Susan most recently led the People and Culture team at Medallia and was an integral part of the team that led the Initial Public Offering.
Susan previously served in Chief People Officer roles at AppDynamics, (acquired by Cisco) prior to their IPO, Juniper Networks and Plantronics, (Poly and HP). She also held Human Resources roles at Hewlett Packard and Agilent Technologies. With more than 25 years in leadership at technology companies, Susan has a proven track record for creating employee experiences that enable people to thrive. This includes reinventing performance management practices, increased flexible work options and benefits that are customized for today’s contemporary workforce. She has consistently engaged in the “future of work” best practices and served on the Global Consortium to Reimagine HR, Employment Alternatives, Talent and the Enterprise, (CHREATE) project team with HR thought leaders and academic luminaries.
Over her career, Susan has supported women in technology through partnerships with the Anita Borg Institute, Grace Hopper Women in Computing, and Watermark. She received Watermark’s 2016 Advocacy Award and served on the advisory board of Catalyst.
In addition to Compa, Susan is a member of the Advisory Boards for Montara, #NotMe, Espresa, Betterworks and Cronycle. She is also an Executive member of the Board of Trustees and Emeritus for Second Harvest Food Bank of Santa Cruz County.
What’s the single surprising thing you must get right as a founder before setting compensation for your team?
How can you avoid the typical pitfalls of early stage founders on HR issues so they don’t come back to bite you later?
What do you need to know about stock option plans and incentives so you’re setting up the best possible environment for your team AND your startup to succeed?
In this episode, startup advisor, HR expert and former Chief People Officer Susan Lovegren, talks about what founders need to know about the strategic and tactical issues of managing HR, how to avoid the typical mistakes early stage founders make, the bird’s eye view of setting up solid stock option and incentive plans, and much more.
Please note that the information shared in this episode does not constitute legal advice. Please consult a licensed attorney to discuss specific advice relative to your startup situation.
Links and Resources:
Syndio: Workplace analytics and equity platform that Susan likes
Susan Lovegren: I’m excited to be here!
Susan Lovegren: I spent most of my career working for publicly traded companies, large organizations, lots of infrastructure, lots of different departments and support. I was finding that in the larger companies it was a little bit more of Groundhog’s Day, if you will.
It was a little bit too much of the same thing over and over, but I was, very candidly, a little bit bored and I wanted to have much more skin in the game and be a part of building something. Looking into everything going on in the startup world, I thought, “Well, why not?”
So, my last two jobs were actually in a privately held pre-IPO company. The last one was Medallia, which did go public in July of 2019, and had the opportunity, prior to the company going public, of being fully integrated in the preparation for that big event.
Prior to that I had a very different experience. I worked for a company called AppDynamics. We were probably within 12 months of going public, and lo and behold, we actually wound up getting acquired by Cisco.
So, that was a very different experience. We were 36 hours away from going public, going to New York to stand on the podium. Parties were all planned, food was ordered, and it was a no-go.
Instead, we spent that day talking to all of our employees about being acquired and what that actually meant. So, two very different experiences, both great experiences, but very different from each other.
Susan Lovegren: It is not just the startup world; I would say this applies to pretty much any organization. I think there is this perception that HR is more of an administrative function. I think the biggest thing that is counterintuitive is what an outstanding business partner HR can be to a CEO, to a founder, to the executive team.
When I say business, it is truly business, in terms of going out, meeting with clients, customers, meeting with investors, working with your employees, talent, culture, and being that confidant-coach. It is truly the only functional area that cuts across all of the disciplines within the company.
So, I think the thing that is counterintuitive is to look for a head of HR who thinks like a CEO or a founder and that is pretty counterintuitive for a lot of founders. The really great CEOs that I have worked with, they absolutely value the partnership and lean on the talents of HR to really help them run the business.
I think it is counterintuitive to think about your head of HR going out and meeting with your customers or being a person involved in a conference, speaking on behalf of your company or playing very integral roles that can add tons of value to your company.
Someone as an example that I think has done a great job is Patty McCord. She was the Netflix CHRO and she and her founder were the two key people who developed the culture and the manifesto around how Netflix would run. So, it wasn’t just the culture of words on the board, but really about describing all the policies around talent, around hiring, around how compensation schemes would work, how investments would be made, and that kind of a partnership added just incredible value to the success of the company.
So, when you think of culture, it is not just in values, it is not just the design of that, but it is really the pull-through into the business. I would leave you with, “Think of HR as a game changer versus a people or paper pusher.”
Susan Lovegren: There have been quite a few, and I’ll do this in two parts. One was with a company that is a public company in which the product was very relatable to the consumer that really focused on integrated communications and devices and the company was Plantronics and it has since become Poly, and then Philip Packer bought it.
But what was so fun about that job was that we showcased all of our products with our employees and all of our employees used the product. It was part of the culture. We had our meetings specifically designed around using the products. We did a lot of testing.
A lot of the employee population was involved in the marketing and there was this real comradery that went on and this integration of product placement and speaking about the product. It turned into this entire campaign called Smarter Working, which was so much fun because everything that we did was about smarter working.
So, it drove our business, it drove our culture, it drove the way in which people physically worked. We designed our building and all of our signals to the employee around the smarter working manifest.
