Wednesday, May 21, 2008

How to become a cynic part 2

Here's another truism I learned starting a new company: a lot of people will say they want in on it and want to help, but when it comes down to actually quitting their job, or putting up money, they'll back off.

Actually I already knew that, because all the books talk about it, but I didn't really expect it in my case for some reason. But sure, people have different levels of risk they're willing to take, some a little, some a lot. So when it came down to it, no, my coworker couldn't quit and work with me for free for a year for a big chunk of the company if we hit it off, because he didn't want to spend his savings and 401K until we had income. Too risky for him and that was totally understandable.

What wasn't so understandable and was disappointing to me, was over the next several years as I took all the risk, finished the product, hit the road selling it, fretted over meeting delivery schedules, took out loans to pay for the equipment and hoped the customer would pay on time, after all that he finally wanted to join. Specifically after I told him I had finally landed a $4 million, multi-year contract with a large government contractor and was really ready now to expand and make it happen.

So being his friend and former coworker, having had lots of lunches together talking about how "someday" we would work together in our own thing and how great it would be with no dress code, work from home sometimes, work from the beach, flex time, no asshole bosses, all those good pipe dreams -- here I was able to actually offer that. I offered him a really nice salary (50% higher than the market), all those benefits, a nice bonus if we do well (and I'm generous with bonuses), and a year severance if it didn't work out. Little risk to him, either -- I had the cash flow and the contracts, no problem meeting payroll, and great momentum with new business opportunities. And we were friends and really worked well together. I really couldn't see how he could decline.

I was surprised though at his lukewarm reception. He seemed disappointed and finally said he expected he'd get a share of the company "since I'm one of the first employees." I asked how much were you thinking? He replied "I don't know, 30, 40 percent maybe."

Okay, if this were a startup with no product, no income, just some people willing to work hard for a payoff in the end, sure. Those were sort of the numbers we had talked about way before. But now? With a $4 million contract and already (by then) $700K a year in sales -- and an established, completed product able to win contracts that size -- surely he'd realize my company had probably what, a million or two in value? And he wants to just come in and I hand him 30 or 40 percent of that? Here you go, here's $500K just to join my company, on top of earning $150K a year salary and another $300K a year profit sharing?

And for what? He's a competent engineer, all-around good guy, dependable and trustworthy. But is that worth $500K a year in this world? Did he really think it was?

I was stunned by his request. I wasn't being greedy, I was being realistic. Paying someone effectively $500K signing bonus, plus $500K a year compensation all for a $100K a year job was just business stupidity. I pointed out how much compensation that would be, and sort of stammered a question asking how he might bring that much value to the business, and his reponse was simply "Well, you'll be making even more on this contract, so we both win!"

I realized then that there are highly intelligent, sane, well-educated people who still just don't... how to say this... "get it." Get business, I mean. I just sort of assumed everyone knew the idea of higher risk, higher reward, knew the idea of bringing value to a company or a project or a relationship and compensation would basically be proportional to that value. And prices and company income is proportional to the value you give to the customer so it all balances out and you don't get "something for nothing" in life. But some people just don't realize that and think -- apparently -- that sometimes people just give you stuff for free.

I wonder if that mistaken belief occurs because of the culture and idea (in the U.S. anyway) that you always have to be ready for an "opportunity" and seize it when it happens. But "opportunity" doesn't mean someone will be holding out free money for you and you just have to grab it when it happens. Come on!

No, opportunity I think means at some point in your scoping the business world you'll find a market ripe for a better product (as in my case), or opportunity means a family friend who runs a highly profitable restaurant is retiring and offering to sell it to you because he likes you and knows you'll work hard to keep it going, or opportunity means a friend of a friend knows this guy who just got a patent on some awesome product idea and is looking for help to build a prototype for free in return for a share of royalties if he sells it. All of those opportunities mean you have to do work and take risks in return for the reward. Opportunity is not "here's some free money for nothing." Again, some people apparently just don't get that.

I was saddened at this possible loss of a friend because of our wide disconnect, and told him his expectations were just too unworkable for me and maybe I really was just looking for someone to do a simple job for a simple salary. But maybe in the future we might still be able to team up "on something." He agreed and we parted amicably.

The next day he called up though and apologized for seeming greedy, that he really wasn't trying to get "something for nothing" but wanted to do it more "as an opportunity than just a job." To me, he still didn't get it. It was an opportunity when I invited him to partner when I first started out, when I had no sales and no money and he'd take the risk of the company failing and getting nothing, in return for the chance at a much higher reward. Now though there wasn't that risk, so it was just a job. I dunno though, I didn't want to lecture him on that. Maybe it was me, maybe I really was being an asshole about it, I thought. But my gut said no, it's just bad business and I went with that.

Today we remain sort of friends, although it's still a little strained.

But that was my lesson learned: some people simply understand "business," and some people simply don't. Not that one's better than the other -- there's a lot less stress just being a worker bee, for example, and maybe life overall is better that way -- but just don't expect everyone to understand business or have the same "common sense" as you. That concept though was new to me, and a little disappointing.


