The Elves Leave Middle Earth – Sodas Are No Longer Free

Sometimes financial decisions that are seemingly rational on their face can precipitate mass exodus of your best engineers.

We Hired the CFO
Last week as a favor to a friend, I sat in on a board meeting of a fairly successful 3½  year-old startup. Given all that could go wrong in this economy, they were doing well. Their business had just crossed cash flow breakeven, had grown past 50 employees, just raised a substantive follow-on round of financing and had recently hired a Chief Financial Officer. It was an impressive performance.

Then the new CFO got up to give her presentation – all kind of expected; Sarbanes Oxley compliance, a new accounting system, beef up IT and security, Section 409A (valuation) compliance, etc. Then she dropped the other shoe.

“Do you know how much our company is spending on free sodas and snacks?”  And to answer her own question she presented the spreadsheet totaling it all up.

There were some experienced VC’s in the room and I was waiting for them to “educate” her about startup culture. But my jaw dropped when the board agreed that the “free stuff” had to go.

“We’re too big for that now” was the shared opinion. But we’ll sell them soda “cheap.”

Unintended Consequences
I had lived through this same conversation four times in my career, and each time it ended as an example of unintended consequences. No one on the board or the executive staff was trying to be stupid. But to save $10,000 or so, they unintentionally launched an exodus of their best engineers.

This company had grown from the founders, who hired an early team of superstars, many now managing their own teams. All these engineers were still heads-down, working their tails off, just as they had been doing since the first few months of the company. Too busy working, most were oblivious to the changes that success and growth had brought to the company.

The Elves Leave Middle Earth – Sodas Are No Longer Free
One day the engineering team was clustered in the snack room looking at the soda machine. The sign said, “Soda now 50 cents.” The uproar began. Engineers started complaining about the price of the soda. Someone noticed that instead of the informal reimbursement system for dinners when they were working late, there was now a formal expense report system. Some had already been irritated when “professional” managers had been hired over their teams with reportedly more stock than the early engineers had. Lots of email was exchanged about “how things were changing for the worse.” A few engineers went to the see the CEO.

But the damage had been done. The most talented and senior engineers looked up from their desks and noticed the company was no longer the one they loved. It had changed. And not in a way they were happy with.

The best engineers quietly put the word out that they were available, and in less than month the best and the brightest began to drift away.

What Happened?
Startups go through a metamorphosis as they become larger companies. They go from organizations built to learn, discover and iterate, to predominately one that can execute adroitly having found product/market fit.

Humans seem to be hard-wired for numbers of social relationships. These same numbers also define boundaries in growing an organization – get bigger than a certain size and you need a different management system. The military has recognized this for thousands of years as they built command and control hierarchies that matched these numbers.

Wake Up Call
The engineers focused on building product never noticed when the company had grown into something different than what they first joined.

The sodas were just the wake-up call.

As startups scale into a company, founders and the board need to realize that the most important transitions are not about systems, buildings or hardware. It’s about the company’s most valuable asset – its employees.

Great companies do this well.

Lessons Learned

  • Be careful of unintended consequences when you grow
  • Recognize the transition boundaries in company size
  • Preserve and manage an Innovation Culture

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85 Responses

  1. It never ceases to amaze me how many startups make the mistake of killing off the free drinks.

    When the CFO asks, “Do you know how much our company is spending on sodas and free snacks,” the answer should be, “Less than the cost of hiring a single engineer.”

    This was the death knell at the very first startup I worked at. Fortunately, I had already seen the writing on the wall and skedaddled to HBS.

  2. This post was mentioned on Hackernews by gaius: Absolutely. Another symptom is machine naming. When people who will never themselves log into them tell you to dump whatever whimsical themes you had and call your boxes according to an official conventio…

  3. Nice post Steve. Going through this transition at a couple of startups (including Stardent) got me thinking about Dunbar’s number too. Here’s
    my take on it.

  4. So, the moral is to keep sodas free to trick your best employees into staying a little longer than they otherwise would want to?

    • My thoughts exactly. If, as the article says, the company has _already_ changed its nature, and the engineers just haven’t noticed the change yet, the answer’s got to be a little deeper than “keep the free sodas, maybe they’ll be oblivious a little while longer,” doesn’t it?

      • It’s not just that. That’s the first step that makes the change. It’s that “wake up call” and just an example.

        Afterward, more changes started to happen and people started to notice. If you keep the free drinks, it’s already a stance that tells you “We’ll keep taking care of our people the way we have” and with that come other decisions that should stay employee-positive rather than a deterrent.

