How Open Should a Startup CEO be with Staff?

Posted on Sep 28, 2013 | 104 comments


CEO transparency. It almost sounds uncontroversial. A CEO should tell her staff everything! Right? Right?!?

Of course not.

It’s a hard topic to write about because it’s almost an accepted norm that total transparency is good. It is not.

For starters let me use “CEO” as a proxy to include her “inner circle” which might mean co-founders or might just mean senior execs of the business. I do believe in total transparency with your core.

The Mind of the Founder

You took the risk to start your company. You quit your day job and look the leap off of the cliff. It’s so much scarier than most people admit – even to themselves.

Scary why?

All of a sudden you know you’re going to be judged.

Your parents want to know why on Earth you’d leave a job at Google. “Honey? Aren’t they worth billions of dollars?” “Yeah, Ma. But I’m working on a large team of people trying to figure out how to make micro improvements to a paid-search algorithm. Fun stuff, I know, but it’s time for me to try something more stimulating.” “Oh, OK, Honey. But aren’t you getting married next year? How are you going to pay for the wedding?”

Your peer group is envious of your finally doing what they’ve always wanted to do but found it too hard to give up the golden paycheck and predictable future. They can’t wait to hear your brilliant idea. “What? You left our team to work on THAT idea? A tool to better help you find bars & restaurants? Aren’t there like 10,000 of those?” “True. But mine is different. I’ve finally cracked it.”

Your VC friends have been egging you on. They told you, “Yeah, man, I’ll gladly write the first $250,000. Call me when you’re ready to leave.” Now they have a deep sigh when they hear what you’re actually working on. “Dude, we saw a bunch of those last year. We funded one in 2005 and lost a lot of money. Sorry, brah.”

Scary because that hard earned $40,000 you have slavishly saved “for the future” is going to dwindle fast if you can’t bring in funding.

But so far this is the easy bit.

Now you’ve got to convince your peer group to quit their respectable jobs and career arcs and join you. You’ve got to convince your buddies to part with their hard-earned savings to back you as angels.

And you pull the basic team together with some tech team members working evenings & weekends to conserve cash. You scraped together enough for an angel round but not enough to pay yourself a real salary. You have a runway that would make San Diego Airport’s look long. 9 months seems like a lifetime but given how long it will take to ship your V1 product (5 months) and how long it will take to raise your next round (3-4 months) there isn’t a lot of room for error.

How can you show “traction” on a product that just launched?

So as a startup CEO you constantly have to suspend disbelief. Or as I often tell first-timers you simply have to have a blind belief that you’ll find a way to make it all work out. You simply can’t afford to be overly cautious or you’ll never achieve anything.

A cautious person wouldn’t try to pry people out of Twitter right before their IPO to” join my cause!!” A cautious person wouldn’t stand on stage and tell a large audience she is going to change the world while secretly wondering when the fuck her team is going to work out the bugs in the product so you can actually launch. “We. Are tackling. A $1 trillion global market. It’s inefficient. And we. Have the breakthrough technology. To change things. We just need your $500,000!!”

A startup CEO’s job is to absorb stress so the team doesn’t have to. Her job is to turn up every day with enthusiasm even though her boyfriend just broke up with her, she hasn’t spoken to her best friends in weeks and she’s beginning to wonder whether this idea was really so great after all.

Startups have to be optimists because no rational person would actually believe you could build Uber into the amazing company that it is today. A rational person would have assumed that the taxi organizations & regulation would have made it impossible.

I’ve written about the downsides on health & relationships and about the insane emotional stresses that people don’t generally tell you about. And even about the unbelievable internal pressure to not let everybody down that sometimes even goes to the extremes of founders taking their own lives.

Yet the best and the strongest founders are able to overcome the stresses, the self-doubt, the sacrifices and the risks and they press on with optimism every day anyways. Perhaps “naive optimism” but in reality that’s probably the best kind.

The mind of a founder is wired differently than most people. They have a higher ability to embrace ambiguity and accept risk. They don’t fear personal failure or shame as deeply as the next person.

Or as Sir Winston Churchill said, “Success is the ability to go from one failure to another with no loss of enthusiasm.”

You need to accept that you are wired differently to know that most people don’t want your full level of data & knowledge.

I think it’s kind of like a terrorism and security analyst. We probably don’t want to know everything they actually know. Just that they’re working hard to keep us safe.