Martin said...

Hello Bill, I've noticed your posts for a while on BoS, and I've actually thought how good it would be if you started a blog. So much on BoS is consumer-software centric, and selling big money applications to government is barely discussed at all.

Consequently it's something I know very little about, and yet it's something I'd love to understand better. I'm not sure it's a business I'd want to be in - despite selling B2B niche software myself I'm trying to keep my MicroISV at the cheaper end of the market as I've always thought it would be less stressful. I'm not keen on the old sales-presentation style way of bringing money in. What I really want is a Four Hour Work Week type thing, not a real job with real employees.

Saying that though, despite spending 95% of my time focusing on the low end of the market in my niche, I've actually made more money on the high(er) end, pretty much by accident. This might suggest that I should think about doing more of it!

Regarding this post: I was actually getting a bit angry at the thought of this guy expecting a big chunk of your equity! My one-man MicroISV has already seen about two and half near partners that have been all enthusiastic about coming into the business but who lose all enthusiasm when there's any mention of risk (e.g. "quit your job and come join me then"). I'm a long way off reaching your impressive level of revenue, so any partner coming to join me would need to take a fair bit of risk.

From the start I've always been completely up front with these potential partners about equity, and I've basically said it's not happening. I'm happy to split profits right down the middle with a partner that comes along a bit late (assuming their contribution at least comes close to doubling revenue), but the equity I've built up by taking risk and slogging my guts out isn't going to be split with anyone that hasn't done the the same. That's been my line at any rate: better to under-promise and then maybe over-deliver if things work out well.

Having been in, and finally got out of, a 50/50 partnership where the other "partner" didn't do much, I'm very wary of getting myself into anything like that situation again. I'm of the opinion that everything's a lot easier when you don't have to worry too much about pleasing shareholders, or convincing them that your decisions are sound.

Anyway, I'm rambling now... All I really wanted to say is that it's great to see you start a blog. I'll add you to my feed reader and look forward to future posts.


Bill said...

"What I really want is a Four Hour Work Week type thing, not a real job with real employees."

Good thoughts, Martin. I think you're describing the "lifestyle" type of business where you "could" grow and expand, but choose not too -- you're happy by yourself just doing your own thing at your own pace.

I did that my first few years and wonder if that is a better way than having employees who maybe bring in more, but have their problems and issues you have to manage, plus you have all that payroll cash flowing out every month... hard to say which is better.

Martin said...

I'm guessing that employees are a big help for the kind of selling you do. I'm based in the UK, and, in my limited experience of selling higher-priced consultingware to the public sector, they certain want to see signs that they're buying from a "safe", established company. I think employee count is one of those signs for them... If you're one guy working out of his spare room, you don't seem like such a safe bet.

Although from your most impressive story (selling a ~200k package whilst operating alone - wow), maybe I should question these assumptions of mine about what government customers are looking for! The urge to learn more about how it all works is why I'm intrigued by your blog.

My ideal growth plan has two parts:

1. Find a good partner, in exchange for the same revenue-related pay I get - no equity involved. You could argue that it's not a real partner without equity... but I'd rather not have the stress of wondering if they'll develop a very different vision for the business than me, or that they might decide they want to cash out long before I want to.

2. Start outsourcing more to virtual assistants / rentacoder etc. Basically I'd hope to have a few people essentially working for the company, but remotely, and on a contract basis. To me this seems a lot less stressful than hiring real employees - payroll and cashflow are things that I think I'd find really stressful.

It's funny how you develop these ideal plans for the lifestyle business you want, and then opportunities come your way that point you towards quite different plans. Balancing the lifestyle you want with the business success you want can be tough!

Bill said...

Outsourcing is a great idea, and I used to and still do it for some things like payroll, graphic arts and proposal editing.

I wouldn't do it for your key product development though because it limits your options if you want to sell your company someday (they may get cold feet not knowing who really "owns" your product, especially if it was developed outside your country).

That partnering idea I think you mean more standard employee but profit-sharing or commission-only, with you still "boss" and having the final say. Partners you can't fire if it doesn't work out, they know it, and that changes the dynamic.

My first employee was commission only (sales) and it worked out okay although there were some annoying issues I'm sure I'll write about here.

Martin said...

Yes, I guess I'm not talking about a real partner as such. Although it's worth bearing in mind that unless equity split is equal in a company owned by "partners", somebody usually has the final say at shareholder level.

Anyway, you're way ahead of me in experience on all this - I'll look forward to learning more from your future posts.

Richard said...

On the post - I suppose I'm not surprised by your friend's behaviour. Perspective and self-interest are powerful. If he were someone else advising you on the situation he'd likely see it the same way you do but because his perspective was "what can I get out of it"...

You know that saying - "the difference between a man and a dog is that a dog won't bite you when you feed it". It's cynical, but accepting it as part of our makeup means we can work towards overcoming it in ourselves.

So how about a joint venture, eh? A kinda todo-list-nuke-station-software-combo. It'll be a world first! :)

Thanks for writing - look forward to your future posts.

