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WHITE PAPER

                                                TAKEAWAYS
          Attracting
          Talent to                             •Startup -vs- Corporate
                                                Culture
           Startups
                                                •Incentives, Compensation
                                                & Equity
           By Patrick Seaman
               February 2013                    •Retention




All Rights Reserved            Revised: February 2013                 Page 1
Topics in this White Paper
✚      Introduction                            3            ✚      Who works for a Startup?              27
✚      Insanity & Genius                       4            ✚      Early Employees                       28
✚      Founders & a Whiteboard                 5            ✚      Poaching?                             29
✚      Wearing Many Hats                       7            ✚      Location & Recruiting                 31
✚      First Hires                             9            ✚      Flex                                  32
✚      Prototype                               10           ✚      Compensation                          33
✚      Beta                                    11           ✚      Options Value                         34
✚      Pre-Launch                              12           ✚      Compensation Plans                    35
✚      Launch / A-Round                        13           ✚      Retention                             36
✚      State of the Team                       14           ✚      The Simple Things                     39
✚      Growing and Growing                     15           ✚      Family                                41
✚      Startups are Nimble                     16           ✚      Perks & Bennies                       44
✚      Startups –vs- Corporate Culture         17           ✚      Change of Control                     47
✚      Networking                              19           ✚      Flush with Cash                       50
✚      Referral Incentives                     21           ✚      Or not                                51
✚      Events                                  22           ✚      About the Author                      52
✚      Interns & College/Universities          24           ✚      About Pepperwood Partners             53
✚      Compelling?                             26

 Note: This paper is based on my personal observations and experiences. It is not intended as a blueprint or
  roadmap or endorsement of any particular strategy, nor does it reflect the views of Pepperwood Partners.

All Rights Reserved                              Revised: February 2013                                 Page 2
Introduction
This white paper discusses some of
the unique problems that face
startups, the “phases of life” that they
go through, and how these affect the
recruitment of both core team
members and talent in general.

We’ll discuss startup
✚Culture
✚Recruitment
✚Incentives
                                                  2929 Elm Street, Dallas, TX
✚Compensation                                     – original home of AudioNet / Broadcast.com
✚Equity                                             (after Mark Cuban’s spare bedroom)

✚Talent retention
✚Etc.

   All Rights Reserved                Revised: February 2013                           Page 3
Insanity & Genius
                      You have to be somewhat crazy to launch a startup….


 “The distance between
  insanity and genius is
measured only by success”
                             -- Ian Fleming
           Tomorrow Never Dies – said by Elliot Carver (Jonathan Pryce)


All Rights Reserved                         Revised: February 2013          Page 4
Founders & a Whiteboard
There are several typical stages
in a startup:

Founders & a whiteboard

In the beginning, someone has a
crazy idea. This crazy person
somehow talks another crazy
person into working with them on
the idea – giving up a big chunk of
their otherwise normal lives.


                                                       Courtesy, Rick Jackson




All Rights Reserved           Revised: February 2013               Page 5
Founders & a Whiteboard

The part about being crazy is not
an exaggeration. Founders –
and the people who follow them
into the fray, must be somewhat
crazy to do what they do. They
are risk takers.

Unhappy with the status quo,
they have a pioneer spirit.                           Who needs Vegas? I run a startup!
There’s a “Problem” they want to
solve. They’re unwilling to take
the safe and ordinary path, or,
the ordinary corporate career.

All Rights Reserved          Revised: February 2013                                 Page 6
Wearing Many Hats

                      Marketing                            Engineering
        Sales                                                            Accounting



    Support                                                              Operations

                                  Founder
        PR                                                                 Quality
                                                                           Control


          Legal                                                          Cook, Bottle
                                                                         Washer, Janitor
                                                           Customer
                      Creative                              Service


All Rights Reserved               Revised: February 2013                     Page 7
Wearing Many Hats

The founder(s) and the early team must wear many hats. A startup isn’t
a corporation where a task can be sent off to another department. The
buck, and everything else, start and stop here.

I know of one startup that had a commercial product, and active sale.
They just couldn’t seem to make ends meet. The “CFO” who had been
hired from a corporate background up and quit one day.

The founder looked in the vacated desk and discovered all the checks
the departed financial wizard had not deposited – this had always been
done by another department when he had worked at a big company….
                                                            And
                                                           Starts!



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First Hires

First hires: By now, the founder(s) have
raised some limited friends and family
money and/or Angel Investor money and
hired some talent to do the heavy lifting.
Sometimes this is a contractor(s), but
usually it is another startup junkie – willing to
work for minimal pay plus equity.                           While Steve Jobs may have needed
                                                            to suit-up to get funding, don’t
                                                            expect suits and ties from early
                                                            hires at your startup!

Leap of faith: The risk-takers, wanting to get in on the ground-floor, and
willing to take the low pay and (usually) no health insurance or other
benefits, often view themselves as rebels. They don’t want a “traditional”
corporate lifestyle, and may leave if the company starts to become too
large. They like the relative independence and less structured
environment.

All Rights Reserved                Revised: February 2013                             Page 9
Prototype


Prototype. The prototype is built,
and the founder(s) use it to
convince more angel investors to
take a risk.

They go on to convince more                             Top
startup-junkies to join the merry
band.                                                  secret


All Rights Reserved           Revised: February 2013            Page 10
Beta

Beta. The founder(s) convince
otherwise sane people at regular
businesses (corporate types) to
invest their time, and hence money,
in trying the beta product.

Beta users aren’t quite adventurous
enough to leave and start their own
companies – but vicariously
experience a hint of it, just by being                  By the time the beta comes out, the
beta users/testers.                                     startup is beginning to develop its
                                                        own “culture”




All Rights Reserved            Revised: February 2013                                 Page 11
Pre-Launch


Pre-Launch. The founder(s)
have now convinced enough
Angel investor(s) or small private
equity investors to contribute
sufficient funds to keep the
dream alive.

Terms like “pre-money valuation”
and “burn rate” are often                              The merry band is still tiny, but has
                                                       attracted multi-talented and colorful
overheard from the founders-                           team members.
circle, answering to investors.                           A few of the early AudioNet /
                                                              Broadcast.com gang
                                                             (courtesy D Magazine)


All Rights Reserved           Revised: February 2013                                      Page 12
Launch / A-Round

Launch / A-Round. The
product has proven itself
enough to attract more
substantial investment. The
founder(s) are challenged by
advisors and investors – how
will the company manage                                   The growing
                                                           AudioNet /
growth and meet its goals                                Broadcast.com
                                                             gang
and projections?                                           (courtesy
                                                        Stan Woodward)


The harried founders pressure employees to provide KPI’s and
reports of all kinds.

