Jeremy Au HF: Pay It Forward

Hello friends! I run across intriguing thoughts everyday - which center on a better life through business, social change, and personal improvement. I hope that we will be informed, inspired and even challenged together. These posts are also not my personal opinions on any particular issue. Happy Reading!


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    Inside the Mind of the Entrepreneur
    Groundbreaking new research shows what sets Inc. 500 CEOs apart from the pack.”

    The most common comment in the long and complicated MBA Mondays series on Employee Equity is the question of how much equity should you grant when you make a hire. I am going to try to address that question in this post.

    First, a caveat. For your first key hires, three, five, maybe as much as ten, you will probably not be able to use any kind of formula. Getting someone to join your dream before it is much of anything is an art not a science. And the amount of equity you need to grant to accomplish these hires is also an art and most certainly not a science. However, a rule of thumb for those first few hires is that you will be granting them in terms of points of equity (ie 1%, 2%, 5%, 10%). To be clear, these are hires we are talking about, not co-founders. Co-founders are an entirely different discussion and I am not talking about them in this post.

    Once you have assembled a core team that is operating the business, you need to move from art to science in terms of granting employee equity. And most importantly you need to move away from points of equity to the dollar value of equity. Giving out equity in terms of points is very expensive and you need to move away from it as soon as it is reasonable to do so.

    We have developed a formula that we like to use for this purpose. I got this formula from a big compensation consulting firm. We hired them to advise a company I was on the board of that was going public a long time ago. I’ve modified it in a few places to simplify it. But it is based on a common practive in compensation consulting. And it is based on the dollar value of equity.

    The first thing you do is you figure out how valuable your company is (we call this “best value”). This is NOT your 409a valuation (we call that “fair value”). This “best value” can be the valuation on the last round of financing. Or it can be a recent offer to buy your company that you turned down. Or it can be the discounted value of future cash flows. Or it can be a public market comp analysis. Whatever approach you use, it should be the value of your company that you would sell or finance your business at right now. Let’s say the number is $25mm. This is an important data point for this effort. The other important data point is the number of fully diluted shares. Let’s say that is 10mm shares outstanding.

    The second thing you do is break up your org chart into brackets. There is no bracket for the CEO and COO. Grants for CEOs and COOs should and will be made by the Board. The first bracket is the senior management team; the CFO, Chief Revenue Officer/VP Sales, Chief Marketing Officer/VP Marketing, Chief Product Officer/VP Product, CTO, VP Eng, Chief People Officer/VP HR, General Counsel, and anyone else on the senior team. The second bracket is Director level managers and key people (engineering and design superstars for sure). The third bracket are employees who are in the key functions like engineering, product, marketing, etc. And the fourth bracket are employees who are not in key functions. This could include reception, clerical employees, etc.

    When you have the brackets set up, you put a multiplier next to them. There are no hard and fast rules on multipliers. You can also have many more brackets than four. I am sticking with four brackets to make this post simple. Here are our default brackets:

    Senior Team: 0.5x

    Director Level: 0.25x

    Key Functions: 0.1x

    All Others: 0.05x

    Then you multiply the employee’s base salary by the multiplier to get to a dollar value of equity. Let’s say your VP Product is making $175k per year. Then the dollar value of equity you offer them is 0.5 x $175k, which is equal to $87.5k. Let’s say a director level product person is making $125k. Then the dollar value of equity you offer them is 0.25 x $125k which is equal to $31.25k.

    Then you divide the dollar value of equity by the “best value” of your business and multiply the result by the number of fully diluted shares outstanding to get the grant amount. We said that the business was worth $25mm and there are 10mm shares outstanding. So the VP Product gets an equity grant of ((87.5k/25mm) * 10mm) which is 35k shares. And the the director level product person gets an equity grant of ((31.25k/25mm) *10mm) which is 12.5k shares.

    Another, possibly simpler, way to do this is to use the current share price. You get that by dividing the best value of your company ($25mm) by the fully diluted shares outstanding (10mm). In this case, it would be $2.50 per share. Then you simply divide the dollar value of equity by the current share price. You’ll get the same numbers and it is easier to explain and understand.

    The key thing is to communicate the equity grant in dollar values, not in percentage of the company. Startups should be able to dramatically increase the value of their equity over the four years a stock grant vests. We expect our companies to be able to increase in value three to five times over a four year period. So a grant with a value of $125k could be worth $400k to $600k over the time period it vests. And of course, there is always the possiblilty of a breakout that increases 10x over that time. Talking about grants in dollar values emphasizes that equity aligns interests around increasing the value of the company and makes it tangible to the employees.

    When you are doing retention grants, I like to use the same formula but divide the dollar value of the retention grant by two to reflect that they are being made every two years. That means the the unvested equity at the time of the retention grant should be roughly equal to the dollar value of unvested equity at the time of the initial grant.

