This will also force good conversations about outliers and, in my experience, tends to be a deterrent to title inflation, which I hate. In summary, don’t be ad hoc about options – be methodical about them.

Option Exercise. Typical option plans allow employees only 90 days to exercise their options once they leave a company. This can be a real incentive for employees to stay at a business, as there are often meaningful tax consequences to exercising options upon leaving (again, I’m not giving tax advice; this is actually something I’d like to see changed in the tax code. More complicated than I want to dive into here, but it would actually benefit employees and also the federal coffers as the tax would get paid on greater gains when the stock is eventually sold. And it would be the more fair thing to do, but I digress). Interestingly, there was a move a few years ago to extend the option exercise period after an employee left to a much longer window – say 7 to 10 years. Pinterest, Kickstarter and a handful of other relatively high profile companies did this. I suppose the idea was that it was an employment perk – like a better healthcare package or free lunch. At the time I had mixed feelings about it and I still do. Options have value because of their optionality – at some point in the future they may become worth a lot of money, but so long as you stay employed by your company, you don’t have to invest (purchase your options) and essentially get a free ride on the potential upside. Something about continuing that free optionality (essentially at the expense of other employees who stay at the firm) feels off to me. But, I know others disagree, and ultimately the choice here relates to your goals for your option program, your personal views about equity ownership and participation and your thoughts on fairness (which could swing this either way). But better to have a view on this that is deliberate. If you don’t say anything about it to your lawyers, your option plan will almost certainly have a 90 day exercise window.

Option Refresh. Even companies that are methodical about their option program set-up often skip this key element of a successful option program. I think it’s a super interesting (and important) part of that program and have put quite a bit of thought into how to best structure time based refreshes to employees. My background thesis inherent in this is that employees with options should continue to vest new option as they continue to work for your business. I think this is both practical and fair.

Here is an idea for what an option refresh package should look like:

  • At an employee’s 3rd anniversary, give them a new grant equal to the greater of a) 25-33% of their existing option grant; or b) 25-33% of what a new employee hired for that position today would receive.
  • The grant would begin vesting on the employee’s 4th anniversary and will vest monthly over 4 years.

This formula works pretty much across the board, with the exception of founders, who need to be considered differently (founders with meaningful ownership typically are not included in refresh grants). To be clear, what I’m describing here is separate from promotion grants and from annual or semi-annual performance related grants (which I think of as more a part of a company’s compensation policy than their Option policy).

Hopefully this post will give you some ideas for how to best structure your own option program. I’ll be interested to see your feedback either below in the comments or directly to me.

Better Zoom Meetings

My partners and I hold weekly Monday meetings and about once a quarter, we do an extended, six or seven-hour version. Before COVID-19, we’d end the day with a dinner and a chance to socialize and decompress after a long day of portfolio updates and strategic planning. And, of course, before COVID we’d all be in person. Our discussions were lively, they were engaged and we’d often make use of whiteboards, sticky notes and other forms of interaction (we have a post card with a logo for each of our portfolio companies which we often make creative use of). They’re fun and super productive.

And then COVID hit and our meetings lost their soul (and their fun, and their interest, and – to be frank – some of their effectiveness). I wrote about my frustration of trying to hold “strategic” meetings (vs tactical ones) over Zoom a few weeks ago. Since then I’ve gotten a bunch of helpful feedback and I’ve spent time researching ideas for how to make these sorts of meetings more effective and productive. Here are a few of the things that I learned (and that we implemented at Foundry in our most recent “extended Monday” meeting this week). I’d love to hear other ideas and will update this post accordingly.