 All Rights Reserved           Revised: February 2013          Page 13
State of the Team

Throughout these                          ✚ Each must wear many hats
(oversimplified) stages, the
                                          ✚ Many report directly to the
company might have grown,
                                                 CEO/founder(s)
for example, to a dozen or
more people. These are often              ✚ Each has much more
people uniquely qualified for                    responsibility than in normal
this early stage.                                corporate environment

What does the profile of                  ✚ Often, these team members are
these early team members                         strong generalists – good at
look like?                                       multitasking & firefighting -- able
                                                 to do many things


All Rights Reserved             Revised: February 2013                     Page 14
Growing and Growing




                                           AudioNet / Broadcast.com just kept growing
                                                  (courtesy Stan Woodward)




All Rights Reserved   Revised: February 2013                                    Page 15
Startups are Nimble
A word about culture: There is a                During the rocket-like growth of
reason why big companies buy                    Broadcast.com, we often “looked
startups. Startups are able to                  over our shoulder” expecting
innovate and explore new ideas                  Microsoft to step on us. Instead,
and markets in a way that big                   MS partnered with us and
companies cannot.                               leveraged our network to prove-out
                                                their own media player technology.
Perhaps a sports metaphor would
help. Think of startups as a farm
team system. Successful startups                                    Broadcast.com
create attractive, fresh, young,                                      ultimately
attractive products. That’s why so                                   merged with
many are bought out by larger                                       Yahoo! for over
organizations.                                                           $5b.



 All Rights Reserved                 Revised: February 2013                  Page 16
Startup -vs- Corporate Culture
So, if big companies can’t do
what startups do, why do so
many startups try to recruit
through mainstream recruiting
channels dominated by corporate
(ie: big companies)? I’ve seen
this over and over. A startup
recruits a corporate... Err...
person, and finds out weeks or
months later that he/she doesn’t                       Wikimedia commons
have a clue about how to work in
a small organization. There are
no “departments” to hand a
problem off to.

 All Rights Reserved          Revised: February 2013          Page 17
Startup -vs- Corporate Culture

Don’t get me wrong. Big
companies are the way they are
for many reasons. They need a
certain amount of inertia. They
can’t afford to run off in multiple                         STAY
directions, losing focus.
                                                             THE
They have a business plan and
their investors require them to                            COURSE
execute on it.



 All Rights Reserved              Revised: February 2013        Page 18
Networking

Startup founders need to be                   Many startups are largely
very active networkers. They                  beneath the radar. Clearly,
need to regularly attend                      recruiting from them can be
relevant “events” as well as                  hard if you don’t know they are
local user group meetings,                    there!
professional and technical
groups/meetings/forums, and
all the other “startups-
anonymous” groups out there.
Founders need to be plugged-
in to their community.
                                                        Startup Networking Groups



 All Rights Reserved           Revised: February 2013                               Page 19
Networking

                                                 ✚         http://www.conotes.com
Of course, it goes without
saying that founders should be                   ✚         http://www.startupers.com
aggressive in quality
                                                 ✚         http
networking on Linkedin, and                                ://www.ventureloop.com/ventureloop/
take advantage of relevant                                 home.php
interest groups.
                                                 ✚         http://www.crunchboard.com/jobs/

Here are some example job                        ✚         http://jobs.mashable.com/a/all-jobs/
boards that target startups (in                            list

no particular order):                            ✚         http://www.startupzone.com/

                                                 ✚         – just google “startup job board”


 All Rights Reserved              Revised: February 2013                                 Page 20
Referral Incentives

Startups often offer referral
incentives, such as cash for
referring / recruiting new team
members. If your startup has a
following, offering swag may also
work. Signing bonuses or top
recruits may include cash or
equity, or both.
                                                     Some incentives include cash or even stock
Each situation is different, but all                   options, warrants, or straight-out stock
                                                                      grants.
require an upbeat and creative
approach. Have fun with it!                          We gamble that the stock in a startup will
                                                    someday be valuable, though many times it
                                                   ends up being worth less than wallpaper or …
                                                              other paper products.
  All Rights Reserved                  Revised: February 2013                           Page 21
Events

Sponsoring special events
provide a nice opportunity to
reach out to your collective
network. This can range from
setting up a “mixer” at a local
hot spot and inviting lots of
people to informally hear about
what you’re up-to, to,
specialized events like
hackathons.                                Willie Nelson event & Broadcast.com. Courtesy Laura Boyd DeSmith




 All Rights Reserved              Revised: February 2013                                       Page 22
Events

Events like these are an
opportunity to invite people to
get to know you and for old
colleagues to find out what’s                                STARTUP
new. It is also an opportunity to
share your growing company
culture and attitude.

In many ways, your company is                                    Courtesy American Idol

the one that is “auditioning.”



 All Rights Reserved                Revised: February 2013                 Page 23
Interns & College/Universities

College career centers and job boards
can be a great place to recruit interns and
entry level team members – young, fresh
and untainted by Dilbert®-esque corporate
culture.

As you grow, your best interns may stay-
on, or return later as some of your very
best talent.

Build a relationship with local universities
and they’ll begin to trust to send you the
best and brightest.

  All Rights Reserved                Revised: February 2013   Page 24
Interns & College/Universities

My friend Bettina Bennett, of
WhichBox Media, has a summer         Einstein Intern Program:
“Einstein Intern” program with the   ✚    How can I help you? Attitude
following requirements:              ✚    Mac savvy and a wizard with Word, Excel, PPT
                                     ✚    Loves widgets, gadgets, iPhone, iPod, iPad, etc.
                                     ✚    Excited about all things digital media
                                     ✚    Loves research and discovery
                                     ✚    Has good communication skills
                                     ✚    Is detail oriented and organized
                                     ✚    Is a self-motivated and independent thinker
                                     ✚    Strives to go beyond what's expected
                                     ✚    Excels at multi-tasking in fast, fluid environment
                                     ✚    Strong artistic/graphic design/creative skills
                                     ✚    Good line and copying skills
                                     ✚    Superior oral and written communication
                                     ✚    Superb online research skills



    All Rights Reserved              Revised: February 2013                           Page 25
Compelling?

Why is working at your startup a compelling thing?

✚Are you on the bleeding edge of your field?
✚Use the latest technology that will help a candidate in his/her next job?
✚Is the “coolness” factor so high that people just “want in?”

Sticking a foosball table in the corner does not cool make. Startups do not
exude job security. People are attracted to startups not because it’s a
career, but because they want to be part of something non-mainstream.

You’ve built a Value Proposition for the product you make – you also need a
value proposition to attract the top talent. You are competing against other
startups and organizations for the talent you want.


  All Rights Reserved               Revised: February 2013               Page 26
Who works for a Startup?

CBInsights reviewed VC
Funded startups back in
2010 and found that
typical founder was a 35-
44 year-old white male
who served as a CEO in
a previous company.

This falls inline with the
following chart of average
startup team member
ages, although these
numbers are for VC
funded startups, not
indies.

 All Rights Reserved         Revised: February 2013   Page 27
Early employees

Your early startup employees (the good
ones) are specialists at working in fast-
moving, unstructured, chaotic
environments. They are geniuses at the
math of Startupville.

Cultivate these people and treat them well.
Many won’t want to stay on after your
company gets big enough for an “HR
Department.”

You’re going to be looking these same
people up for your next startup. Treat them
with respect!


  All Rights Reserved               Revised: February 2013   Page 28
Poaching?

Where do you find talent?
 From your competition,
of course. Business
Insider did a study on
LinkedIn, backtracking
Apple employees’
previous employers to
find out where Apple
recruits from.

Looks like Apple loves
HP, IBM and Microsoft!