So How Open Should You Be With Staff?

Of course you need to be open. I believe in transparency as much as the next guy.

But total transparency is what most people think they want, not what they really want.

I’d like to give you a few examples that are more nuanced:

1. M&A
In the startup journey if you have success in your early product launches, fund raising and PR you’re likely to get “inbound interest” from likely acquirers. It’s hard to parse out the real level of interest from people just sniffing around or gathering facts. You try to take calls to be polite and let’s be honest – for many of us the flattery is nice and who knows? maybe this could be a real financial bonanza.

But in the back of your mind you’re a realist. You know this isn’t likely to lead anywhere and frankly you didn’t quit your job to pursue your life dream of being an entrepreneur to sell 12 months later in an acquihire.

You take the meeting but you’re not really pursuing it. But staff can’t make the delineation in their heads. They see the dollar signs and the victory. The don’t understand VC liquidation preferences or multiple return expectations. They weren’t with you when you did the VC pitch where you looked them in the eyes 9 months ago and said, “I see only one outcome, we want to build something really big. This project has been my life’s dream.”

So to an actual story. I worked with a startup CEO who decided he wanted to sell his company. I wasn’t in favor but when the CEO decides it’s the right thing to do you support him. So he went on the road and talked to many acquirers. He told his entire team what was going on. There are an obvious excitement around the office. The company had been hot so he had assumed that selling for “just $75 million” would be achievable.

It was not. Good press and industry mojo wasn’t enough to overcome the financial metrics of the business and the offers came in at more like $10 million.

I wasn’t surprised. We decided not to sell. The startup CEO was not the original founder. He told me that he wanted to transition out of the business if we weren’t going to sell it. I know, that sounds terrible. Like most startup situations – it’s complicated. But we departed on good terms.

But here’s the shitter. His entire team knew about the process and that we didn’t sell. So the tech team departed en masse to find the next great stock option scheme to make their big bucks.

Had they stayed I believe we could have done it together. The business concept was strong, we just needed to tweak it to adjust for market changes and we needed patience and resilience.

So I’ll put it more bluntly. You simply can’t tell most of your staff when you have M&A approaches.

It is a big fucking distraction while you’re going through the process. It is a big fucking distraction when buyers play the usual mind games like, “well if we don’t buy you we’ll buy your competitor and compete with you.” Yes. That happens all the time. It is a big fucking distraction when they seemed all hot-and-heavy at your first meeting but don’t bother even calling you back after that.

And it’s even a big fucking distraction when you do finally say “yes” to be acquired and you deal with the endless minutiae of details involving disclosures, indemnities, taxation problems,

2. Runway of cash
An employee walks up to me and says, “Mark, I’m thinking about buying a house. Would now be a good time to buy a house? I’d need a letter from you to help with my loan.”

“Buy a house? Are you kidding me? We have 5-month’s cash in the bank! It’s 2003 and VCs aren’t exactly lining up to fund startup businesses. Sure, our revenue is growing, but is that enough to raise an internal round? Yes, I know our VCs said they would lead an inside round if we didn’t find the money externally, but you DO know that they’re going to let us run right up to the cliff and fund us when we have 3-week’s cash left in the bank, right? Of course you shouldn’t fucking buy a house. Do you see ME buying a house!!!”

I didn’t actually say that. It’s just what ran through my brain.

What I translated was, “Well. You do know we work at a startup and that has more risk than working at Barclays Bank. Our VCs are pretty supportive of us so I feel good about the future but of course you know I could never say for sure that they’ll fund us going forward. I personally prefer not to own a home in these circumstances but if you really want to buy a home I’ll happily help you by writing a letter.”

I think that IS transparency. It’s just not TOTAL transparency. It’s not ruthless transparency.

And yes, he did buy a house.

I’ve had this debate privately enough to know that most junior people at companies think that this mindset is a cop out.

But I’ve also had enough direct experience to know that what people want to know is at the highest level “is it going to all be ok or are we facing tough times?” The details is the sausage factory that nobody really wants. They want the end product.

And trust me when I tell you that 90%+ of the people can’t wake up every day with the uncertainties and insecurities that startup founders face.

Most employees want cruising altitude, most founders live in take off mode.

3. Dilution / valuation
I hate when companies publish too much information about the total stock option allocations, the company valuations, the dilution faced in every round, etc.