  • Prework. We often have some amount of pre-work for meetings but its even more important, I think, to prepare ahead of time for Zoom meetings. It’s also an opportunity to use the meeting for more conversational topics rather than reporting (see below), which can drag on in a Zoom. A brief exercise ahead of the meeting gets people thinking about the agenda and ready to jump in when the meeting starts.
  • The agenda order matters a lot. In thinking through the ordering of the agenda, put deep discussion items first. Unlike in person meetings where it’s sometimes helpful to ease into the meeting with some lighter topics, Zoom meetings are most engaged when people are fresh. Best to have the meatier items up front and save the end of the day for more informational topics. We also used the pre-work for this – pre-meeting exercises that resulted in update-style content being created (and then consumed) ahead of time so we didn’t have to spend Zoom time doing it.
  • A quick green/yellow/red check-in can be very helpful. I like starting most of my meetings this way – a quick stoplight check-in so everyone knows what frame of mind everyone else is in. It’s even more important over Zoom where some of the subtle cues of a person’s emotional state are easily missed. I have some meetings where people just put this in their Zoom name so everyone can see it in the chat (i.e., this doesn’t have to take up a ton of time). I also like starting longer meetings with a few deep breaths (10 works) so everyone can get in the present and clear their heads before jumping in.
  • Timed breaks versus topic breaks; frequent breaks. This is an important one. Zoom fatigue is real. Other than keeping meetings relatively short (hard for strategic meetings) one of the best things you can do to stay fresh is to take relatively frequent breaks. I like every hour to 90 minutes for longer meetings. And, importantly, these should be time based, not topic based. Have the discipline to stop mid-topic to take breaks as scheduled, rather than trying to power through them with a break as the “carrot” at the end (leads to rushed, incomplete discussions.
  • In-meeting engagement. Find ways for people to stay focused and engaged. Some kind of feedback task can be really helpful for this. For our last meeting, we went old-school with sticky notes to replace the usual whiteboard, and asking people to share feedback after each session. Zoom is starting to roll out some in-meeting collaborative apps. Tools like Miro, Lucidchart, and Stormboard are things I’m looking at.
  • Use grid view; stay off mute. Looking at and listening to one person for an extended time gets dull quickly. Allowing everyone to see and talk to each other at the same time help mimics an in-person meeting better and allows everyone to stay engaged. Having everyone stay off mute encourages engagement and keeps people off email.
  • Second screen for shared docs. The screen share feature on Zoom is fine, but it makes it harder to see everyone who is on the call. If it’s possible, try to have people look at shared docs on a separate device. If you have to screen share, keep it short and pop back to the grid view/no share frequently.

We implemented all of these ideas at our last Foundry meeting and it was much, much better. More engagement, more fun and we got much more done. It also allowed us to limit the meeting time (although it was still 5 hours, which is definitely the outer limit for Zoom meetings). Still not the same as in person but better. We’ll keep trying to improve.

Resume Coaching Resource

If you’re not familiar with Energize Colorado, I’d encourage you to check them out. Energize CO is a volunteer organization working to mitigate the effects of COVID-19 in Colorado. As part of this they just launched a pilot Resume Coaching program geared toward people whose jobs have been affected by COVID-19. This is a free resource utilizing volunteer recruiters from some of Colorado’s best companies and staffing agencies. If you’re interested in learning more, sign up here to schedule a resume coaching session. Energize Colorado is also offering help with business guidance, mental health, procuring PPE, and other resources to help Coloradans navigate the personal and professional hurdles of the pandemic (all listed on their website – check it out).

As a reminder, Foundry Group helped set up the Colorado #Covid-19 Talent Network for those looking for employment in the tech sector. If you’re a recruiter and looking to hire, please check out all of the great talent available on our portal. If you’ve lost your job or it’s been scaled back due to COVID-19, add yourself to the talent list. Job seekers can also view a list of Colorado companies who are currently hiring on this site.

Lastly, don’t forget that the COVID-19 Finance Assistant Network (FAN), a volunteer group of CFOs and other finance professionals that I helped set up, is available to small business owners who need help applying for government assistance, preserving cash, modeling and understanding the new realities of their business, and any number of other fiscal challenges due to the pandemic. The FAN is open to any small business owner in any geographic location (i.e., not just in Colorado).

This is a challenging time for so many of us but all of these resources are free so please make use of them if you need (and please let others know about what’s available). I love seeing Colorado coming together to support businesses and people that need help through this time.

 

Colorado’s State-Wide Mask Order

Yesterday evening, Colorado Governor, Jared Polis, announced a state-wide mask order directing Colorado residents to wear a mask or face covering while in indoor public spaces. Citing the rise in COVID-19 cases in the state, Jared said, “…Masks are the ticket to the Colorado we love and a critical part of supporting Colorado’s economy and prosperity. The best way to support Colorado workers and businesses right now is to wear a mask.”

I’m proud of this decision and more broadly the way Gov Polis has handled the pandemic for Colorado. His proactive approach, which is has been a mark of his leadership style, has been tremendously beneficial to our state’s handling of the crisis – both in terms of our population’s health as well as the health of our economy.  The evidence is overwhelming that wearing masks slows the progress of the virus and saves lives. Unfortunately, other states such as Georgia are eschewing mask orders and turning their backs on the data showing that face coverings are very effective in spreading the virus. It’s so disappointing that this has somehow become a political issue and not one of common sense. And while I’m really pleased about Colorado’s decision, I’m truly worried about the populations in other states who aren’t thinking reasonably or who are putting politics ahead of the health of their people. Stay safe out there. And wear your mask!

Vacation in the time of Covid

I’ve written a few times about the importance of taking vacation time and I had the opportunity to take most of the week off a few weeks ago. It was good but not great (and different than I expected). In the past when I’ve gone away on a trip, I’ve been successful at truly unplugging. But there’s no getting away during Covid. I imagine I’m not alone in this but I find that when I’m at home and taking time off it’s difficult to completely disconnect. That was true the other week – I was only able to do a fair job of avoiding work and almost felt guilty about setting an out of office on my email (I nearly forgot to do it, in fact – perhaps my subconscious pushing back on my taking the time in the first place).