                            http://www.businessinsider.com/where-apple-hires-from-2012-4?op=1

All Rights Reserved                  Revised: February 2013                                     Page 29
Poaching?

As a startup, you probably don’t
have the deep pockets to pay big
salaries and steal talent from the
likes of IBM or Microsoft.

That’s good. You don’t want
corporate-types. You need
people who understand what it
means to work a startup – and
who are willing to take that risk
with you.

So, instead of stealing from the big boys, you need to really know your local
startup community. There are always struggling startups, low on cash. Put
on a straight face and circle the wounded beast like the predator you are at
heart. Just be careful to take only the best cuts.

All Rights Reserved                  Revised: February 2013            Page 30
Location & Recruiting
Startups often end up at a
location that is convenient for
the founder(s). Before setting
the anchor, look at where you
are located with respect to the
talent pool you are recruiting
from.

For example, if you are a tech
startup, where are the
companies you want to recruit
from located?                                                  Map, copyright MapQuest




This is a very strategic decision. Locate companies that have the kind of
people you need (competitors, or not) on a map and draw a circle around the
highest concentration. You need to try and be inside that circle.

All Rights Reserved               Revised: February 2013                 Page 31
Flex

Are you providing flexible working
arrangements? While you obviously
need to watch out for people who abuse
the privilege, keep in mind that you’re
often asking people to work below
market rates, for long hours in the
hopes that there will be a long term
liquidity event. That is, if everyone
survives that long. As long as the work
gets done in a timely way, it can pay-off.
Trust, but verify!

The flip side is that there is really no substitute for having your team
together in the same space, sharing the vibe, the energy and working
as, well, as a team. I prefer to have my team physically together!

  All Rights Reserved               Revised: February 2013          Page 32
Compensation

Technical fields are especially price-
competitive. To fill these roles, you need
to look for people who want to use your
startup to push their personal envelope.
Overachievers, who seek the greater
responsibility and relative freedom in
startups as cure to the anathema of a
corporate cubicle.

Make sure you communicate an
understandable picture of the options
pool, and what the total outstanding
shares look like.



  All Rights Reserved              Revised: February 2013   Page 33
Options value

For example, if you are offering a salary that is, say, xx% below
market, and are offering stock options -- are those options going
to conceivably worth *more* than the difference?

I’m serious. Over the years, I’ve seen founders offer
substantially below market salaries and a pittance for stock
options.

That said, you can’t predict an actual value – and you need to
be careful you don’t try to. OTOH, if you offer 1000 options to
offset low wages, how much will those options have to
eventually be worth to make up the difference? Is that
number…. Crazy? Is it believable? Let the employee do the
math themselves, but the numbers had better seem
“reasonable” and within the risk the employee is willing to take.



  All Rights Reserved                   Revised: February 2013      Page 34
Compensation Plans
                                                ✚ http://theoperationsguy.com/building-
                                                  compensation-package-startup-equity-
There are many, many papers, blogs                compensation
and articles on how to structure your           ✚ http://www.payne.org/index.php/Startup_Equity_F
options pool (just google “startup                or_Employees
compensation package”). The following           ✚ http://www.quora.com/Startups/What-
links talk to structuring compensation            compensation-can-a-CMO-VP-of-Marketing-
packages and equity and benefits. These           expect-for-a-late-stage-startup-that-has-closed-
are sample links to give you a feel for           series-C-and-is-growing-rapidly
                                                ✚ http://www.quora.com/Startup-
some of the questions often asked.
                                                  Compensation/Whats-the-typical-salary-for-an-
Keep in mind that there is a huge                 entry-level-Marketing-PR-Social-Media-position-
difference between a large VC-funded              at-a-San-Francisco-start-up
startup with $30m in the bank and a             ✚ http://blog.salescrunch.com/how-to-compensate-
small private equity backed startup with          at-vp-sales-at-a-tech-startup/
a fraction of that amount available to          ✚ http://www.zanebenefits.com/blog/bid/121633/The
work with:                                        -5-Minute-Guide-to-Affordable-Startup-Health-
                                                  Insurance

  All Rights Reserved                Revised: February 2013                           Page 35
Retention

Whether the economy is up or down,
keeping your team members from jumping
ship when the wind blows is challenging.
Retaining team members with high demand
skills is hard enough. If you happen to be
located in an area experiencing growth, it
gets harder-still.

It is a catch-22. The best people are usually
found where the action is, and where the
action is, is often where the location cost
goes up.




  All Rights Reserved               Revised: February 2013   Page 36
Retention

On the other hand, you can take advantage
of local conditions – such as locations with
high tax rates or costs of living (like
California). If you can offer a great
environment with significantly lower costs
but is a great place to be, you can attract
savvy people.
                                                            Facebook is building a
For example, many California-based                          major office in Austin,
companies have been either moving                           and Apple already has
operations to Austin and Dallas — or —                      over 3000 employees
keeping their offices in California, but                    there.
opening new offices in Texas where the bulk
of growth is taking place.



  All Rights Reserved              Revised: February 2013                       Page 37
Retention

Example: It is no secret that it is
more expensive to do business in
California — and the tax situation
reminds me of an old-world hunt,
where beaters walk through the
bush, driving the tigers out into the
open. In the case of California
taxes, driving business out of the
state.

Don’t forget, the tiger bites back.                              Gutenberg Project




  All Rights Reserved                   Revised: February 2013         Page 38
The simple things
Sometimes, it is the simple things that help. If you’re good on everything else,
*knowing* your people counts:

Attention to detail: Knowing when birthdays, anniversaries, etc. are and just
sending a hand-written card is, sadly, rare these days. Bump it up with flowers
or the equivalent – appropriate to the individual.
Extra time off after really pitching in with long days & nights on a project.
Extra vacation days. Pros: This is a popular method that does not require
direct cash, and it can be just the ticket for overworked, overstressed and
burnout-avoidance. Cons: Care needs to be taken when using it. Jealousies
can erupt if not perceived as being applied fairly. Also, extra vacation days can
turn around and bite productivity and even delay product launches at critical
points in your roadmap.



  All Rights Reserved               Revised: February 2013                 Page 39
The simple things

 Impromptu. Pros: Extra time off doesn’t just mean vacation time.
  Impromptu company celebrations– “Hey everyone, take tomorrow off!”, or,
  “Wow, great news on closing that big sale, take the rest of the day off!”
  can be great ways to relieve stress in improve general morale. Cons: If
  you do it too often, it can become expected.
 An employee may want to attend a trade or industry conference or event.
  Subsidize the trip with time-off or even paying for some portion of the trip.
 Keep up with money issues, such as pay freezes or other actions that
  may have been necessary earlier, but should be regularly revisited. Be
  open with fiscal realities – don’t keep your team members wondering.
  Transparency can be your best defense against the rumor mill.
 Movie day. Is there a big movie coming out that one or more of your team
  really wants to see? Either buy them tickets or even make an event of it –
  shut down early and all go to the movie – “I’m buying the popcorn.”
  All Rights Reserved               Revised: February 2013                Page 40
Family

 Invite spouse and/or children to lunch or other “company events.” While this
  can sometimes be logistically challenging for working parents and school
  schedules, the payoff can be honest good wishes if you are able to
  “connect” with the spouse and family. Your team member sacrifices a lot to
  work for your startup. Establishing good will and support from the spouse
  and family can go a long, long way to reducing the stress on your team
  member.
 This doesn’t have to be a complicated or expensive event – it can be as
  simple as a company picnic or other family-friendly outing.
 You have a team member who has put in much extra time, long hours, and
  been a total rock star. Send flowers or equivalent gifts to the spouse and/or
  family!