That was truly exciting to be a part of something like that. It wasn’t just, an HR program that was separate from the company, but it was completely integrated into everything the company did. So, that was one example.
The other very interesting thing I’m doing now is that I’m an advisor to six different companies and they are all in the HR technology space. So, what is really fun for me is to think about their mission, what each of them is trying to accomplish, and from an HR perspective, how I think about those solutions, and being able to provide feedback to those founders, to those investors about what is working, and what wouldn’t work.
Susan Lovegren: There is a fairly big difference when you are just starting a company. A lot of founders, maybe they are short on funds, so they are not necessarily investing in HR.
Typically the first role that gets filled in startups is talent. People are trying to grow their company. They are trying to get the right people in seats and if they have any funding usually some of it is going to go towards a couple of key hires. So, talent acquisition is typically the first area.
To think of it as your Chief Talent Officer is a pretty critical role at that stage. That person is really on the hook for getting your brand out there, creating the employee value proposition, working with the founder about the story and how you are going to communicate the values, the culture, and what is important in terms of who you are hiring. Hiring and labor are going to be your most significant investments.
For the most part they are also going to be the source of probably some of your most significant problems. It is a double-edged sword and getting hiring right is super important.
The other thing I would say, in the beginning, go to market – super important. It is going to be about sales for a long time and without sales, you don’t really have a business. You are maybe in R and D for a little bit, but that runs out and your cycles are going to be longer before you become public.
That is another trend that has been pretty well documented. In the past you can see maybe two to five years for a company going public if it was on a high growth path. Now it is more of around six-eight years on average.
The two companies that I was with that were going public, one was an eight-year old startup and the other was a 20-year old startup. There are some reasons for that. Obviously the investors are trying to have the company be worth more so when they do go public, they have a better opportunity to recoup on those investments. But that also creates some interesting challenges for founders.
If you don’t go public, that creates a much longer trajectory to keep your employees satisfied before they have any sort of significant reward. Going back to that, your head of talent is very important. That is probably your first key position, and that person has to be, in my mind, pretty multifaceted.
That means that they can set up some basic operations. They know how to sell, they know how to sell the company, and they also are a truth teller to that CEO in terms of values and culture. That is the first team you get yourself.
Second, you are probably going to need somebody who has a pretty good handle on compensation. The reason I talk about compensation is that people don’t often think about it. It is more of a technical back office function, but the decisions that are made around comp early on stay with you for a very long time.
So, in terms of design and getting things right, and in terms of how you are going to motivate people, how you are going to pay people, how competitive or non-competitive you are going to be, all of those decisions become pretty important.
As the time goes on with the company, that function carries a lot of weight. That is the function that is going to be meeting with your board, your advisors, helping you stay honest with your stock programs and all of those other things that are going to come if you have that level of success.
So, I’d say those things are different. Once you become more mature, then you are going to want somebody who has probably done the job, because there is so much that has to be done.
You can pick a high potential person. I’ve seen that you get somebody in there who has got a lot of capabilities, but they just don’t have the experience quite yet. Typically, I’ll get a call from those founders saying, “I need to pull out” or “I need to get somebody in here with the experience. We are one, two years away, three years, or even five years away, and we have got to scale and this person has just no idea how to do that.”
You start off, I think, a little bit smaller. You get some of the core things built, and then as you start moving along, you start getting a bit more experienced person. Then hopefully you will get an experienced CHRO. That is what I’ve seen.
Susan Lovegren: There are a few. One critical mistake is that a lot of CEOs don’t have a very good listening strategy. Both, a programmatic listening strategy, but also really just listening and that is listening to the employees, listening to their advisors, listening to their mentors, and not necessarily feeling that they have to be the smartest person in the room.
Some CEOs, what I’ve seen and when I will get a phone call is when they are in trouble, meaning they have tried for a long time to solve some of their people problems. They don’t really know how, and they just didn’t get help soon enough and all of a sudden, things start to unravel in terms of their executive leadership team or others in the organization.
I think some of that comes from, no offense to anybody but some founders have awfully big egos and a lot of confidence – and as they should believe in their product and what they’re doing, but sometimes they just don’t do a very good job of stopping and listening.
The other mistake I think they make is time application. So, their time application tends to be with maybe one or two of the functional areas and not the entire team. So, if you are going to hire an entire team to represent various tasks that need to be done in the company, you really need to ensure that you are spending time and gaining the value out of all of those leaders in your company or all of those positions in your company. If you are only really hanging out with sales or hanging out with engineering, you are going to miss a lot of things going on in your organization.
The other mistake I’ve seen is with some leaders, depending on the type of leader. The mistake is not doing the analytics early and often enough on go to market. What I mean by that is the analytics really require understanding. Your sales productivity, understanding where you have risk of people leaving your organization, what those costs associated with that are, and what’s going on around renewals is necessary.
It could be understanding placement of where that talent sits physically and if that is the right thing. Are you structured the right way and really having the analytics around your full go-to market and truly run your marketing as well and what you’re getting out of that?
Where I’ve seen people really struggle is not having a good handle on that and all of a sudden if they lose key talent in that area and salespeople are very coin operated, again, no offense to anybody, but it is just what I’ve seen.