The Wall Street Journal recently reported that fewer people are taking time off this year. Americans already have challenges with getting away and unplugging – apparently Covid is making that worse. I also suspect that when time off is taken, it’s less relaxing and less of a real break (I’m projecting here, clearly, but I have heard stories from others who have tried to get some time away during the pandemic that recounted similar challenges).

I don’t have the answer but the reason I’ve written about it a couple of times is that I think it’s a real issue. We need to think about ways other than just creating long weekends for ourselves and our employees to take time away and be disengaged from work. Maybe others won’t struggle the way that I have with taking “staycation” but I suspect that many will.

I think this is something we should be paying attention to. People are already stressed and stretched – finding ways to recharge is especially important now. If anyone has any ideas or strategies for themselves or their teams, I’d love to hear about them in comments.

Board Diversity / Network Diversity

Fred Wilson’s recent post on diversity was thought-provoking on several levels and got me thinking not just about board composition but more broadly about the question of networks and how relying too heavily on existing networks can limit the diversity of those networks. There are many things that we (meaning the tech and venture industries, but I’m also shining this light on myself here) need to do to better promote and support equity and diversity in our work. To some extent at the core of this challenge is that many of us have limited diversity in our own personal and professional networks (see this interesting take from Rick Klau of Google on this topic). Fred’s post helped clarify one of the real challenges of limited networks because in large part the search for outside board members is an exercise about the network of one’s current board members’ networks. Companies typically look for new board directors on their own (meaning they typically don’t engage a search firm) and the result is that most new board member are either directly connected to their existing board or management team or one degree away. That’s incredibly limiting, even for a group (tech entrepreneurs and investors) that considers itself very networked.

One of the things that’s really hit home with me over the past weeks as I’ve reflected on why I have done such a poor job promoting diversity across my work (and venture more broadly has) is that I/we need to do a better job of proactively building networks that include more diversity. I recognize that this is hard – it’s something that I’ve been consciously trying to do for years and I know from first hand experience that it takes both time and effort. On the board level, supporting organizations such as The Board List, himforher, and The Valiance Funding Network are good ways to jump-start the process. But conscious and deliberate effort is required to both recognize that many of us have limited networks when it comes to diversity and that we can do more to expand those networks. There’s a change in mindset that needs to accompany this and I’d encourage us to embrace it rather than ignore our network shortcomings or rationalize them away (there are tons of interesting people from all sorts of backgrounds out there – it actually doesn’t take that much work to find them and start connecting).

Fred also talks about the challenge of opening up new seats in the board room. The basic issue is absolutely correct – board rooms are too static. In economics, there’s a term known as business dynamism. Ian Hathaway and Robert E. Litan, in a report for the Brookings Institution describe business dynamism as “the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others are destroyed, and others still are turned over.” Importantly they go on to note that “[r]esearch has firmly established that this dynamic process is vital to productivity and sustained economic growth.” Almost like a living organism, economies stay healthy by constantly building and changing. It’s a balancing act between growth and consolidating market power and new businesses and new ideas nipping at the heels of incumbents. The US has historically had relatively high dynamism and it is one of the factors that has been credited for America’s relative advantage in net job creation and the overall health of our economy.

Contrast this with the behavior of corporate boards which tend to be extremely and stubbornly static. They start with the founder and initial investors and typically when new investors come in, more investors are added to the board (rarely replacing an existing investor, more typically just adding to the number of people around the board table – for whatever reason, people are loathe to get off of boards once they’re on). We know from research that having more than three venture investors on your board is correlated with lower outcomes. Fred’s point in his post about creating board turnover is both helpful in terms of thinking about opening up spots for other diverse candidates but also in terms of enhancing the overall health of an organization by bringing in new ideas and new thinking. Bringing dynamism to the board level would be beneficial on both counts. 

I took a look at this across my own boards (I’m on 14 company boards at the moment – subject for a different post about the optimal number of board seats…). My average tenure is over 5 years. I have several boards where I’ve been on the board for more than 10 years. Most of the board’s I’m on change their composition rarely outside of adding a new investor (I wasn’t able to quantify exactly but board’s I’m on add or remove a board member on average about every 4 years). It’s clearly a problem and one with both an easy solution (introduce more prescribed board turn-over) that’s at the same time very hard (a CEO I work with suggested this idea and when I volunteered to be the first person off the board was told that no, that wasn’t what they were thinking).