 All Rights Reserved               Revised: February 2013              Page 41
Family

 Simple, simple, simple: Find out when the spouse’s birthday, anniversary,
  children’s birthdays are – send a card or cake! Bump it up by enclosing a
  gasoline gift card or just a Visa/MC gift card.
 Date night. Pay for dinner & a movie (you get the idea) to help your team
  member(s) stay happy on the home front. I recall during the early days of
  broadcast.com, we had encoder/servers sitting at Mark Cuban’s house in
  Dallas. Mark was off to talk to investors in New York, so he paid for my
  wife and I to have a nice dinner and spend the night at his house while I
  tended to the hardware. It was a nice gesture, which my wife never forgot.
 Find a great vacation deal (for cheap) and award tickets for a long
  weekend vacation, or, similarly, concert tickets.



 All Rights Reserved              Revised: February 2013                Page 42
Family

 Junior Interns. Inviting teenage family members to be a summer intern
  can be a great way for parent and child to have a special bonding
  opportunity – expanding on the ‘take your child to work’ idea, and turning it
  into a real learning experience for them. Of course, some pre-screening is
  important – you need to be confident that the teenager is really interested
  in doing it, and, that they’ll actually be serious about it. Take it slow and
  non-committal to make sure it is really going to work out. If it does, then
  everyone wins and you can have fun giving them special recognition.
 Gifts for the kids – a gift-card to Game-Stop is the kind of thing kids prize
  these days.




  All Rights Reserved               Revised: February 2013                Page 43
Perks & Bennies
 Enhance their “space” – upgrade their chair or desk or some other
  improvement to their workspace. Similarly, upgrading their computer,
  monitor or tablet device or phone, is something they’ll use every day.
 Pay an auto detailing service to clean and detail the team member’s car,
  while it is sitting in the parking lot (maybe even pitch-in, too!).
 On their birthday or work anniversary, have cake and personally narrate a
  brief PowerPoint/slide-show that lists and celebrates their
  accomplishments and longevity with your organization.
 Have a trophy or plaque made that honors the team member and their
  accomplishments.
 EASY / SIMPLE: Write a nice recommendation for them on their LinkedIn
  profile.


All Rights Reserved               Revised: February 2013              Page 44
Perks & Bennies

 Year Book: Many on-demand book printing services exist now that make
  it easy to have one or a small number of hardcover or perfect bound
  books printed. Create a company “Year Book” that celebrates your
  people, your company, and the milestones, accomplishments and
  individual contributions. Give them out for a company annual
  anniversary, Christmas, or other occasion. Combine it with a company
  signing party. Make sure the founder(s) personally sign and write an
  individual message of appreciation in each book.
 Meals. Bring in or cater occasional breakfasts and/or lunches, and make
  them relaxed affairs / mixers.




 All Rights Reserved              Revised: February 2013             Page 45
Perks & Bennies

 Alternate job titles. Consider “secret identity” or, simply, fun alternate job
  titles. They keep their official title, but you help them choose a more
  fanciful title. For example, at WhichBox Media, Bettina Bennett is CEO,
  and also “Chief Maverick.” Other examples might be “Legal Eagle” or
  “Head Intern” or “Codaholic” or “Java Junkie” – you get the idea.
 Telecommuting may or may not work for your organization. In my own
  experience, I’m not a big fan of it for startups – you really need the in-
  person dynamic. Regardless, I do encourage organizations to be flexible,
  especially under special circumstances. For example, if the weather is
  bad, or the roads are icy (usually a day or two out of the year, here in
  Dallas, at most), I encourage people to work from home.




  All Rights Reserved                Revised: February 2013                 Page 46
Change of Control /
M&A (Merger & Acquisition)

Much has been written about the structure of
options plans and vesting. Is the deal fully vested
at issuance, or over time? What are the vesting
triggers?

One of the tricky areas has often involved what
happens on a material change of control in the
organization, including a merger or acquisition.
Some plans have vesting triggers tied to such a
change of control.

Whether the company is expecting a 4-5 year play,
or is on an accelerated trajectory, will impact what
kind of plan really makes the best sense for the
unique requirements of the organization.

  All Rights Reserved               Revised: February 2013   Page 47
Change of Control /
M&A (Merger & Acquisition)

In other cases, there are Change of
Control bonus plans, granting a
contractually agreed upon amount of cash
to be paid to the employee in the event
such a change happens. More
complicated plans may use a formula for
a bonus payout based on the size of the
deal.

Often, these documents are dumped on
the team member with little or no
explanation. “You get x options that vest
on a y formula at a strike prize of z… “
Followed by 50 pages of legalese.


  All Rights Reserved              Revised: February 2013   Page 48
Change of Control /
M&A (Merger & Acquisition)

Transparency is critical here. Those team members who’ve been around
the block may have been stung by other deals in the past. It needs to be
crystal clear to team members what the stakes are – how the deal is set up,
and how it will work in different scenarios and liquidity events. If certain
questions are asked over and over – maybe you need to have your
agreement “improved” to be more understandable.

Beyond these issues, it is normal for most startups to rely heavily on an
options pool (or equivalent) to provide for some degree of deferred
compensation and upside liquidity. Care should be taken here. Regardless
of NDAs, employees will often compare notes. Gross allocation disparities
will often come to light, and it’s usually not good when they do.




 All Rights Reserved               Revised: February 2013              Page 49
Flush with Cash?

Even some of today’s high flying
organizations, flush with cash, find it
difficult to attract and retain top echelon
talent.

For them, it is gourmet cafeterias, free
massages, laundry service, shuttles,
hair cuts, upscale cubicle/work-spaces,
couches, pubs and bars, park-like
campus settings, full-service gyms,
arcades (yes, even foosball), bring-your-
dog-to-work policies, and on and on.


 All Rights Reserved              Revised: February 2013   Page 50
… or Not

Chances are, your startup doesn’t (and shouldn’t)
spend this kind of money. That’s not what your
investors had in mind. Oh, and don’t go and buy a
new car or boat!

You can creatively build a fun and fiscally
responsible environment. The kind of people who
are attracted to companies at this stage of
development will usually appreciate that you’re not
blowing money on frivolities, and instead are
focused on your company and product.

Take pride in what you are able to do, and
listen to your team!


  All Rights Reserved              Revised: February 2013   Page 51
About the Author
                         Patrick Seaman currently mentors and advises technology startups
                         and turnarounds at Pepperwood. Most recently Patrick served as the
                         Chief Operating Officer for Cinsay Inc., and as COO and CTO of the
                         Software as a Service company, WhichBox Media. Author of the first
                         major book on online media, Website Sound, Patrick was the first
                         employee of Broadcast.com (then owned by Mark Cuban) and served
                         as Director of Technology, VP of International Development, and on
                         the Board of Directors of Broadcast.com Japan. Broadcast.com sold
                         to Yahoo! for more than $5 billion.
Patrick Seaman

                         Patrick currently serves on the Advisory Board of Kraftwurx (3D
                         Printing), Qples (Digital Coupons) and the University of Texas at
                         Dallas School of Natural Sciences & Mathematics Advisory Council.