        I’ve witnessed these changes at several startups and it starts with “free drinks” being abolished, a first step that is quickly followed by numerous similar decisions, and ends in a corporate-style environment that none of the original employees signed up for. The thing is, these kind of decisions make you, as an employee, feel like things are “getting worse” and “who knows what will happen” and creates an unsure environment where employees are secondary.

        On the other hand, coming into an environment that already does not have free drinks, you can easily dismiss it and won’t see it as a detriment. Taking away other benefits, however, will create the same atmosphere.

    • You didn’t read until the end? “As startups scale…” describes what needs to happen.

    • The end of the free snacks are the canary in the coal mine. Whether it’s their intention or not, that’s one of the ways that a company says, “Our bottom line is more important than the happiness of our employees.” It never stops at no-more-free-snacks, that’s always part of a more comprehensive cultural change. Obviously the bottom line will always have some level of primacy, but there are companies that see employee focused expenditures as things that have pay off, measurable or not, and there are companies that see every non-essential expense as something to be cut back. Generally the latter type skimps in far more areas than just free snacks. I think that’s the underlying point.

  5. Did you mean “unintended consequences” in the final points?

  6. I’d love to know what happened with this company – did the mass exodus of experienced engineers precipitate an immediate fall from grace, or did they limp along for a while before someone else came and ate their lunch?

  7. It not only happens in startups – it happens in decades old companies too. From getting the job done, it suddenly becomes “are we following best-practices”, and processes over results. Beaurocracy sets in (I call it hardening of the corporate arteries). People that would initiate new products and projects see that the effort to get something done is too high, so they don’t even try anymore.

    • I’ve been through this transition at startups, but I also went through it at Oracle, where I worked for several years. The company was very large when I started (at least 15,000), but it was much bigger when I left, and it had become even more “professionally managed”. These changes weren’t all bad – the company was more profitable, which I appreciated as a stockholder – but there was less “love for the engineers”, which made it much easier to leave. I had been very surprised at how good a place to work it was for engineers even though it was so huge, but eventually it was just a job.

  8. This sounds soooo familiar. I’ve been through this twice. The first time it was soda’s and free beer & wine @ 4pm on Friday afternoons (you guessed it, a European company, software development), the second time it was birthday cakes and monthly sponsored group lunches (American biotech).

    In both cases, company-wide social interaction, cross-pollination and simple “group-belonging” was destroyed in a matter of weeks, to save the equivalent of one or two egineering salaries a year.

    The former company had successfully survived the 150 person ‘anonymity limit’ with these weekly get-togethers. After disbanding the Friday socials, single and childless employees within a building organized their own, leaving in droves at 5pm sharp to organize building-specific meetups in a nearby bar, not only creating a wedge between locations, but even within departments (the “boring breeders” vs “young singles”)

    At the latter company, people were not paid wages commensurate with their professional averages because a large pool of people willing to live in NYC. After the “cake perk” was made redundant, many felt under-appreciated and robbed (or were scared the company wasn’t doing well enough). Many left. Others started to rebel by taking long lunches to compensate for unpaid overtime, or working strict hours and “caring as much about the company as it did about them”…

    Hence I’m convinced that the day google cancels all free lunches, they’re doomed…

  9. Can you imagine her saying “Do you know how much we spend on board meetings? Everyone pony up for the food and the photocopying costs…”

  10. It doesn’t have to be a startup with the characteristics you describe however. In my first job out of school at NCR our group admin decided that if we lost our Pentel mechanical pencils we had to replace them ourselves. She kept them locked in a cabinet so we couldn’t steal them. (Her idea, not the company’s.) I spent 20 minutes of both of our time arguing about this. She missed the point of that wasted time but her boss didn’t.

    In the case of the startup engineers it would have been much more meaningful for them to return the financial thinking by beginning to work 40 hrs/week. After all why should they give away their work (cokes) for free? They should have then demanded that the new CFO resign. If they weren’t successful **then** they should leave.

    I’m not sure when engineers will wise up but I hope they will someday. We get so enamored with the “coolness” factor of what we are doing that we are easy targets for cost cutting. Tuning in to the financial environment will make us less likely to leave when the cokes cost a quarter and less likely to give it our “all” with out appropriate remuneration.

    Being in balance makes for better workers and better companies.

    • But the point is that great engineers DON’T fight, they just move on. They aren’t in the business of fixing companies, so they feel that anything that gets in the way of them creating is a huge waste of their time. I’d have to agree with them, at least in spirit.