Still, I’d push us as an industry to think about how these two dynamics intersect. We know from studies that diversity at the management and board levels leads to better business outcomes. We know in other contexts, dynamism is helpful to systems. Perhaps we can and should bring those two ideas together.

Functional Versus Strategic Meetings on Zoom

Like a lot of people, I’m stuck on Zoom for most of the day, although I’ve tried to mix in some regular phone call meetings – even when Zoom would be available – just to give me a break from time to time. I’ve found that Zoom works reasonably well for functional meetings and for information sharing / webinar-style meetings. When I say “functional meetings”, I mean executive team meetings, check-ins, and board meetings – ones that are fairly informational and have a relatively set agenda, but likely the kind of meetings that you have on a regular basis (weekly or monthly).

However, when I’ve held meetings that were more strategic in nature – such as open-ended planning meetings and those to talk about general strategy – they haven’t translated to Zoom very well. These meetings tend to run longer and I’ve struggled with video conferencing as the medium because it feels like there’s something missing – the body language in the room is hard to read and it seems easy to lose people’s attention, even from the very start. I find it’s even easy for me to lose attention in this setting and stay fully engaged. It’s harder to follow the more open ended conversations that “strategy” meetings lend themselves to and it’s just harder to stay engaged. This isn’t “Zoom fatigue” – that’s real and I definitely feel it many days – but something else.

I’m wondering if other people have noticed this and if anyone has any ideas for ways to improve that dynamic. We’re all stuck on Zoom for the foreseeable future, which had been working great for more functional meetings. But as we at Foundry have moved from tactical meetings related to Covid/PPP/our weekly Monday meetings to planning meetings (portfolio reviews and in particular our quarterly off-sites that we’ve been doing since the start of Foundry), they’re just not translating as well to Zoom. Bring remote has had many advantages in terms of productivity (no travel, no driving to/from work, lots of focused time) but there are plenty of draw-backs and this is a big one in my world.

If you have ideas and suggestions for ways to counter these issues, please weigh in – I’d love to hear your thoughts.

Make Juneteenth Meaningful

I’ve always been aware of Juneteenth but I’ve never done anything in particular to mark it. I’m sorry about that and it’s not something I’m proud of. For me and clearly for a lot of other people this is changing. I hope it can be a part of what perhaps – finally – will be a movement to change the way people of color, and specifically black people, are treated in our country.

I found this reflection on Juneteenth from Daria Hall particularly poignant. It’s short but worth reading if you have a moment. There are many other authentic voices online today talking about what the holiday means to them who are worth listening to as well.  “There are deep parallels between the delay of democracy and emancipation reaching Black people in 1865 and the Black experience today, ” as Hall writes in her piece.

I don’t know what you’re doing today. Actually, maybe I do – I’ve watched too many people on Twitter and other platforms fall all over themselves to show how suddenly woke they are to something that has been celebrated in one way or another for almost 150 years. I hope you’ll make today about more than a personal social media moment.

I don’t care what you do today, but I hope it will be meaningful. Juneteenth isn’t just about a day in the calendar. It’s about the actions we take the other 364 days of the year to create meaningful change in our society. If we’ve learned anything new over the past few weeks since George Floyd’s murder, its that this change is too long in coming. And long overdue.

A Few Days

This last weekend, I took the weekend off along with a half-day on Thursday and a full day on Friday. I called it a mini-vacation and it was fantastic. I turned off email and (for the most part) social media and enjoyed some digital free time. Like many of you, I’ve been running hard the past few months. Long days, working weekends, etc. Spring break was skipped and we’re running headlong into summer. At some point we all need to take a moment, ideally a few, and recharge. A week off right now felt like a step too far, so I decided to start with a smaller step. It was a good reminder both of how needed it was as well as about the importance of taking what you can.

I was talking about this with a group of CEOs on Monday when I was back. We had a good conversation not just about the importance of their each getting a break, but also about how to encourage people throughout their organizations to recharge. As part of this discussion we also talked about summer planning and how they’re approaching the summer schedule in general and encouraging employees to get some vacation time in, even if the lock-downs prevent them from venturing far from home. I was encouraged that a number had already communicated to their teams a handful of different workflows for the summer. Some were experimenting with Fridays off for a month or 6 weeks. Others were instituting half day Fridays for the full summer. Most were talking about digital free weekend days (in some cases full weekends) where Slack and email were strongly discouraged across the company (meaning that everyone was offline at the same time and where this was a shared expectation across the entire org – days to unplug, which used to be what we used weekends for without having to give/get permission).

These pauses are so important for both mental and physical health. Even if we can’t take traditional vacations with travel right now, there are opportunities to get outside and hike, go camping (even if it’s in your backyard) to break the routine and monotony of the past couple of months. I’d encourage you to think about it for yourself and for your team or organization.