                         Contact Patrick at patrick@pepperwoodpartners.com,
                         patrick@patrickseaman.com and
                         www.linkedin.com/in/patrickseaman/.


   All Rights Reserved                     Revised: February 2013                      Page 52
About Pepperwood Partners

Pepperwood Partners is a boutique
investment banking advisory firm
headquartered in Dallas, Texas.
Pepperwood provides a suite of
investment banking advisory services to                     Two Lincoln Centre
businesses in the technology, media,                        5420 LBJ Freeway, Suite 535
telecom, nanotechnology, energy and                         Dallas, Texas 75240 USA
                                                            +1 214.442.6056
alternative asset sectors. With a strong                    info@pepperwoodpartners.com
focus on institutional relationships in the
Russian, European, and CIS regions,                         Learn more at:
                                                            www.PepperwoodPartners.com
Pepperwood works with businesses to
achieve capitalization and growth
objectives.


All Rights Reserved                Revised: February 2013                           Page 53
Startups: Attracting and Retaining Talent (updated 3/6/13)

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Startups: Attracting and Retaining Talent (updated 3/6/13)

  • 1. WHITE PAPER TAKEAWAYS Attracting Talent to •Startup -vs- Corporate Culture Startups •Incentives, Compensation & Equity By Patrick Seaman February 2013 •Retention All Rights Reserved Revised: February 2013 Page 1
  • 2. Topics in this White Paper ✚ Introduction 3 ✚ Who works for a Startup? 27 ✚ Insanity & Genius 4 ✚ Early Employees 28 ✚ Founders & a Whiteboard 5 ✚ Poaching? 29 ✚ Wearing Many Hats 7 ✚ Location & Recruiting 31 ✚ First Hires 9 ✚ Flex 32 ✚ Prototype 10 ✚ Compensation 33 ✚ Beta 11 ✚ Options Value 34 ✚ Pre-Launch 12 ✚ Compensation Plans 35 ✚ Launch / A-Round 13 ✚ Retention 36 ✚ State of the Team 14 ✚ The Simple Things 39 ✚ Growing and Growing 15 ✚ Family 41 ✚ Startups are Nimble 16 ✚ Perks & Bennies 44 ✚ Startups –vs- Corporate Culture 17 ✚ Change of Control 47 ✚ Networking 19 ✚ Flush with Cash 50 ✚ Referral Incentives 21 ✚ Or not 51 ✚ Events 22 ✚ About the Author 52 ✚ Interns & College/Universities 24 ✚ About Pepperwood Partners 53 ✚ Compelling? 26 Note: This paper is based on my personal observations and experiences. It is not intended as a blueprint or roadmap or endorsement of any particular strategy, nor does it reflect the views of Pepperwood Partners. All Rights Reserved Revised: February 2013 Page 2
  • 3. Introduction This white paper discusses some of the unique problems that face startups, the “phases of life” that they go through, and how these affect the recruitment of both core team members and talent in general. We’ll discuss startup ✚Culture ✚Recruitment ✚Incentives 2929 Elm Street, Dallas, TX ✚Compensation – original home of AudioNet / Broadcast.com ✚Equity (after Mark Cuban’s spare bedroom) ✚Talent retention ✚Etc. All Rights Reserved Revised: February 2013 Page 3
  • 4. Insanity & Genius You have to be somewhat crazy to launch a startup…. “The distance between insanity and genius is measured only by success” -- Ian Fleming Tomorrow Never Dies – said by Elliot Carver (Jonathan Pryce) All Rights Reserved Revised: February 2013 Page 4
  • 5. Founders & a Whiteboard There are several typical stages in a startup: Founders & a whiteboard In the beginning, someone has a crazy idea. This crazy person somehow talks another crazy person into working with them on the idea – giving up a big chunk of their otherwise normal lives. Courtesy, Rick Jackson All Rights Reserved Revised: February 2013 Page 5
  • 6. Founders & a Whiteboard The part about being crazy is not an exaggeration. Founders – and the people who follow them into the fray, must be somewhat crazy to do what they do. They are risk takers. Unhappy with the status quo, they have a pioneer spirit. Who needs Vegas? I run a startup! There’s a “Problem” they want to solve. They’re unwilling to take the safe and ordinary path, or, the ordinary corporate career. All Rights Reserved Revised: February 2013 Page 6
  • 7. Wearing Many Hats Marketing Engineering Sales Accounting Support Operations Founder PR Quality Control Legal Cook, Bottle Washer, Janitor Customer Creative Service All Rights Reserved Revised: February 2013 Page 7
  • 8. Wearing Many Hats The founder(s) and the early team must wear many hats. A startup isn’t a corporation where a task can be sent off to another department. The buck, and everything else, start and stop here. I know of one startup that had a commercial product, and active sale. They just couldn’t seem to make ends meet. The “CFO” who had been hired from a corporate background up and quit one day. The founder looked in the vacated desk and discovered all the checks the departed financial wizard had not deposited – this had always been done by another department when he had worked at a big company…. And Starts! All Rights Reserved Revised: February 2013 Page 8
  • 9. First Hires First hires: By now, the founder(s) have raised some limited friends and family money and/or Angel Investor money and hired some talent to do the heavy lifting. Sometimes this is a contractor(s), but usually it is another startup junkie – willing to work for minimal pay plus equity. While Steve Jobs may have needed to suit-up to get funding, don’t expect suits and ties from early hires at your startup! Leap of faith: The risk-takers, wanting to get in on the ground-floor, and willing to take the low pay and (usually) no health insurance or other benefits, often view themselves as rebels. They don’t want a “traditional” corporate lifestyle, and may leave if the company starts to become too large. They like the relative independence and less structured environment. All Rights Reserved Revised: February 2013 Page 9
  • 10. Prototype Prototype. The prototype is built, and the founder(s) use it to convince more angel investors to take a risk. They go on to convince more Top startup-junkies to join the merry band. secret All Rights Reserved Revised: February 2013 Page 10
  • 11. Beta Beta. The founder(s) convince otherwise sane people at regular businesses (corporate types) to invest their time, and hence money, in trying the beta product. Beta users aren’t quite adventurous enough to leave and start their own companies – but vicariously experience a hint of it, just by being By the time the beta comes out, the beta users/testers. startup is beginning to develop its own “culture” All Rights Reserved Revised: February 2013 Page 11
  • 12. Pre-Launch Pre-Launch. The founder(s) have now convinced enough Angel investor(s) or small private equity investors to contribute sufficient funds to keep the dream alive. Terms like “pre-money valuation” and “burn rate” are often The merry band is still tiny, but has attracted multi-talented and colorful overheard from the founders- team members. circle, answering to investors. A few of the early AudioNet / Broadcast.com gang (courtesy D Magazine) All Rights Reserved Revised: February 2013 Page 12
  • 13. Launch / A-Round Launch / A-Round. The product has proven itself enough to attract more substantial investment. The founder(s) are challenged by advisors and investors – how will the company manage The growing AudioNet / growth and meet its goals Broadcast.com gang and projections? (courtesy Stan Woodward) The harried founders pressure employees to provide KPI’s and reports of all kinds. All Rights Reserved Revised: February 2013 Page 13
  • 14. State of the Team Throughout these ✚ Each must wear many hats (oversimplified) stages, the ✚ Many report directly to the company might have grown, CEO/founder(s) for example, to a dozen or more people. These are often ✚ Each has much more people uniquely qualified for responsibility than in normal this early stage. corporate environment What does the profile of ✚ Often, these team members are these early team members strong generalists – good at look like? multitasking & firefighting -- able to do many things All Rights Reserved Revised: February 2013 Page 14