It has been the truth and if you don’t have a good handle on that and you are not comping people in a way that is motivating and paying attention to that you could find yourself in a lot of trouble.
Susan Lovegren: Absolutely.
Susan Lovegren: So, a couple of thoughts. One thing that I think many of the VC firms do well is that they have a lot of resources depending on who you are partnering with. Many of those folks know HR people and they can even help you with an interim HR person – somebody to come in and help you establish and assess where you are at and what you actually need. These investors have a lot at stake, and they know tons of great people, and certainly that is what I’ve seen work pretty effectively. Somebody to come in for six months, go side by side with the CEO.
Now again, going back to talent, if you are all of a sudden going to be needing to hire a bunch of people, then you know you are probably going to need somebody in HR. If you decide you are going to hire a bunch of people, what are you going to do about things like stock options? Are you going to incentivize people with any sort of compensation bonuses? What is it going to be if you are going to keep your company at a relatively small size initially, around 10-20 people.
You may or may not need somebody to help you. Maybe you could get away with a contractor to help you put some things in place. But I think the tell-tale signs, when you start getting up around 125 people to 700 people. 700 is an inflection point where you are probably going to need somebody pretty experienced.
It starts to get pretty active, and the activity level is going to come from everything from employee relations issues, maybe even having to lay people off if the economic situation changes. Maybe you are in high growth. Maybe you are not. If you are going to be going into a different country or a different region, there are different implications around just setting up things to meet the labor requirements.
You want to be looking at anything that are changing in the law and again, there will be signals to you. There will be signs of things that you are going to need to start to address. So, I’d say, it probably depends on how much cash they have and how quickly they are going to grow.
I always want to be cautious about over-hiring because I don’t like to lay people off. That’s the worst thing, in my world, for sure. I think it’s heart-breaking for founders who have so much passion in what they are doing. I’d say a hundred people then you can maybe get away a little bit for a while if you get a strong talent person, maybe a good generalist, a good operations person.
But once you get to between 500 and 700 people, you are going to have to implement things like some sort of a HRIS system to keep track of your people. You are going to have to have some sort of incentive programs that you are going to have to have. You are going to have to hire somebody in stock administration or you are going to have to have a consultant in stock administration.
So, things start to get a lot more complicated just operationally in terms of setting up a compliant company. That is why you want to have some of those other fundamental things established.
Obviously your values, and I don’t think I mentioned this, but CEOs or founders have got to be looking around all the corners. They have got to be looking at the long view. What are the implications or unintended consequences of these decisions early on. Is this sustainable? Can I afford to give these people lunch every day between now and the next five years?
Susan Lovegren: Obviously they should be reading the newspaper and looking online. Things in our world keep changing. The world of work has shifted so much.
One thing I’d say that they need to be paying attention to is that it is very transparent out there. So, with everything that you do, you are staking the reputation of your company on. Reputation management and transparency are super important. In the early days paying attention to that and paying attention to changes in the law is important.
So, pay transparency is a big shift. There are new legal requirements in the state of California, Washington State, New York, and I’m sure others will be coming online regarding pay equity – making sure that you are paying people appropriately and that you are thinking about just your own values every day.
“Is this really how I want to behave and perform? Is this how I am I modeling the right things for even a handful of people that I have working around me. What are the boundaries between me and the people in this company?”
I do see a mistake, talking a little bit about it. Some of these founders think everybody is your friend, that it is a family. When push comes to shove that may or may not be the case. You may need to make some very hard decisions. You may find that you aren’t getting honest feedback from people.
This is what I was referring to with the listening strategy. People may not be telling you what you need to hear because you are their friend or you are spending too much time, being their friend versus focusing on things you need to do in the business. We have all seen that. You see those headlines in the newspaper where things went south.
So, there can be too many gimmicks, too many things that seem cool in the moment. But really looking at that long view is absolutely critical. Pay attention to all of those things and obviously pay attention to the business.
But then, making sure that you are in touch with all your people, that you are ahead of it. There is a lot of data that can help you do this, but if you are sensing that somebody is at risk of leaving the company at a critical time, you may want to have more and more risk mitigation strategies in place. That can take the form of compensation and hitting key milestones.
There are a lot of things you can do to de-risk your business, but I think right now, for a founder in those early stages, you do need to think about risk taking but also managing risk.
Susan Lovegren: I think some of them would include real estate. Getting involved in a long-term lease or probably spending too much money on ments and then down the road when cash is needed for other things, they came up short. Being conservative around things that are going to be more difficult to get out of down the road is necessary.
A good example would be with anywhere from 12 to 18 months before you go public, you are really trying to conserve cash. That is a time where you are looking at everything. You are looking at your headcount, you are looking at your rate of hiring, you are looking at your investment in all the benefits, if you will. All of the things that are costing you money. Some of the things that I think have come back to bite people are some of those decisions.
Not a company I was involved with but a company that is now public spent exorbitant amount of money on ski trip for all the employees. The intention was really good, in terms of team building and whatnot, but when they were getting ready to go out into the world, out into the investment world, it wasn’t viewed too favorably.