    • An alternate argument might be made that CFO’s should learn to engineer and make things to empathize and how a soda break can change your mood for the day. 🙂 (or at the very least, look at the free work the existing engineers were giving balanced against the snack cost. In less easy terms, as others mentioned, the cost of replacing the skills and knowledge of those people)

      Ultimately, my point is that our global society is moving towards skill specialization, not skill generalization. This means that expecting engineers to actively think financially will result in people less skilled at engineering. These are certainly different skill sets, and if you are hiring for an engineer, and your candidates are: A.) Great Engineer, or B.) Average Engineer, Average Financial Guy (and the job isn’t for a financial project), who are you going to pick?

      (the worst thing I’ve seen small companies do, is to try and turn all of their employees in to sales people, with commission incentives and the whole nine yards. Your average employee is a terrible sales person, and that only distracts them)

  11. Great post! This sort of thing always makes me crazy.

    What really bothers me about it, and part of what I think the engineers are responding to in this example, is that it represents a shift from a company-wide “we” into an a managerial “us vs them”.

    The way you get those sodas early on is people saying something like, “Look, it’s stupid for us all to go out and by drinks retail. This is our company; let’s make this place homey and save us all some money at the same time.” When you are thinking of everybody’s pocketbooks together, it’s a clear collective win.

    Your example CFO, though, isn’t thinking primarily about a “we” that includes the employees. Her “we” is the high-level managers and investors. “Why should we subsidize their drinks and dinners?” is the question she’s asking. Note that she doesn’t give the money saved back to the employees. She just takes it, so it’s a net salary cut.

    And then these allegedly professional managers wonder why people are leaving. From the employee perspective, they’ve already been kicked out from what really matters.

    • I think this is a great perspective. It really isn’t about the money (besides the fact that most engineers I know don’t always keep enough change in their pockets for the soda machine).

  12. I’ve definitely seen this happen at several companies.

    As you’ve said, the soda is just a wake-up call. In the examples I’ve seen, it’s not always soda, but the results are the same.

    The engineers realize that they’ve become a commodity in the eyes of the stakeholders. In most cases, the next step is to replace “overpaid” engineers with new talent, so the engineers leave before they get canned.

    In the end, CFO’s and other C-Level people need to realize one thing. Even in the current economy, a good engineer can make the same money you’re paying them at another company.

  13. I find it interesting how many people reached a completely different set of opinions about the subject than I did. The lack of free sodas wasn’t a death knell for the company, it was the trigger that caused long term people to look around and notice the other changes.

    As companies grow they make changes, that’s part of growth and determining the self-image of the company.
    I found it interesting how many people assumed that all processes are bad, that losing the early engineers would cause the business to fail, and similar conclusions. I disagree with them all, but they were interesting nonetheless.

    My read of the article was that we were examining an example of how not to handle the transition as the company grew not an example of how to freeze a company in it’s early adolescence and prevent the transition from happening. How may of you are actively paying attention to your company, talking to new people as they come on board to get fresh opinions, and so on? How many of you are assuming that your company is working exactly the same as it was 6 months ago, a year ago, 3 years ago?

  14. I just joined a company that’s in transition. Unfortunately, I was hired by the “corporate” people so I’m not feeling the love from the old timers. By association, I’m part of the “Man” trying to hassle them. Oh, and I’m a software tester, which makes things worse. 🙂

  15. I’ve been through the end of free sodas myself, and yes, it sucks, and yes, it was part of the process through which I eventually left. But I think Eli’s comment is insightful.

    Maybe there’s a stage of growth at which the early engineers, the ones who work crazy hours for a pittance of soda, leave. But *maybe* they aren’t the engineers the company needs at that stage. A small team of talented, driven developers can do great things; but maybe they’re not the same great things that need to be done as the company has more and bigger customers, legal and fiduciary obligations, and so on.

    Maybe! I don’t know. But I wouldn’t assume it’s bad for a startup when it stops feeling like a startup. And in my case, the end of free sodas – and my eventual move to a new job – wasn’t so bad for me either.

    • Erik, I’m glad to say it’s generally bad for small companies. Not because of the sodas, which don’t matter at all. What matters is the kind of company culture you want and the sort of business you want to be in.

      As to the first, you can either have an inclusive, collaborative culture or one that’s top down, command and control. In the early days of the startup, somebody would have stood up and said, “Hey, should we really be spending all that money on sodas?” The group would come to some sort of consensus and gone with that. Nobody would have quit no matter the outcome.