It is not out of a desire to hide things or be deceptive.

It is because when you share too much of this information with staff you develop an “options culture” the I find unhealthy. If you find employees building spreadsheets and spending time on exit scenarios and what their take would be then you know your company has “optionitis.”

Of course as a founder & CEO you know that your 18% of the company at an $80 million is worth more than 26% of a $30 million valuation but I promise you that this is a nuance that even really smart & educated employees struggle with.

“But I was promised 0.75% of the company and now I only have 0.49% – I feel like I got screwed. I wasn’t expecting this much dilution this quickly.”

Yes. This is a real conversation I have ALL the time even still.

I always encourage transparency about compensation – but just in a different way.

Other than when we first started and were both dumb & naive (“Well, when we IPO for $3 billion your stock would be worth ….”) I steered away from an option culture. My regular speech (which many of you have heard) is …

“Join our company because we’re doing exciting things. 

Join because you’re going to get more responsibility at a young age than you would a bigger company. Join because we’re a meritocracy and promote success not tenure.

Join because every year at the end of the year you can say that your resume is significantly better than it was the year before. Join because as we continue our successes we will have more resources to reward you with and reward we will.

But don’t join if you’re looking for a get-rick-quick scheme. We’re not that company. We pay less than you could earn at other companies. We have to. 

All I ask is to earn your employment every year. If at the end of each year you haven’t grown in skills and stature, if at the end of the year you don’t feel like you’re still enjoying the journey, if at the end of the year you don’t think your resume is going to look better at the end of next year 

… then it is time to leave. I’m going to work hard to make sure you never have to.

and if money comes through options at the end of our journey that’s icing on the cake.”

Those are two different types of transparency.

Summary
Of course I could go on and on. There are transparency issues around firing or redundancies. There are issues around performance of key staff members. There are times when you need to “hire above” somebody not rising to the expectations you’d have of their role. There are merger discussions, board debates, product miscues, revenue misses and a litany of delicate topics.

I do believe in being open and direct. I believe in giving people a general sense of the business performance and the challenges the company is facing.

I believe in company metrics that are publicized and can be used as company motivation and creating a unified sense of purpose.

As a startup CEO you’ll have to develop your own comfort level with what to share and with whom.

But please remember that we’re all wired different to accept uncertainty, risk & stress. And remember the reason that most people aren’t startup CEOs is that deep down while they might want your job theoretically most of them don’t actually want the kind of life and pressures that come with your job.

And it’s your job to appropriately shield them from the dangers they may face.

** Photo by Laura Williams on 500px

  • AshitPatel

    The puzzle of stated desire for transparency sought by employees and the challenge of practicing it due to its consequences can be solved as follows:

    - The amount of risk taken by an employee is measured by their trade-off on options vs salary as well as how early in the game they started. So, co-founders deserve the most level of transparency as consequence of the risk they took and trust you have in them.

    - The next level is founding members or early employees who took a salary/benefit cut in a significant way to take the risk and showed some trust. You disclose most but not everything. Discussion about challenging situations should not deter them but galvanize them since they were seeking to crack more than usual challenges to begin with when they joined the team.

    - The 3rd level is full salaried employees (this happens after first 10 or 15 employees). They are usually risk averse. So, transparency should be practiced carefully.

  • http://blog.teamspir.it/ Casandra Campbell

    A transparent culture doesn’t necessarily mean a culture where everything is disclosed all the time. I think the most important point above is that you never lied or mislead employees. While you didn’t tell them everything, you certainly didn’t try and trick them either! A good, transparent culture is really about having great communication with your team – whether that means disclosing everything or not!

  • https://twitter.com/#!/sergeynazarov Sergey Nazarov

    Thank you for the actionable advice, a welcome change of pace from the highly theoretical “align incentives via information sharing” approach.

    Minimizing employee’s perception of risk to keep them motivated while keeping people accurately informed is a difficult line to walk, ethically speaking; at what point do you feel someone should fully disclose that things are going poorly? What is the golden mean of disclosure for those events that lead you to doubt the company’s future?

  • http://www.subimage.com/ Seth

    Great article – thanks. I referenced it as one of my keys to ‘faking it’ and becoming successful as a startup founder here: http://subimage.com/blog/2013/10/27/fake-it-until-you-make-it