So, not to be taking away anything from employees, but what I think investors want to see is that you have a solid benefits plan. You have a solid 401K plan in place for people. You have some stickiness that you are planning on doing an employee stock purchase program, the real true wealth generating vehicles for employees, for people who have really helped you get to the promised land – making sure that you’re taking care of your employees.
Those are the things that the investors are going to want to look at versus all the gimmicky things. So, I think that is where you can be a little bit short-sighted.
I think the other thing around looking around the corners is around managing your talent. There are usually somewhere between 5 and 10 critical positions in any company, any organization, that create the most value or the wealth generating position in a company – the differentiated positions.
Having a good handle on what those positions are and ensuring you have a good comp strategy around those positions and ensuring you have the right talent in those positions is important. Those are positions I would describe as hard to replace if you lost them, difficult to hire in the market and would cost you potentially 18 months of revenue. So, really thinking about those positions.
For example, at Costco, the biggest wealth generating position is the membership renewal. That is their biggest form of revenue. That is a critical position. So, that is an example, but really understanding where those positions lie and looking around the corners and asking, “Do I have the right people? Am I mitigating risk? How are they doing? How much time do I spend with those eight people? That guy in the basement who is my only coder who knows how to do this one special thing? I don’t even know who that guy is or woman.” It is really that kind of stuff. It is anticipating all of those issues related to your people and changes around policies.
With work from home, looking around the corners, what is going to happen a year from now when people don’t want to come back to the office? Have you anticipated that? Have you anticipated your benefits program because guess what?
They are going to look really different. They already do. People care about very different things. They want coaches for their kids, they want tutoring, they need help with childcare or whatever it might be. People want more flexibility.
It is that constant staying ahead of the market, the themes, and ensuring that you are not going to become obsolete in your practices but that you are also not going to go overboard and invest too much of things that don’t really matter.
So, always measuring and ensuring you have the right things in place to keep people pretty excited and motivated is necessary.
Susan Lovegren: The first thing you really need to be clear on is a set of goals, really.
What is your philosophy around compensation? I spent a lot of years at Hewlett Packard. Hewlett Packard was a pay for performance company in terms of its big philosophical umbrella. So, pay for performance. The way they thought about that was that you had a set of goals, and you had a set of metrics and you had a set a timeline and other things you were accountable for.
You had some stretch goals and if you met those things relative to others doing similar work, or you exceeded expectations, you would be rewarded by more, whether it was stock or a higher pay bump or maybe some other reward type of thing. So, pay for performance was really the cornerstone of that philosophy and everything around it was designed to support that.
Some companies don’t have a pay for performance philosophy. It might be more of an egalitarian philosophy. They might say, “We are going to give the team and the group some goals. If we achieve those, we are going to give everybody the same amount of whatever it might be.”
So, you really want to think about it culturally. What are you communicating? Do you want to have strictly an individualistic type of compensation scheme? Do you want to have something that is more balanced, maybe you are trying to drive people to be more collaborative. So, you want to build that into your structure or your philosophy.
You really want to think about what it is that you are trying to accomplish. Pay and compensation, total rewards can take many different forms as we know, but getting clear on your philosophical point of view and how sustainable that will be down the road and how you will think about administering that and any unintended consequences of that is important.
For example, pay for performance sounds like a pretty good idea. Right?
However, the unintended consequence that came with pay for performance was this thing called ranking. You may recall ranking, GE was big on this Jack Welch, they called it the rank and yank. Being engineering companies, the only way they could figure out how they were going to pay for performance was to do stack ranking because you only have so much money, you have a pool of dollars and you have to distribute that amongst, 10 people or 15 people.
So how do you do that? You stack rank people. Unintended consequence of pay for performance was stack ranking. People hated it. At the end of the compensation cycle, you had maybe two people who were happy and 95% of your work force that was angry and felt cheated, and you’d see attrition.
People would get their bonus and leave; get their little raise and they’d be out of there. So, those were the unintended consequences of something that I think started off as feeling very fair and feeling very egalitarian.
If I think of the HP way, wonderful philosophy, wonderful treatment of people and truly a legendary company, very cutting edge, especially at the time in the 1930s when they set up the company to have those progressive policies was really unheard of.
So, it’s not a criticism of that philosophy, but it’s a criticism of the way in which they approach the mechanics of how to support that philosophy.
Compensation design is super complicated as you can see. So, it is really important to think in a very thoughtful way, what is it you are trying to accomplish. Then from there, what are the metrics that you are going to use to accomplish that particular outcome?
I’ll give you an example. The last company I was with, the main metric for executives was the actual contract value. The board felt very strongly that that was the only metric. I shouldn’t say the only, but it was a pretty important metric that executives needed to be held accountable for. Everyone on that executive team had an accountability.
We had other things that we were accountable to and for as well, but that was the unifying goal. It was really around growing the company and around revenue. So that metric, while it was not necessarily one that you would keep forever, was really important for driving, this high growth company and wanting to ensure that people were aligned around that goal.
So, the philosophy, what kind of goals you want to have in place for people and how you’re going to hold them accountable? What are those metrics going to look like? What is that alignment going to look like from one group to the other?
Some companies believe in cascading metrics – that you start at the top and you cascade those goals all the way down. I’d say an unintended consequence of that is if people can’t see themselves in those goals and metrics, they are not going to be too excited. So, I would caution cascading metrics. That would be another design principle.