      But the CFO gave a top-down mandate: we, the rulers, are unilaterally taking a perk from you little people. No collaboration there! And in my experience, a lot of other decisions, important ones, will start to get made the same way. People who value collaboration and professional autonomy will naturally leave.

      That might be fine for a business that is done innovating. If the execs think their job is just to extract maximum cash from an existing value stream, then maybe they don’t need to further innovate. In which case, perhaps they’re content to wave goodbye to the people who got them where they are.

      But I think that’s ludicrous for a 4-year-old company in today’s world. If they want to get a lot bigger without getting beaten by a hungry competitor, then they’ll have to keep finding new ways to generate value for people. Driving off their innovators to save 1% of their salaries isn’t the way to do that.

      Acting like a big company will get you the results of a big company.

      • If you haven’t already, I think you’d really enjoy Red Mars by Kim Stanley Robinson based on this comment.

  16. Fantastic post! What a wake-up call. This story needs to get in front of every company as a reminder about treating your employees well.

  17. Is it worth mentioning that there’s no reason for the apostrophe in “soda’s”? I believe you meant “Sodas are no longer free.”

  18. Entrepreneurs AND Engineers know how to pivot when business throws them a curve.

  19. It’s never a good sign when you’re depriving engineers of caffeine.

  20. This was a great read and quite enlightening. Thanks so much. Hmmmm, interesting. I know my mom’s company (a HUGE corporation) doesn’t go all out with free food or anything, but they still keep the little benefits like free drinks, local produce, and tutoring hours for employees who have kids. And it’s weird because she prefers not to have it…she thinks that it’s a waste of money. But she’s also of an older generation, so maybe that could have been part of it. The CFO and board v.s. the engineers…was there a generation gap as well as a corporate culture gap?

  21. It appears there can be turmoil in the growing of a business. Understanding how a business should grow and how big it should get, is an important decision for every leadership team.

    The problem wasn’t necessarily the sodas or the managers but a deterioration of trust in the founders judgement. Hiring external specialists should be something a growing company does as a team.

    Integrating outside folks into part of your core culture is the best way to maintain corporate cohesion. There certainly should be greater fracturing of a business into more startup sized teams. You get some good old competition, groups of 5-6 with a single participatory lead, 10-12 with a couple of participatory leads, one non participatory lead for 30 or so, one-two overhead/support for 30 or so.

    Let human resource folks control hiring and your engineers at your own risk. They should make the process easier, not have final say.

  22. Any removal of a perk no matter how small may be taken personally and in turn speed up the process where one asks if this work is worth it.

    Its too bad that no one mentions these unintended consequences during the meetings as the outcomes seem to usher in the finalization and brings the spark that ignites the exodus.

    While keeping the sodas free may not have been a long term solution for turnover removing the sodas (name your perk) allows for the feeling that the company doesn’t care. I cant imagine a scenario where the perceived lack of care towards fellow employees benefits anyone, other than the short term bottom line.

  23. “Do you know how much our company is spending on free sodas and snacks?”

    I work at a mid-sized manufacturer – just over 5,000 folks, worldwide. Twenty-five years ago it was fifty people in one building.

    Back then everyone got a turkey for Christmas. At some point they ran the numbers and decided that was getting kind of expensive, so they stopped.

    People _still_ talk about that, twenty years later.

  24. It comes down to an important rule:

    Happy workers word harder.

    If you don’t understand that, then no matter what the bottom line might be saying, you suck at management and people won’t want to work for you.

    The sodas are easily an allegory for everything that management does at various companies (I’m gonna go ahead and list Borders, where I used to work) to “save on the bottom line” and instead just shoot themselves in the foot.

    • Well even happy workers can hungry or lack caffeine. Even just the annoyance of paying $1 for a soda can be the difference between just leaving and finishing whatever you were working on.

      How many minutes of extra work of an engineer justifies an engineers worth of soda a day? On top of that soda is WAY cheaper when bought in bulk.

      Seems like the classic case of penny wise (stop free soda) vs pound foolish. Many times I’ve worked extra hours to finish something complicated to work on. That’s pretty hard to do if you are hungry or under caffeinated.

    • Perhaps the fundamental issue is that those productivity gains are hard to measure – particularly in the absence of a “control group.” There is a certain class of manager (all too common) that will assume something does not exist if you can’t see it on a management report or a balance sheet. Innovative engineers in particular shun that type of thinking, and that’s why that line of thought drives them away. That type of manager will always nurture mediocrity as a result.