  • 15. Growing and Growing AudioNet / Broadcast.com just kept growing (courtesy Stan Woodward) All Rights Reserved Revised: February 2013 Page 15
  • 16. Startups are Nimble A word about culture: There is a During the rocket-like growth of reason why big companies buy Broadcast.com, we often “looked startups. Startups are able to over our shoulder” expecting innovate and explore new ideas Microsoft to step on us. Instead, and markets in a way that big MS partnered with us and companies cannot. leveraged our network to prove-out their own media player technology. Perhaps a sports metaphor would help. Think of startups as a farm team system. Successful startups Broadcast.com create attractive, fresh, young, ultimately attractive products. That’s why so merged with many are bought out by larger Yahoo! for over organizations. $5b. All Rights Reserved Revised: February 2013 Page 16
  • 17. Startup -vs- Corporate Culture So, if big companies can’t do what startups do, why do so many startups try to recruit through mainstream recruiting channels dominated by corporate (ie: big companies)? I’ve seen this over and over. A startup recruits a corporate... Err... person, and finds out weeks or months later that he/she doesn’t Wikimedia commons have a clue about how to work in a small organization. There are no “departments” to hand a problem off to. All Rights Reserved Revised: February 2013 Page 17
  • 18. Startup -vs- Corporate Culture Don’t get me wrong. Big companies are the way they are for many reasons. They need a certain amount of inertia. They can’t afford to run off in multiple STAY directions, losing focus. THE They have a business plan and their investors require them to COURSE execute on it. All Rights Reserved Revised: February 2013 Page 18
  • 19. Networking Startup founders need to be Many startups are largely very active networkers. They beneath the radar. Clearly, need to regularly attend recruiting from them can be relevant “events” as well as hard if you don’t know they are local user group meetings, there! professional and technical groups/meetings/forums, and all the other “startups- anonymous” groups out there. Founders need to be plugged- in to their community. Startup Networking Groups All Rights Reserved Revised: February 2013 Page 19
  • 20. Networking ✚ http://www.conotes.com Of course, it goes without saying that founders should be ✚ http://www.startupers.com aggressive in quality ✚ http networking on Linkedin, and ://www.ventureloop.com/ventureloop/ take advantage of relevant home.php interest groups. ✚ http://www.crunchboard.com/jobs/ Here are some example job ✚ http://jobs.mashable.com/a/all-jobs/ boards that target startups (in list no particular order): ✚ http://www.startupzone.com/ ✚ – just google “startup job board” All Rights Reserved Revised: February 2013 Page 20
  • 21. Referral Incentives Startups often offer referral incentives, such as cash for referring / recruiting new team members. If your startup has a following, offering swag may also work. Signing bonuses or top recruits may include cash or equity, or both. Some incentives include cash or even stock Each situation is different, but all options, warrants, or straight-out stock grants. require an upbeat and creative approach. Have fun with it! We gamble that the stock in a startup will someday be valuable, though many times it ends up being worth less than wallpaper or … other paper products. All Rights Reserved Revised: February 2013 Page 21
  • 22. Events Sponsoring special events provide a nice opportunity to reach out to your collective network. This can range from setting up a “mixer” at a local hot spot and inviting lots of people to informally hear about what you’re up-to, to, specialized events like hackathons. Willie Nelson event & Broadcast.com. Courtesy Laura Boyd DeSmith All Rights Reserved Revised: February 2013 Page 22
  • 23. Events Events like these are an opportunity to invite people to get to know you and for old colleagues to find out what’s STARTUP new. It is also an opportunity to share your growing company culture and attitude. In many ways, your company is Courtesy American Idol the one that is “auditioning.” All Rights Reserved Revised: February 2013 Page 23
  • 24. Interns & College/Universities College career centers and job boards can be a great place to recruit interns and entry level team members – young, fresh and untainted by Dilbert®-esque corporate culture. As you grow, your best interns may stay- on, or return later as some of your very best talent. Build a relationship with local universities and they’ll begin to trust to send you the best and brightest. All Rights Reserved Revised: February 2013 Page 24
  • 25. Interns & College/Universities My friend Bettina Bennett, of WhichBox Media, has a summer Einstein Intern Program: “Einstein Intern” program with the ✚ How can I help you? Attitude following requirements: ✚ Mac savvy and a wizard with Word, Excel, PPT ✚ Loves widgets, gadgets, iPhone, iPod, iPad, etc. ✚ Excited about all things digital media ✚ Loves research and discovery ✚ Has good communication skills ✚ Is detail oriented and organized ✚ Is a self-motivated and independent thinker ✚ Strives to go beyond what's expected ✚ Excels at multi-tasking in fast, fluid environment ✚ Strong artistic/graphic design/creative skills ✚ Good line and copying skills ✚ Superior oral and written communication ✚ Superb online research skills All Rights Reserved Revised: February 2013 Page 25
  • 26. Compelling? Why is working at your startup a compelling thing? ✚Are you on the bleeding edge of your field? ✚Use the latest technology that will help a candidate in his/her next job? ✚Is the “coolness” factor so high that people just “want in?” Sticking a foosball table in the corner does not cool make. Startups do not exude job security. People are attracted to startups not because it’s a career, but because they want to be part of something non-mainstream. You’ve built a Value Proposition for the product you make – you also need a value proposition to attract the top talent. You are competing against other startups and organizations for the talent you want. All Rights Reserved Revised: February 2013 Page 26
  • 27. Who works for a Startup? CBInsights reviewed VC Funded startups back in 2010 and found that typical founder was a 35- 44 year-old white male who served as a CEO in a previous company. This falls inline with the following chart of average startup team member ages, although these numbers are for VC funded startups, not indies. All Rights Reserved Revised: February 2013 Page 27
  • 28. Early employees Your early startup employees (the good ones) are specialists at working in fast- moving, unstructured, chaotic environments. They are geniuses at the math of Startupville. Cultivate these people and treat them well. Many won’t want to stay on after your company gets big enough for an “HR Department.” You’re going to be looking these same people up for your next startup. Treat them with respect! All Rights Reserved Revised: February 2013 Page 28
  • 29. Poaching? Where do you find talent? From your competition, of course. Business Insider did a study on LinkedIn, backtracking Apple employees’ previous employers to find out where Apple recruits from. Looks like Apple loves HP, IBM and Microsoft! http://www.businessinsider.com/where-apple-hires-from-2012-4?op=1 All Rights Reserved Revised: February 2013 Page 29
  • 30. Poaching? As a startup, you probably don’t have the deep pockets to pay big salaries and steal talent from the likes of IBM or Microsoft. That’s good. You don’t want corporate-types. You need people who understand what it means to work a startup – and who are willing to take that risk with you. So, instead of stealing from the big boys, you need to really know your local startup community. There are always struggling startups, low on cash. Put on a straight face and circle the wounded beast like the predator you are at heart. Just be careful to take only the best cuts. All Rights Reserved Revised: February 2013 Page 30