The other thing you should keep in mind, when you are designing a comp strategy is that you have to sit down with your investors and who is funding you and really see what you can even afford. What is affordable? What is doable? How much equity are you going to put in the pool for founders and startups?
If you are not giving people equity, they are probably not going to join your company. So, you have to have some sort of an equity plan, whether it is stock options, whether it is restricted stock units, whether it is key milestones that people achieve, and then you give them some reward at the end of that period.
All of those things really matter to and incentivize people. If they don’t feel incentivized – especially the early people who come into the organization who are going to help you build your company then that is not good. There should be, in my opinion, a differentiation of those people who have hung in there with you longer. They should be able to see that value and see that growth over time. Whereas people who come later typically don’t receive the same amounts. It is just par for the course.
So, at some point you have to level out the difference as a startup. You typically can’t pay people as competitively a base salary and bonus programs, but typically you can compensate for that or compensate from a lack of 401K match and things like that, that you are not going to have early on with more options.
So that is typically where you want to make sure that you have got that right balance of something that is attractive enough to people and competitive enough. Where I think stock programs are going to struggle a little bit more as in today’s market there are ups and downs in the stock market, obviously, but companies taking longer to go public. That means more anticipation of refresh programs and having to refresh that stock a little bit more often. It means having to keep it interesting for people.
The longer your company stays private, you are going to have to innovate more on the product side, probably a lot more to get to that point before you get that infusion of cash and help and mentoring and all those things your company is going to need. So, it can be a really long haul from the time you start to the time you start to see some profitability. So, design is a super important part of how all of that is going to come together.
Susan Lovegren: Investors will weigh in and I shared one, the actual contract value. They will definitely weigh in depending on their functional expertise and their experience. They will be offering you some really sage advice and that is why they have been so successful, many of them.
I’d say for the metrics around values, one way of doing it, and it really depends on the company over time, is that you typically have an annual survey or you have a quarterly survey, or you have a pulse survey which gives feedback from the employee perspective about how well the company is doing on living its values.
Then, you have a net promoter score that you can use to keep you honest, to help you understand how we are doing, and how people are feeling. Are we doing what we said we were going to do? Are we doing right by these people? What could we be doing better?
This is where that listening strategy really comes into play and being transparent with people that, “Hey, we failed this quarter. We didn’t communicate new benefits as well as we should have”, or “We didn’t communicate our strategy” or “We have been confusing our employees about certain things”, or “We haven’t provided the right tools for you to be successful in doing your job.”
Those are the kinds of things that you definitely want to keep a good handle on with your employees so that values can be measured. They can be measured through things like your surveys. I don’t like annual surveys personally. They are too in the past looking, I like forward looking things.
Just a simple pulse survey helps you with your values. Another example, from a previous company – we would measure the turnover or attrition of certain key positions. It was a core engineering group that was very important to the company, very valuable. We would reach below a certain level. It affected all the bonuses across the board.
It wasn’t an HR problem, it wasn’t an engineer’s problem, it wasn’t go-to-market problem. It was all of our problem. So, it affected a percentage of that bonus pay-out.
So, depending on what you want, you can put some people metrics in there for sure. Then, obviously you can put your business ones in there. Attrition, for startups is such a great metric. I would use it more for just key positions because attrition is going to run between 17% and 22% for startups, which seems really high, but it is actually pretty average.
Susan Lovegren: Super well understood and a lot of thought from experience from the investment community.
One thing I will say about that too, and this might be helpful advice for the founders, if you have got something that is a non-negotiable, when I say non-negotiable, everything is negotiable I guess to some degree, but when you know that your investors value something, that something is very near and dear to their heart, you want to pay attention to that.
It doesn’t mean you can’t argue with it, or you can’t look for other things, but you also have to respect that point of view because you will have, as a CEO and founder, your team will pressure you for other metrics. Your team will pressure you for other things that they want to be accountable for or want to get credit for and those may be very different things than what your investors value. You most likely will have some conflict along the way, especially if things aren’t going as well from a comp perspective.
Let’s say you aren’t hitting your metrics. If you’re not hitting your metrics, you probably shouldn’t get rewarded for that. However, when people are in the trenches and it’s a slog and they are not getting rewarded for their efforts, then they become restless, and they want to then renegotiate some of those metrics.
I think that is may be an unintended or unforeseen consequence, but that is one of those corners to look around, that can cause some discontent. That is also where I think some coaching or getting some advice in having those conversations with whether it is your chair, or member or head of your comp committee becomes important. Some of those conversations are around other ways of continuing to engage people.
So, I’d say that’s been in very real time with no confusion from the investors, certainly ever about what they want to see. Sometimes you are going to have to negotiate a little bit but appreciate the point of view certainly of where those investors are coming from because they really want the company to be successful.
Susan Lovegren: The ESOP as we talked a little bit about needs to be well designed. It needs to ensure that it motivates in the right way and that it is sustainable and affordable so that you have enough in the pool. While that is being managed you are probably going to need to have somebody in stock administration so whether you do that through a consultant or through a firm, or you bring somebody in, it has to be managed.