  25. This is about more than just perks, it’s about what is Germaine and what is fluff. I worked for a mid size service company sold to large corporation. Almost immediately a clerk masquerading as a supervisor told me, in her teachers aide talking to an idiot voice, that there would be no more overtime. I asked her why that was and she was stunned. Why it was to cut cost of course. Do you believe our working margin is so small that it is better to lose jobs than pay overtime for their completion, I asked her. Or perhaps you believe customer satisfaction is too expensive if it involves overtime says me. These decisions are made by higher ups I was told. Smiling I told her I believed her and began my job search.

  26. Whoops,egg on my face. I now know that Germaine is a girls name. While germane would work a little better in the first sentence of my previous comment 🙂

  27. Free food leads to obesity, and sugar-laden free food
    leads to diabetes. Removing the financial incentive
    to limit food intake to an healthy amount is not
    doing your employees any favors. Look at it this
    way … to your dog, the food you feed it is “free”,
    but if you care about your dog, you wouldn’t keep
    filling up the food dish over and over again each
    night until the dog stops eating it. The dog didn’t
    evolve in a world of limitless free food, and neither
    did human beings.

    • Could you mentally substitute “organic tomato juice” for soda in the parable? Or maybe just reserve your hectoring for your family, friends, and co-workers?

    • Sure, John, and if the employees collectively decide to ditch the sodas for something healthy, that’s great. But if managers do it unilaterally, even for reasons of health rather than cost cutting, then they are — like in your analogy — treating employees as irresponsible pets rather than functioning adults. Who’d want to work in a place like that?

  28. When I started at mindspring as a startup (a dial up company) there were some very interesting rules.

    1. Drug testing policy. If you have drugs we will test them.
    2. You were allowed to drink beer on the job and soda was free.
    3. Dress code? There was none.

    What did you get out of such minor freedoms? The creation of a kick ass culture that resolved problems and became one of the largest ISP’s in the country.

    But then there was a buyout, sprint moved in everything changed. And the kick ass coders and engineers put the word out they were hired guns. I sat in on a meeting where the top coder was being asked not to leave and that he would get a 100% raise. He looked at management and said, its NOT the money man, its the fact that I LOVED working here, I can work anywhere. I kick ass in the world of code and I know it. You killed the albatross and your going to pay for it.

    10K is really peanuts and the VC’s know it. Think of how much money they have lost now because of the talent leaving. Phoenix is not a city of elite coders. I met coders that wrote pure poetry and very rarely had to debug. Personally, I know who the rock stars are on my team and if they want a day off I give it to them. I buy lunch-dinner I am interested in their lives.

    Be proud gangplank your now just like all the other companies.

    • Were you there before or after the Earthlink/Netcom debacle? As an Ex-Commie (Netcom alum), the end of the fun for us was when Earthlink’s $cientologists came in and got rid of whatever culture we had left. Our infrastructure team and network backbone was sold to one of the hundreds of scam-artist penny-stock communications companies that existed back then, ICG, who were promptly brought up on fraud charges.

      The Earthlink founder was a very early Netcom subscriber and was a huge proponent of the misguided lawsuit concerning our NNTP syndication – requiring us to /dev/null any posts mentioning Thetans, Xenu, etc. Back then, it was common for subscribers to set up phone trunks, a small modem bank and re-sell their oversubscribed dial-up to locals (either for cost or phone bill reasons), which is how Earthlink started.

      Sky Dayton, the founder, made it his personal mission to purchase Netcom as a “I’ll show them!”-kind of move to get back at the company for what he considered anti-$cientology actions*, and said as much during his first all-hands meeting in San Jose. You want to kill morale, culture, and precipitate a mass exodus of loyal employees? Telling them that their new boss only really cares about sticking it to them will definitely do that.

      * The really messed up part of this whole thing was that the posts disparaging them wasn’t originated on our network, nor on any of our NNTP servers. We syndicated, as most ISPs did at the time. The plaintiffs, while dialed into their Netcom accounts, loaded one of the alt.whatever.whatever newsgroups, saw a post they didn’t like and thought that Netcom a) endorsed the post, b) had some sort of *editorial* control over what was syndicated. They very well could have sued Best, Mindspring, hell AOL for that matter.

      Eternal September had some really weird ramifications for sure.

  29. Great post! We were just talking a version of this topic earlier today. There seems to come a time in an organization when it’s time to start applying “best practices.” Kind of like “growing up.” That’s not a bad idea, but it’s dopey to adopt these practices in a formulaic way.