    We have a very sophisticated spreadsheet that Andrew Parker built that lays all of this out for current employees and future hires. We share it with our portfolio companies but I do not want to post it here because it is very complicated and requires someone to hand hold the users. And this blog doesn’t come with end user support.

    I hope this methodology makes sense to all of you and helps answer the question of “how much?”. Issuing equity to employees does not have to be an art form, particularly once the company has grown into a real business and is scaling up. Using a methodology, whether it is this one or some other one, is a good practice to promote fairness and rigor in a very important part of the compensation scheme.


    By now, we’ve all heard about the Apple Watch, but how will you use it?

    Today’s reveal of the Apple Watch put an end to years worth of speculation as to what an Apple wearable would look like. Many predicted it would adopt many of the iPhone’s gestures and behaviors like pinch-to-zoom, the ingenious interaction that would changed the way a billion people around the globe used a smartphone. But that simple gesture it’s nowhere to be found in Apple’s newest creation.


    So how will the Apple Watch UI work? Since the Apple Watch hands-on demo is actually just a video loop on the watch screen, we did our best to piece things together from the presentation today.

    Read More>


    We’ve already heard that we need to embrace failure. Now here’s everything we need to know about what that actually means.

    It seems like everywhere we turn we’re being told to “embrace failure.” From social media to countless business books and articles and the global failure conference FailCon, the importance of mistakes is lauded as a key stepping-stone for success.

    Even advertisers are realizing the power of bragging about getting it wrong. For example, earlier this year Domino’s commercials touted that at their company “failure is an option” with a nod to its failed cookie pizza of 2007.

    Despite all the failure-embracing saturation we’re seeing these days, this concept is nothing new. Iterations of “embrace failure” have existed long before the slogan was popular. Before the likes of Steve Jobs and Richard Branson told us to embrace failure, Michael Jordan told us that he fails over and over again. Before that Truman Capote said failure was “the condiment that gives success its flavor.” And before that James Joyce dubbed mistakes “portals of discovery.” Thomas Edison, Abraham Lincoln, Henry Ford—the list of innovators that used failure to get at their success goes on and on and on.

    So why the apparent resurgence? More importantly, what does embracing failure really mean, does it work, and at what point is it too much?

    In an effort to find the answers, we consulted a few experts who know a thing or two about failure.

    Read More>


    The author of The Doodle Revolution explains how this common “time waster” is really a creative launch-pad.

    Read More>

    (via goodideaexchange)


    In defense of almonds

    Source: why_rob_y (reddit)

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    Insights from the time-diaries collected from Americans over the past 11 years show we’re shifting in our priorities.

    If you can’t catch a breath during the frantic daily grind, don’t blame it on not having any free time.

    Americans actually have more leisure time, are less rushed, less stressed, and sleep much more than we think we do. According to sociologist John Robinson, or better known as “Father Time” to his colleagues, most people have around 40 hours of free time per week.

    Robinson, a professor at the University of Maryland and director of the Americans’ Use of Time Project, has been studying how people spend their time for more than 50 years. In 1972, he became one of the first social scientists to collect detailed time diaries of people all over the country. According to his massive studies and research, Robinson tells Fast Company that modern Americans only merely feel like we are working more hours and we also tend to exaggerate about our work hours since the actual hours on the job have been decreasing steadily for the past 40 years.

    If this is the case, then why don’t we feel like we have more time and what exactly are we spending our time on? Below Robinson gives us the major findings from decades of time-use and social attitudes research:

    Read More>


    With the help of an Australian professor, the former Microsoft co-founder and CEO wants to change the way our youth learns about history.


    Overall, men were twice as likely to eat bugs than women, and every 10-year increase in age was associated with a 27% decrease in the likelihood of eating insects, they report in the journal Food Quality and Preference

    Read More>

    (via fastcompany)


    Parents often say: ‘I just want my children to be happy.’ It is unusual to hear: ‘I just want my children’s lives to be meaningful,’ yet that’s what most of us seem to want for ourselves. We fear meaninglessness. We fret about the ‘nihilism’ of this or that aspect of our culture. When we lose a sense of meaning, we get depressed. What is this thing we call meaning, and why might we need it so badly?


    Billions of dollars are spent on experts who claim they can forecast what’s around the corner, in business, finance and economics. Most of them get it wrong. Now a groundbreaking study has unlocked the secret: it is possible to predict the future — and a new breed of “superforecasters” knows how to do it.


    Like many in the field, Steven Ma helps kids apply to college. Unlike his competitors, Ma guarantees that his students will get into a top school or their parents get their money back.

    Ultimately you have to enjoy your life as an entrepreneur. It’s great to provide professional satisfaction from work, but work can’t be everything. You have to be able to say that this weekend I am going to enjoy something and not think about the work I could be doing.

    5 business tips from Tough Mudder’s CEO (via forbes)

    (via goodideaexchange)

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