Stock administration is really important because there are some compliance issues. You need to make sure you are understanding what you are distributing, what is coming back into the pool, making sure that you are being accountable to your investors about not diluting your stock pool.
So, paying really close attention to what is in there and just the management of it is really critical. Also on the design, thinking about what you are going to need is what I would call your reserves. So, down the road, are you going to have any key hires? Are you going to replace the founder with a professional CEO? Are you going to need anything for merit increases or quarterly retention or refresh on stock?
So, all of those things need to be part of those discussions and you need to really figure out what the right amount is. Typically, when you start, there’s no value, you are not profitable, you haven’t had an analysis done and no one has come in, much like an audit to even give you the valuation on your company.
That is where you are going to want to get some advice from your investors and from the attorneys. You are going to want to really understand that you have enough to do what it is you need to do because from my perspective, you don’t want to keep going back to your board and asking for more.
You want to manage within what everybody has agreed to in order to be reasonable, unless obviously there is some crazy unforeseen thing that could come along, or you have an opportunity to hire some rockstar person that you need some stock for. But again, those situations are pretty rare.
The other thing to think about is education. From a pure HR perspective, many of the people you are going to be hiring are early career stage. Oftentimes, not always, you are going to have people who have maybe never received a large amount of stock options or maybe they were in a position where stock options in the large company weren’t even really part of their compensation package.
It would be more typical that they would have restricted stock, which operate very differently. But an option basically is that somebody has to outlay cash if they want to buy it once it is vested.
Investing period will be another very important design element. You want to do a three year vest or a four year vest on options. It’s typically a four-year vest. Again, that vesting schedule is pretty important. Is it going to have enough stickiness, enough hold to keep somebody in their seat long enough and it’s going to have enough potential value to keep somebody retained or are they going to go next door and somebody will basically buy out their stock options for them?
So, making sure you have enough in your pool that the outlay of cash is an important one from an employee perspective.
So, options, until somebody purchases them, they’re really not issued. It is not your grant. Whereas with an RSU, it is your grant. As soon as you accept that grant and you pay the taxes and what not but for options, it is very different. It is a long time. It is an outlay of cash.
If somebody leaves the company, do they want to pay for those? Do they want to negotiate a longer window in which to purchase those stock options? There are lots of complications that do definitely go with those options. They can be great, but it can also, for some people feel like, “I’m never going to get anything out of these. They are kind of worthless. At least with an RSU I have cash in hand to pay the taxes. I spend that money.”
So, you really want to think about the design and the time of educating employees on all these different types of stock options and how they work. The mechanics are super important because like I said, you have a lot of early career stages, people don’t really understand them.
Even my experience in public companies, people didn’t really understand the value of options. They left right before something was going to vest. They just left cash on the table. They didn’t really understand that.
Educating them about the timing and educating them about what they would have to pay in order to receive those and all of those things is important.
The value and the potential value, not that you want to mislead people or promise something, but really helping them understand how those options could look over time. Modeling that for employees is really important to help them see what that potential is.
So, I think people can get excited about those things, and options are going to be great, but they are going to have to find that right mix of people being able to see the value and that takes a lot of communication and a lot of education in order to be able to get the outcome you want from people in performance.
Susan Lovegren: Yes, it is a heavily regulated program, as it should be. Many companies over the years have gotten lots and lots of trouble for not doing things correctly. Again, risk and consequences are really important.
The other thing to think about in the design is, whether you have the new hire stock approved monthly. One recommendation I would have is to time your new hires. So, if you are going to bring 10 people in a month or 5 people in a month, let’s say it is the 15th when you bring all your new hires in for the orientation, then try to match that up with your stock grants being approved on the 15th of the month. Do that close.
Don’t cheat employees a month or two or a quarter. They hate that. Provided you educated them, or they are already educated about what it means to have that. It is a little bit of both and that is where you really want to be mindful of the impact on people. It may not seem like a big deal, and somebody may be in the financial engineering background, and they would say, “But look, we can delay this for three months. We can get six more months out of these people.” That is not cool.
The things you do upfront to show people, you are signaling to them that you are a part of this team right now. “I want you to contribute. Here is your potential comp. Why would I delay you?” It is like, “I’m going to not give you your pay check for three more months.” It is kind of interesting.
All those little things signal to people how you are treating them. This is where you do want HR and finance lined up. My experience in some companies would be that finance had a heavier amount of influence in a lot of areas than they probably should have because the decisions that were made were very financial. They were singularly financial decisions versus looking at all of those implications.
So, one other thing I’ll say about HR, if you are going to bring somebody in from HR, do not have them report to your Chief Operating Officer. Anybody worth their salt won’t take the job because it will become an administrative G&A function and it will just be squeezed and squeezed and squeezed from an employee perspective till there is no more budget whatsoever.
I speak from experience and all of my colleagues, they will not, if the job reports to the CFO or the CHRO, they will not take the job. They won’t even interview. As a founder, your job is to make sure that the CHRO is always a direct to you. That is right in my opinion.
Susan Lovegren: It is so interesting with the timing. Let’s say you are 18 months away from going public. I’ll use the “going public”, for a moment. You are going to have to decide to stop using options, right? Because you are burning through more shares with your option, and you are going to have to convert over to RSUs.