    It’s easier to cut costs by cutting sodas–or man hours–than doing an analysis of what works and why. Maybe cutting the sodas *is* a good idea for the organization, but there doesn’t seem to be any thought behind this knee-jerk “solution.” Just a blind application of a rule and the concomitant unintended consequences.

  30. I’ve watched this twice, once was my own experience, a S&P 500 corporation that had one division that managed to stay pretty nimble over the years, however, it was in its dying throes when I left. The other was a OSS VOIP startup that my girlfriend was employee #42. In both cases it just made me sick, to see the stifled innovation due to short term cost cuts. I think in both cases, it was that gradual transition from “we” to “them” it kills all desire to exceed in a company. Both companies models require them to be innovative, but their management seems to go out of the way to stifle that innovation. At the large corporation, I watched time and again my colleague’s projects get cut due to insufficient funding, even when they had proven benefit’s to production. It got so bad, that an engineering manager literally fired someone so they couldn’t quit, because his director was asking him about the high turnover in his department. The lesson I learned was never leave decisions like this up to people above you, I have worked freelance as a consultant since leaving that company, and I don’t intend to go back to that world again!


  31. I’ve been through this a couple of times. It sucks when you notice you are not longer working where you thought you were, even if you’d seen signs before. When the one ‘final straw’ comes down, then you know it is time to change – move on, or change your game plan if staying here, because here isn’t what it was when you started.

    There’s another side to this though too. I’ve worked with a consulting software dev house (mostly in house projects of 4-40 staff). They tried to keep gross numbers under 100, maybe 60% employees (after the brutality of the dot-com crash convinced them having 15-20% contractors wasn’t enough wiggle room in bad times). They still have free beer, weekly lunches, various social events. People stay (I don’t know of many employees quitting).

    And thus the downside. Trying to stay the same size (or having hit the size where a major culture shift at the top management level would be required and isn’t really wanted) means that they’ve had devs working there a long time and a fair few. This means they have good project teams. But it means they have *expensive* project teams. You need some stars, but now they’ve got a lot of talent and not enough of the young n00bs to fill in the teams. They’ve got high overhead if they do let people go (large severances). They’ve got no place for people to grow up to… dev managers are few so that’s a very thin path and devs will top out and then wonder… what next? There just isn’t enough heirarchy to pay people what they want to be paid and let them do the architectural jobs that their experience would demand.

    So they’ll get losses eventually. The only reason it hasn’t been worse so far is that they *are* a good place to work, for the most part. But one day, their HR staff (which has been working towards the Eschaton of The Next Size Up) finally pisses off the old guard. New IP policy that claims everything you ever touch. Reduced free perks. And so on. Then the engineers will notice they are still delivering amazing projects on tight deadlines and working killer hours and decide… ‘why am I doing this again?’. So far, its mostly residual good will. But the worm will turn, sooner or later.

    They are a good company. But their people are outgrowing them. Their senior guys should be leads at new startups. Their mid level guys should be senior guys. Working on project teams where the junior guy has 5 years experience and 20% of the people could probably lead teams easily if necessary means that there just isn’t that sort of opportunity in a 50-employee+contractor firm.

    So, growth gets people to leave. Eventually, not growing will get people to leave because they are growing.

    There are valid reasons companies grow. What they should be looking to do is handle the growth smoothly. If you plan to stick at a size, they should encourage some of their people to strike out for new ventures, maybe help back some to help move their people on, making room for new blood (to avoid stagnation). This might also net beneficial synergies in the long run, if they act as sponsors and incubators and maybe a labour pool for the new startup.

    The one thing life is not is stagnant. If it seems that way, that’s a sure sign something is going to change soon.

  32. The key tipping point in corporate growth is when entrepreneurial flair is replaced with accountancy expertise.

  33. This sounds like a classic transition described in the book “Accidental Empires”.

    The book describes this pattern as a normal and healthy part of rapid growth tech companies where they progress through three more or less quantum phases of development: commando, infantry, and finally “don’t screw up”.

    What is described above is all the commandos (first wave of hires) becoming uncomfortable in the company’s transition to a necessary state of more infrastructure, rules and systems (the infantry). While you are in the second phase you need different people (not commandos) so it’s probably healthy that the first wave of kick-ass coders left.

    Even though the commandos are incredible people, they are uncomfortable operating in the new environment of a growth stage company & would do themselves and the company a favor by moving on to another early stage startup. What the company has to do is to hire managers who are comfortable bridging the commando and infantry roles. The right managers can hire quality replacements that can operate effectively in the infantry environment of light process and infrastructure.