  • 31. Location & Recruiting Startups often end up at a location that is convenient for the founder(s). Before setting the anchor, look at where you are located with respect to the talent pool you are recruiting from. For example, if you are a tech startup, where are the companies you want to recruit from located? Map, copyright MapQuest This is a very strategic decision. Locate companies that have the kind of people you need (competitors, or not) on a map and draw a circle around the highest concentration. You need to try and be inside that circle. All Rights Reserved Revised: February 2013 Page 31
  • 32. Flex Are you providing flexible working arrangements? While you obviously need to watch out for people who abuse the privilege, keep in mind that you’re often asking people to work below market rates, for long hours in the hopes that there will be a long term liquidity event. That is, if everyone survives that long. As long as the work gets done in a timely way, it can pay-off. Trust, but verify! The flip side is that there is really no substitute for having your team together in the same space, sharing the vibe, the energy and working as, well, as a team. I prefer to have my team physically together! All Rights Reserved Revised: February 2013 Page 32
  • 33. Compensation Technical fields are especially price- competitive. To fill these roles, you need to look for people who want to use your startup to push their personal envelope. Overachievers, who seek the greater responsibility and relative freedom in startups as cure to the anathema of a corporate cubicle. Make sure you communicate an understandable picture of the options pool, and what the total outstanding shares look like. All Rights Reserved Revised: February 2013 Page 33
  • 34. Options value For example, if you are offering a salary that is, say, xx% below market, and are offering stock options -- are those options going to conceivably worth *more* than the difference? I’m serious. Over the years, I’ve seen founders offer substantially below market salaries and a pittance for stock options. That said, you can’t predict an actual value – and you need to be careful you don’t try to. OTOH, if you offer 1000 options to offset low wages, how much will those options have to eventually be worth to make up the difference? Is that number…. Crazy? Is it believable? Let the employee do the math themselves, but the numbers had better seem “reasonable” and within the risk the employee is willing to take. All Rights Reserved Revised: February 2013 Page 34
  • 35. Compensation Plans ✚ http://theoperationsguy.com/building- compensation-package-startup-equity- There are many, many papers, blogs compensation and articles on how to structure your ✚ http://www.payne.org/index.php/Startup_Equity_F options pool (just google “startup or_Employees compensation package”). The following ✚ http://www.quora.com/Startups/What- links talk to structuring compensation compensation-can-a-CMO-VP-of-Marketing- packages and equity and benefits. These expect-for-a-late-stage-startup-that-has-closed- are sample links to give you a feel for series-C-and-is-growing-rapidly ✚ http://www.quora.com/Startup- some of the questions often asked. Compensation/Whats-the-typical-salary-for-an- Keep in mind that there is a huge entry-level-Marketing-PR-Social-Media-position- difference between a large VC-funded at-a-San-Francisco-start-up startup with $30m in the bank and a ✚ http://blog.salescrunch.com/how-to-compensate- small private equity backed startup with at-vp-sales-at-a-tech-startup/ a fraction of that amount available to ✚ http://www.zanebenefits.com/blog/bid/121633/The work with: -5-Minute-Guide-to-Affordable-Startup-Health- Insurance All Rights Reserved Revised: February 2013 Page 35
  • 36. Retention Whether the economy is up or down, keeping your team members from jumping ship when the wind blows is challenging. Retaining team members with high demand skills is hard enough. If you happen to be located in an area experiencing growth, it gets harder-still. It is a catch-22. The best people are usually found where the action is, and where the action is, is often where the location cost goes up. All Rights Reserved Revised: February 2013 Page 36
  • 37. Retention On the other hand, you can take advantage of local conditions – such as locations with high tax rates or costs of living (like California). If you can offer a great environment with significantly lower costs but is a great place to be, you can attract savvy people. Facebook is building a For example, many California-based major office in Austin, companies have been either moving and Apple already has operations to Austin and Dallas — or — over 3000 employees keeping their offices in California, but there. opening new offices in Texas where the bulk of growth is taking place. All Rights Reserved Revised: February 2013 Page 37
  • 38. Retention Example: It is no secret that it is more expensive to do business in California — and the tax situation reminds me of an old-world hunt, where beaters walk through the bush, driving the tigers out into the open. In the case of California taxes, driving business out of the state. Don’t forget, the tiger bites back. Gutenberg Project All Rights Reserved Revised: February 2013 Page 38
  • 39. The simple things Sometimes, it is the simple things that help. If you’re good on everything else, *knowing* your people counts: Attention to detail: Knowing when birthdays, anniversaries, etc. are and just sending a hand-written card is, sadly, rare these days. Bump it up with flowers or the equivalent – appropriate to the individual. Extra time off after really pitching in with long days & nights on a project. Extra vacation days. Pros: This is a popular method that does not require direct cash, and it can be just the ticket for overworked, overstressed and burnout-avoidance. Cons: Care needs to be taken when using it. Jealousies can erupt if not perceived as being applied fairly. Also, extra vacation days can turn around and bite productivity and even delay product launches at critical points in your roadmap. All Rights Reserved Revised: February 2013 Page 39
  • 40. The simple things  Impromptu. Pros: Extra time off doesn’t just mean vacation time. Impromptu company celebrations– “Hey everyone, take tomorrow off!”, or, “Wow, great news on closing that big sale, take the rest of the day off!” can be great ways to relieve stress in improve general morale. Cons: If you do it too often, it can become expected.  An employee may want to attend a trade or industry conference or event. Subsidize the trip with time-off or even paying for some portion of the trip.  Keep up with money issues, such as pay freezes or other actions that may have been necessary earlier, but should be regularly revisited. Be open with fiscal realities – don’t keep your team members wondering. Transparency can be your best defense against the rumor mill.  Movie day. Is there a big movie coming out that one or more of your team really wants to see? Either buy them tickets or even make an event of it – shut down early and all go to the movie – “I’m buying the popcorn.” All Rights Reserved Revised: February 2013 Page 40
  • 41. Family  Invite spouse and/or children to lunch or other “company events.” While this can sometimes be logistically challenging for working parents and school schedules, the payoff can be honest good wishes if you are able to “connect” with the spouse and family. Your team member sacrifices a lot to work for your startup. Establishing good will and support from the spouse and family can go a long, long way to reducing the stress on your team member.  This doesn’t have to be a complicated or expensive event – it can be as simple as a company picnic or other family-friendly outing.  You have a team member who has put in much extra time, long hours, and been a total rock star. Send flowers or equivalent gifts to the spouse and/or family! All Rights Reserved Revised: February 2013 Page 41