So, when you make that decision that is a really important thing from a business perspective because it can really affect what you are going to have on the other end of going public. It can affect your value as well.
So, when you make that decision, or even thinking about a hybrid between RSU restricted documents and options, those things become important. I have seen one, when you say mistakes, I know it is so much of a mistake. It was just strange.
I saw a company, I won’t name the company, but for a very long time, they still offer options to their CEO, and it was very strange, and I just think it was a clean-up kind of thing, and eventually it got cleaned up and changed to RSU and some other types of performance shares.
Performance shares typically come later for the executive team. But I thought that was that was weird, and it was burning more equity and I don’t know, it was a very odd design. Again, I think it was just more of somebody just not really paying attention.
Just make sure you are keeping a handle on your dilution, and you are keeping a handle on consistency with hiring. Every month you will review what shares went out for new hires as a good example or if you had a merit program, you want to look at that and understand, really was there equity from a gender representation perspective.
You want to pay attention to all of those things. You gave away all this stock, did it do what it was supposed to do? Or did you wind up losing some people? Why was that? That look back in your program to make sure you are not making the mistakes and that it is achieving its objectives and its outcomes are some things to think about.
Susan Lovegren: Good HR is going to be looking at all of the analytics all the time and there are so many great tools out there that we now have at our disposal. We can create dashboards that with some simple software show us where we have problems with inequity where we might have a correction we need to make.
One company we had to shore up about 7% of our females, to make sure that they were being paid in an equitable manner. Obviously, there were some issues, and we had to do a quick correction. So, having that kind of exposure to the data is really important.
Who are you paying? Why are you paying them this and what is happening? How is it performance? If you have underperformance then paying attention to that, if you know you have an under-performer and you see on your reports, why do we give this person a marinate? Those are the kinds of things that HR business partner would be sitting down with you and looking at on a fairly regular basis to make sure that you have got a good handle on.
Susan Lovegren: So, a tool I absolutely love is called Syndio, I believe it is a group of analytic people and maybe some ex-law are in there. It is a fairly small company and they created this, and I have nothing to do with them, I’m not an advisor to them or anything, and essentially what it does is that it provides you with a scattergram report of all your departments. It shows you promotion rates. So, you are asking what to pay attention to promotion rates, how quickly are your females versus males versus folks in underrepresented groups being promoted.
Is there any sort of inequity occurring there? If so, why? What is going on there? It points you to where to look. “Hey, what’s going on with pay? How come women are receiving much less on their merit increases. So how do we do merit increases? How are we doing on base pay? Bonuses, what are we doing on that? How are we doing on overall equity position for the hold for various groups?”
You should see pretty visually where you have any gaps. I’m very proud to say in many of the companies, once we were able to really look at the data to quickly address anything and the fact that you are sitting down with your CEO and looking at that data, people’s behavior got much better in terms of paying people much more fairly and much more equitably.
Now, obviously there is going to be some leeway that you are going to have with some people being paid more depending on the position it is or how long they have been with the company or whatever it might be. But it gives you pretty good indication.
So, those are the things to look at. Rate of promotion is very important. If you don’t have as many women going for those promotions, it can point you in that direction as well. Why is that? Are they not being encouraged? Are they not being developed? Is there an issue with their confidence. They just need a mentor. They need a coach. What is happening?
So, you can tell a lot from the data, frankly and it is the same with pay transparency. Companies are being asked to show, not necessarily line up all your employees and let’s talk about what every single person in the company makes, but really understanding what the ranges are. So, again, something founders need to be thinking about is how they want to design their comp structure.
Are we going to have three buckets? Are we going to have 29 job levels? Are we going to have special positions for special kinds of roles? What are we going to do because we are going to have to be transparent about it and we are going to have to make sure our employees understand what those job levels are and what it takes to go from one level to the next.
Now in startups, typically more levels are introduced so people can feel and see that they are progressing.
What you’ll see in a more mature company is maybe three big buckets for professional roles and three big buckets for managerial. Google is a good example. They don’t have a lot of job levels, but they have got a lot of people so they pay their people very well, and everybody is very happy and they usually don’t complain about salary.
They complain about other things, but not really salary so much. So, you’ll want to make those kinds of decisions clear and transparent. What are those job levels and what is the bottom of that? What is the midpoint? What is the top of that job level pay? So, people can have a pretty good understanding of where they are at.
A lot of companies now are publishing their rate ranges with their job posting. So, the value of the job is disclosed right from the get-go. Bonus programs are very clear with what the metrics are and timeline is. I think people are requiring more and more transparency to make sure of that.
As negotiators, women typically and historically haven’t negotiated as well or they aren’t used to seeing the value of their worth in the same way. Unfortunately, some men have. This is a way to help close that gap and make sure that they are asking the right questions. I think HR and I think the talent acquisition function is also doing a much better job of reviewing those offers and raising the flag.
It is like we are not going to pay this person 20% less for this job that is valued at this. So, I think that is really important to do the right thing. People feel much more valued, and they feel much more collaborative and agreeable to working with somebody.
If you are sitting next to somebody, you came in at the same time and they are making more money than you, you are not going to feel too great towards them. Everybody finds out and everything is transparent. People go online and say all kinds of stuff. So, people typically are going to find out and they are going to know.