    The mistakes I see above were to put the original commandos in charge of managing teams of new folks (probably infantry) and to hire a CFO who seems to manage from a third wave mentality like you might see at a fortune 500 company. You need someone more flexible at this point in your startup to manage the growth.

  34. As a teacher in NYC, I can certainly relate to the stupidity of management “cost cutting” that usually results in higher unexpected costs. On the other side, to anyone outside of your culture, this stuff about free soda sounds like so much whining. Try getting your Principal to approve the cost of a gross of pencils so your students can take a standardized test. No more free soda? Tough.

    • Bmj2k,
      Imagine the school taking away your break room, where you and other teachers go to relax a bit, and making it into a storage room. You don’t **need** a break room to relax. This is **work** after all. Same idea as the soda being removed.

      Try getting your manager to approve the purchase of $10 worth of wire for a test fixture when he just wants you to spend your own time scrounging around the lab(s) for it.

    • When I started DOE, teachers got free lunch, paid PD days, an compensation for over-time. Buying supplies was easy and straight forward. When I left, after the Bloomberg years, all that had changed, and the atmosphere towards teachers was hostile to the point of indiscriminate 3020a (s) being given out to retire teachers over 50. So yeah, the little things were about respect.

  35. Ask anyone who lived at Lotus in the early 90’s about the “Juice Wars” and they’ll tell a similar story. We weren’t a startup at that point, but the reaction to taking away the free milk and juice (yes, real fruit juice!) from the cafeteria was a far larger loss to productivity the first year than the cost savings were. Luckily, no-one was dumb enough to take away the free coffee (well, not for another 10 years or so…)

    The trick is to do things like this at the right point in the company lifecycle, and to do them in an honest and approachable manner that actually matches the company’s current culture – or, in a way that tactfully and politely signifies the shift in the corporate culture.

  36. […] The Elves Leave Middle Earth – Sodas Are No Longer Free Sometimes financial decisions that are seemingly rational on their face can precipitate mass exodus of your best […] […]

  37. Thank you for writing this! 🙂

  38. @sgblank: “Great companies do this well.”

    Now I’m sitting on the edge of my seat wondering “How do great companies do this well?” Time for another post, hopefully? 🙂

  39. “Some had already been irritated when “professional” managers had been hired over their teams with reportedly more stock than the early engineers had.” was what forced me to quit my startup gig. First engineer, knew the product inside and out but I had to report to someone making 5 times as much salary + stock who couldn’t design the right way down a one way street because he had been a manager at another company that our CEO wanted to be. I didn’t vest any of my stock (essentially losing half of my income) because I was pretty sure at that point, the company was swirling into the toilet. Haven’t looked back since.

    I have to say that size doesn’t have as much to do with it as leadership. I’ve worked at large companies that maintained the startup culture and small ones that blew it early on. The startup culture isn’t just caffeine fueled nights and free dinners and video games and random perks, it’s also making sure that everyone in the company knows what’s going on everywhere in the company and that everyone is invested in making it better all the time. It’s about treating employees as people who deserve value and respect, whose opinions matter in big decisions — not as expendable pieces that you can replace with a big HR budget. A good leader can keep that feeling going in a company of 100K, a bad leader can stratify a company of 3.

  40. I’m curious about the backgrounds of the “experienced VC’s in the room”? Were they former founders, management consultants, professional managers, professional VCs…? Had any of them founded and grown a sustainable business?

  41. had free soda while housed at Idealab but not after moving. After our IPO, I gave our CFO a spreadsheet showing how many years of free soda (factoring in growth in the number of employees) the company could afford. It may have been an narrow view of the use of the IPO money but the next week there was a sign on the soda machine: “Not broken. Free.”

  42. Why is it that free sodas is often considered a luxury, while free coffee is considered a necessity? If you get rid of sodas, get rid of free coffee and tea.

  43. You typically find that senior management continues to fly private jets and stay at the Ritz while the workers lose free sodas. Great morale message.

  44. […] The Elves Leave Middle Earth – Sodas Are No Longer Free […]

  45. Phase four in corporate growth is when only the once newly hired CFO and the upper echelons of management remain ‘onshore’ due to cost concerns…

  46. I think the real error here was that the engineers found out about the policy change via a notice on the soda machine. That’s insulting.