  • 42. Family  Simple, simple, simple: Find out when the spouse’s birthday, anniversary, children’s birthdays are – send a card or cake! Bump it up by enclosing a gasoline gift card or just a Visa/MC gift card.  Date night. Pay for dinner & a movie (you get the idea) to help your team member(s) stay happy on the home front. I recall during the early days of broadcast.com, we had encoder/servers sitting at Mark Cuban’s house in Dallas. Mark was off to talk to investors in New York, so he paid for my wife and I to have a nice dinner and spend the night at his house while I tended to the hardware. It was a nice gesture, which my wife never forgot.  Find a great vacation deal (for cheap) and award tickets for a long weekend vacation, or, similarly, concert tickets. All Rights Reserved Revised: February 2013 Page 42
  • 43. Family  Junior Interns. Inviting teenage family members to be a summer intern can be a great way for parent and child to have a special bonding opportunity – expanding on the ‘take your child to work’ idea, and turning it into a real learning experience for them. Of course, some pre-screening is important – you need to be confident that the teenager is really interested in doing it, and, that they’ll actually be serious about it. Take it slow and non-committal to make sure it is really going to work out. If it does, then everyone wins and you can have fun giving them special recognition.  Gifts for the kids – a gift-card to Game-Stop is the kind of thing kids prize these days. All Rights Reserved Revised: February 2013 Page 43
  • 44. Perks & Bennies  Enhance their “space” – upgrade their chair or desk or some other improvement to their workspace. Similarly, upgrading their computer, monitor or tablet device or phone, is something they’ll use every day.  Pay an auto detailing service to clean and detail the team member’s car, while it is sitting in the parking lot (maybe even pitch-in, too!).  On their birthday or work anniversary, have cake and personally narrate a brief PowerPoint/slide-show that lists and celebrates their accomplishments and longevity with your organization.  Have a trophy or plaque made that honors the team member and their accomplishments.  EASY / SIMPLE: Write a nice recommendation for them on their LinkedIn profile. All Rights Reserved Revised: February 2013 Page 44
  • 45. Perks & Bennies  Year Book: Many on-demand book printing services exist now that make it easy to have one or a small number of hardcover or perfect bound books printed. Create a company “Year Book” that celebrates your people, your company, and the milestones, accomplishments and individual contributions. Give them out for a company annual anniversary, Christmas, or other occasion. Combine it with a company signing party. Make sure the founder(s) personally sign and write an individual message of appreciation in each book.  Meals. Bring in or cater occasional breakfasts and/or lunches, and make them relaxed affairs / mixers. All Rights Reserved Revised: February 2013 Page 45
  • 46. Perks & Bennies  Alternate job titles. Consider “secret identity” or, simply, fun alternate job titles. They keep their official title, but you help them choose a more fanciful title. For example, at WhichBox Media, Bettina Bennett is CEO, and also “Chief Maverick.” Other examples might be “Legal Eagle” or “Head Intern” or “Codaholic” or “Java Junkie” – you get the idea.  Telecommuting may or may not work for your organization. In my own experience, I’m not a big fan of it for startups – you really need the in- person dynamic. Regardless, I do encourage organizations to be flexible, especially under special circumstances. For example, if the weather is bad, or the roads are icy (usually a day or two out of the year, here in Dallas, at most), I encourage people to work from home. All Rights Reserved Revised: February 2013 Page 46
  • 47. Change of Control / M&A (Merger & Acquisition) Much has been written about the structure of options plans and vesting. Is the deal fully vested at issuance, or over time? What are the vesting triggers? One of the tricky areas has often involved what happens on a material change of control in the organization, including a merger or acquisition. Some plans have vesting triggers tied to such a change of control. Whether the company is expecting a 4-5 year play, or is on an accelerated trajectory, will impact what kind of plan really makes the best sense for the unique requirements of the organization. All Rights Reserved Revised: February 2013 Page 47
  • 48. Change of Control / M&A (Merger & Acquisition) In other cases, there are Change of Control bonus plans, granting a contractually agreed upon amount of cash to be paid to the employee in the event such a change happens. More complicated plans may use a formula for a bonus payout based on the size of the deal. Often, these documents are dumped on the team member with little or no explanation. “You get x options that vest on a y formula at a strike prize of z… “ Followed by 50 pages of legalese. All Rights Reserved Revised: February 2013 Page 48
  • 49. Change of Control / M&A (Merger & Acquisition) Transparency is critical here. Those team members who’ve been around the block may have been stung by other deals in the past. It needs to be crystal clear to team members what the stakes are – how the deal is set up, and how it will work in different scenarios and liquidity events. If certain questions are asked over and over – maybe you need to have your agreement “improved” to be more understandable. Beyond these issues, it is normal for most startups to rely heavily on an options pool (or equivalent) to provide for some degree of deferred compensation and upside liquidity. Care should be taken here. Regardless of NDAs, employees will often compare notes. Gross allocation disparities will often come to light, and it’s usually not good when they do. All Rights Reserved Revised: February 2013 Page 49
  • 50. Flush with Cash? Even some of today’s high flying organizations, flush with cash, find it difficult to attract and retain top echelon talent. For them, it is gourmet cafeterias, free massages, laundry service, shuttles, hair cuts, upscale cubicle/work-spaces, couches, pubs and bars, park-like campus settings, full-service gyms, arcades (yes, even foosball), bring-your- dog-to-work policies, and on and on. All Rights Reserved Revised: February 2013 Page 50
  • 51. … or Not Chances are, your startup doesn’t (and shouldn’t) spend this kind of money. That’s not what your investors had in mind. Oh, and don’t go and buy a new car or boat! You can creatively build a fun and fiscally responsible environment. The kind of people who are attracted to companies at this stage of development will usually appreciate that you’re not blowing money on frivolities, and instead are focused on your company and product. Take pride in what you are able to do, and listen to your team! All Rights Reserved Revised: February 2013 Page 51
  • 52. About the Author Patrick Seaman currently mentors and advises technology startups and turnarounds at Pepperwood. Most recently Patrick served as the Chief Operating Officer for Cinsay Inc., and as COO and CTO of the Software as a Service company, WhichBox Media. Author of the first major book on online media, Website Sound, Patrick was the first employee of Broadcast.com (then owned by Mark Cuban) and served as Director of Technology, VP of International Development, and on the Board of Directors of Broadcast.com Japan. Broadcast.com sold to Yahoo! for more than $5 billion. Patrick Seaman Patrick currently serves on the Advisory Board of Kraftwurx (3D Printing), Qples (Digital Coupons) and the University of Texas at Dallas School of Natural Sciences & Mathematics Advisory Council. Contact Patrick at patrick@pepperwoodpartners.com, patrick@patrickseaman.com and www.linkedin.com/in/patrickseaman/. All Rights Reserved Revised: February 2013 Page 52
  • 53. About Pepperwood Partners Pepperwood Partners is a boutique investment banking advisory firm headquartered in Dallas, Texas. Pepperwood provides a suite of investment banking advisory services to Two Lincoln Centre businesses in the technology, media, 5420 LBJ Freeway, Suite 535 telecom, nanotechnology, energy and Dallas, Texas 75240 USA +1 214.442.6056 alternative asset sectors. With a strong info@pepperwoodpartners.com focus on institutional relationships in the Russian, European, and CIS regions, Learn more at: www.PepperwoodPartners.com Pepperwood works with businesses to achieve capitalization and growth objectives. All Rights Reserved Revised: February 2013 Page 53