So, I think with VC firms CEOs are under much more scrutiny and are more accountable. I think the ignorance is bliss argument is fine until it isn’t and usually something will come up. It is like looking the other way. If you see harassment, it is looking the other way. If you have had what you would call an incident at work and eventually it just gets worse and worse.
So, for founders it is a new world. It is the new transparent world, and it is not going away. It is going to only get more visible to people and again, from an integrity and values perspective, if your values are, “I only want to hire white men”, be honest about it and don’t try to recruit women or underrepresented groups into your company because they are not going to be very happy or very excited to be there. I think that is one.
I think from the VC world they are doing a much better job. Some of them, in this area, are putting more and more people in their firms that are female. They are doing more to support female founders and spending more time in trying to support and help them. But they are just as accountable.
So, if they have a reputation of harassing people in their firm or not paying people from an equitable perspective or not treating women well, we all have read the headlines, I won’t go into the specifics, some of them, but some of the bigger firms, definitely have their share of bad press when it came to all of this stuff.
So, when I was talking earlier about reputation management, it matters. This world of transparency is one of the biggest shifts that we are seeing, and it is a much more democratic workforce and young people are not embarrassed to tell you what they make.
Susan Lovegren: So, as an advisor to several different companies, as I mentioned, I have been involved with customer visits, and meeting with CEOs of different companies along with the founders and other people on the advisory board to share a perspective about how the product works from an HR perspective. I have personally not gone in and said, “Would you write me a check for such and such for this company?” But I think it certainly is not off the table depending on what it is.
I think if you have got the kind of relationship between the CEO or founder and the CHRO that can really show the integrity of the company, that these are good people to work with, this is our talent strategy, this is how we are going to get all these people to do all of these things, this is how we are going to set up those types of things, then you may be pulled in and can be very instrumental in getting and securing an investment. So, I think it varies depending on what you are trying to do, and it doesn’t replace the founder by any stretch or the CEO, but you can enhance that opportunity on the exit strategy.
It is very common that when you are meeting with the bankers, you have the opportunity they want to hear from all of the functional areas. They want to know about the culture of the company. They ask a lot of questions about diversity, equity, and inclusion. They want to see your statistics on all of that.
So, I’ve provided all of that business, and what we do for our communities. Philanthropy is also super important to investors and you know that you are a good citizen out in the community and people want to see that reputation. So, maybe you have a small foundation in your company established. You give a day off for volunteerism.
If you say you are a value-driven company and you are into sustainability or whatever you into, they are going to look for that kind of stuff. They are going to want to make sure that you are walking the talk. That is where HR can help you in a lot of ways, to really inform that sense of culture and that you are not just BS-ing them, that you really have the data to back it up.
Susan Lovegren: I was thinking about that question. I would say that remember the world of work has changed significantly and it is going to look, even more different in the next five years. There will be more transparency, as I mentioned, and it will be democratic on the part of the employees.
For a listening strategy – when I say listening strategy, it is not just employees, it is customers and paying attention to your customers and your employees to have your house in order. Make sure you have all of your documentation cleaned up in case you have an acquisition, so you are ready to go. HR can also help you with that because you are going to need all those documents, your benefits plans, your stock plans, your employee files, and all of that stuff, as boring as that may sound.
Always be ready, ready to go with all of those things. I’d say, period cycles will be longer. People will be less patient. So, talent becomes increasingly important and really getting the culture and the talent right is just paramount to your success.
Susan Lovegren: Yes. One piece of advice for founders who find themselves in the wonderful position of going public, people can become very interesting at that inflection. One word of advice would be to really look at all of your change and control agreements and understand what is in them and understand how those are designed.
We didn’t really talk about that but some people can get very political and very greedy towards a public offering and will try to renegotiate everything. You are in a difficult position at that point, especially if you have a suitor who is trying to buy.
What I mean by difficult position is when somebody is trying to buy you, they want the whole lot and that is contractual. So, people sometimes will surprise you and come back in and try to renegotiate a lot of things for their personal interests and for their personal financial gain.
As a founder, this is where having a backbone and your investors having a backbone and being equitable and fair across the company comes into play. It’s not one person who makes a company. I think it is important to have a good handle on that.
If you are concerned about that type of behavior, weed it out early because eventually that person is never going to be satisfied and they are just going to cost you a lot of equity and they are going to create a lot of animosity amongst the team. That is unfortunate but it is human nature when there is a lot at stake.
Susan Lovegren: Yes. There are a couple. Depending upon if the female founders have a board member, if their board members or advisors can introduce them to other female CEOs or people or even leaders. Some of my former founders will call me and say, “Hey, can you talk to such and such person? They are getting ready for HR. Will you talk to them for an hour?”
So, I think that just the network of good people and some other resources for founders like the executive MBA program at Stanford or Harvard, they have a whole section on organizational development and organizational psychology. I think it is a must course for CEOs.
It is just one of the most important dimensions. They should expose themselves to mentors, old bosses, and the other one I would, suggest is the Young President’s Club. Lots of people in startups and tech along to that.
It is important for women and people in underrepresented groups to be out there rubbing elbows with a lot of influential people and they also do a lot of development for people, but it is just the power of that network that is incredible. So, those are just so top of mind.