    At the last start-up I was at, the CEO gave the floor to the CFO at an all-hands, and the CFO then explained to us how much we were spending on sodas and snacks, and invited comments. the consensus was that we were willing to pay ‘something”.

    That something turned out to be a quarter, and three months later the CFO was able to announce that consumption had fallen to a quarter of what it had been.

    Incidentally, that start-up eventually failed, but I doubt this had anything to do with it.

  47. […] edit: I found the original blog post to be even better and funnier, titled “The Elves Leave Middle Earth – Sodas Are No Longer Free.”) Possibly related posts: (automatically generated)Bored? Want some free stuff to […]

  48. It typically ends with the business experiencing “tough economic conditions”. Unhappy customers. Less sales. Less revenue and profit. Death spiral. CxO’s are very good at making excuses as to why that happened while still extracting a huge salary.

  49. Hmmm……does a company want an engineer who can’t do simple math. 50 cents for a soda and a IPO payday worth millions of $$ in the near future or free soda and another four years to a potential IPO payday at another firm. The CFO made the right call, prune the stupid.

  50. I work in such an environment. However, I have found a way around it. I manage a small team. We went out and bought our own refrigerator, and stock it with our own Cokes. At the end of the week, we have our own Pizza Friday. I have made sure that we have room in our budget for training and travel. While other areas of the company have lost people, we have grown over the last seven years and we have won awards for our work.

    I can not change the Corporation. I can change what I have control over. Also, it is not the free cokes, pizza, &c. It is the environment and the camaraderie. While I am the manager of the group, it is a group effort that we all work at maintaining.

  51. But does a startup need engineers at all anymore? All tech jobs can be outsourced to low-paid Indian code-crunchers. All the company ever needs now is C-level employees and salespeople.

  52. Also. I am not sure if you read the seminal Tversky-Kanheman study in behavioral economics on loss aversion (that earned Kanheman a Novel’06) but the soda case fits this study like a hand fits a glove. Principally, Tversky and Kanheman found out that people feel much worse when they lose something rather when they do not gain this something.

    In other words, the CFO did not do her MBA homework, else she would knew that engineers must be given something nice and less costly in exchange for taking away soda – and they would still think they are in engineering heaven.

  53. Steve, I still offer free soft drinks and snack and my company just turned 14……keeping people happy is the name of the game. Great post.

  54. How about an alternate universe where the CFO at the board meeting says: “This is the amount of money we waste every year by running ineffective meetings. Let’s cut that by at least 50% by the end of this fiscal year by teaching all our managers, etc. to run effective meetings and making an effort to eliminate meetings where a less costly form of communication would do just as well.”

    One can dream… 🙂

  55. The worst thing is the group of new managers and financial execs who propose eliminating this free stuff gets a hefty raise and the engineers working their pants off are notices less when the companies grow.

  56. […] Blank on how the transition to professional management can have unintended consequences as a startup matures; more from Steve on the same theme […]

  57. […] this with their culture (and staff) intact, or are all companies doomed to go through a “they fired the founders and took away the free sodas” […]

  58. Free drinks and snacks are a must, especially for software engineers. I don’t care what the company is or does, if you take that away, I’d rethink my options about working for you. A developer literally spends all day coding, eating and drinking. Chips and soda make happy developers, happy developers make great software, great software makes great companies.

  59. Tell the executives they’re wasting money on free parking. From now on, all executives will be charged $20 a month (or $1 a day) for parking. The primo parking spaces will be $50 a month. Surely that is reasonable! And watch the executives go into an uproar. This might help them understand in a way they can relate to.

  60. A company I worked for started charging 20 cents for sodas that used to be free. Workers, who never brought sodas home before, started buying lots of cheap sodas to bring home. The company lost more money charging 20 cents than when the sodas were free.

  61. Even Oracle still has free soda – I’m just sayin’.

  62. I don’t think the sodas were the “wake up call”. And I don’t think the CFO was ‘evil’ in cutting costs.
    Hiring the CFO was the “wake up call”. The CFO was probably tasked with cutting costs right from the hiring interview (if the Board wanted otherwise they would have told the new CFO, or hired someone less prone on cost cutting, or stopped initiatives in that direction).
    In my opinion engineers need to understand that these decisions do not come from Finance; they ultimately come from the Board, not from the CFO. The CFO is merely an instrument.
    If a CFO is rewarded for cutting costs, what do you expect?
    My point is that the Board did not understand that you can’t have at the same time _both_ a culture of innovation _and_ a culture of efficiency.
    You can’t have free sodas and drink them too.

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