Steve McLeod said...

I love the article. That some people just don't get business, even though they are otherwise intelligent and astute - that was also my surprising finding when I ran a small business.

Even the concept of either having to receive more money than I gave out or going bankrupt seemed too hard for some people to understand!

My solace came when I met with other small business owners. These were people who always understood the challenges of doing business.

sanity said...

Hey Bill, really like the blog.

I'm an entrepreneur myself, although until recently I've gone the venture capital route, raising around $20M for various early-stage tech projects.

It took me quite a while to realize that venture capital is a good way to ensure you have a salary while you work on a new project, but a bad way to build a business unless you really strike gold.

I've been bootstrapping my latest venture for the last 6 months. I spotted a gap in the market, something people wanted that didn't really exist and that they would pay for. Something I was pretty well qualified to build.

Its still early days, I've been fortunate in that one of my first customers was willing to give me a large advance, but I'm still building up recurring revenue.

I guess my question is: when it is just you, how do you divide time between working on the product, and finding new customers?

Anyway, thanks for a great blog.

Bill said...

Sanity, when it was just myself I spent about 80-90% writing up proposals and answering inquiries and emails, and and unfortunately very little on upgrading my product.

Now I have a sales guy but still spend most my time as his sales manager steering him around and keeping him focused on the priorities because he's all over the place trying to get his commission.

I also have three software engineers I hired over the past year who have just about now gotten comfortable with my mess of code and are starting to move it forward. But the product has mostly been stagnant the past 3 years, apart from individual customer modifications mostly slapped together the week before delivery. Not very pretty, but the checks do keep coming in.

sanity said...

Thanks for the quick response Bill.

This prompts another question. What is the value of sales people with a sophisticated software product?

My software requires significant domain knowledge to explain to people. Typically I'm talking to CTOs who expect quick responses to very technical questions. I just can't imagine a non-technical person explaining this in a persuasive way.

I have a friend who recently made a decent amount of money selling his tech company. The company that bought it figured that they could significantly increase sales by adding a sales team. My friend had been selling his software to that point, and he is a software engineer (although a good salesman in my opinion).

I suppose the real question is: "Is sales snake-oil?". I just have a hard time seeing how throwing non-technical sales people at a product can necessarily improve sales...

sanity said...

Oops, meant to add to my previous comment: my friend, having observed the sales team (that was installed by the new parent company) in action, he is very skeptical that they will increase sales beyond with they would otherwise have been.

Bill said...

Sanity, you say "I just can't imagine a non-technical person explaining this in a persuasive way"...

Often though the person who makes the decision to buy is non-technical. So you can put your non-technical sales guy on him to convince him of your product's value and benefit to his organization, meanwhile you talk to his technical people about your product's great features and easy implementation.

chris said...

Cynic, indeed. Back in 2004, I happily quit a six-figure job to work full time developing a niche product. I was the software guy, my best friend the hardware guy, and one of his friends was the "business guy". We each put in $10K in cash to fund the hardware prototypes and then two of us (HW/SW guys) spent the next 20 months busting our asses building the product. (Business guy did pretty much nothing during this 20-month interval.)

After the product was done and shipping, my part (software) was essentially done. Business guy finally had something to do (billing, basically). He decides to pay himself wages for his now-part-time job (he keeps his day job). To my everlasting surprise, business guy decides that not only is he entitled to a wage for his time (us development guys worked entirely for free for 20 months), he's also entitled to an equal third of the profits! I guess he somehow thought his $10K chip-in entitled him to an equal share. In other words, to him the 20 months of blood, sweat, and tears of his two partners was either valueless or was charity.

To my everlasting chagrin, my best friend and other partner did not disagree with business guy! I couldn't believe it! He was basically willing to sell out nearly two years of my labor (and his own) as if it was worth nothing.

I raised a big stink and insisted that our little company should pay a small royalty to us two developers as some compensation for our investment of time and risk. I didn't care how much the royalty was--I just insisted that the developers should get paid something up front for each unit sold rather than settling for a third of whatever was left over after business guy paid himself his wages.

Ultimately, the product didn't go very far, but this little episode damaged my best-friendship tremendously. We're still friendly, sort of, but it's strained. I think there are life lessons here, but I'm still not sure exactly what they are. One thing's for sure: next time I'll get it all in writing before I spend ten seconds working in partnership with anyone else, even if (especially if?) they're good friends who I think I can trust.

Anonymous said...

Hi Bill

Just found your blog and it's a great read!

Just wanted to say i wasn't surprised to read about your friend

My company started with three guys who worked together who decided we could do things better

Two of us decided to take the "opportunity" (and obviously the risk!) whereas the other one didn't want to take any risk (even though he actually had the least to lose, he had no mortgage, no wife or kids...but his choice i guess)

About a year in he started making noises about "coming on board" again

From an employee perspective he could have been very valuable but as in your situation he was looking for a piece of the company (now we were established!)

We ended up offering him a job but just as regular employee. His interest cooled after that!

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