It took losing something important to understand the difference between a commodity and an opportunity. Along the way I also learned yet another way entrepreneurs see the world differently from their investors.
Advisory Board
In the early days of Rocket Science I realized that we needed high-level advice on multiple fronts; technology, game development, video game distribution, etc. At one of our initial board meetings we had agreed on the general principle of an advisory board and put together an overall stock budget to compensate advisors.
One of the first potential advisors I reached out to was someone who 10 years earlier tried to hire me as the VP of Marketing of his new division at Sun Microsystems. For lots of reasons that never worked out, but I liked him so much that the following year I tried to hire him as the VP of Engineering of Ardent. (He was having too much fun at Sun and turned me down.)
Now a decade later, we caught up over lunch and I found that he was in the middle of taking a new job inside his company and had some time on his hands. Chatting with him just reinforced my earlier opinion that he was an extraordinary combination of sheer technical talent, great business and common sense and a level-headed decision maker. I knew he would bring immense value to me and the company.
Over the next week we exchanged emails over advisory board stock. I made him an offer and he countered with one I thought was still reasonable (but I didn’t tell him that.) The timing was perfect, my board meeting was in two days. I could get him the stock he asked for approved at my board meeting and then reply.
Death by Spreadsheet
I was so excited to break the news to the board that I put this new advisor on as the first agenda item. Even back then the advisor was a well-known name in Silicon Valley. The conversation went great and everyone agreed he’d teach us a lot – until one of the board members asked, “How much stock do we have to give him?” I threw out the number of shares I had offered and he had requested, naively thinking everyone would see what a no-brainer this was. Instead what I got was, “Wait a minute. He’s asking for one-third of our advisory board stock budget. We had agreed we were going to get 5 to 6 advisors with that amount of stock.” At first I wasn’t sure I was hearing this correctly. The advisor was a world-class guy, in my judgment he was worth more than all the other advisors I was going to get.
Then the other VC’s piled on. “You need to live on the budget we gave you. Go back to him and offer him less stock.”
As a first-time CEO getting beaten up my board I thought this wasn’t a fight worth having. (I couldn’t have been more wrong.) So I agreed to go back to my potential advisor and tell him the best I could do was my first offer.
I was about to get a few lessons that have lasted for a long time.
Thanks But No Thanks
Putting my best marketing spin on it, I sent our potential advisor a message that essentially said, “I’m not sure I can meet your request, but here’s another offer.” I dressed it up as best as I could, making some of the other terms more palatable, but it still wasn’t what he asked for.
I guess I shouldn’t have been surprised when he sent me a very polite note back that said, “Thanks but no thanks. I’m now getting more involved in my new job as CTO and I’m too busy to go back and forth negotiating this.” But I was crushed. I knew my company had just lost something important. Something that I couldn’t just go out and replace. And I realized I screwed up in at least two major ways.
You Negotiate Commodities, But You Seize Opportunities
I hadn’t just lost a potential advisor I had lost an irreplaceable opportunity. We lost him not just over a stock offer. We lost him because we had treated him as a commodity – something that was readily available from multiple sources – and that you could negotiate its price.
In reality what I had in front of me was an opportunity – a favorable combination of circumstances that rarely occurs and if seized upon would have given me an advantage.
You treat commodities and opportunities radically differently.
Founding CEO’s are supposed to search for a repeatable business model, not just blindly execute their original plan. That requires you to identify opportunities and seize the day. Opportunities are not just about sales, marketing or product. In this case it was about a resource I had in my hands and let go of.
I had acted like an employee, not as a founder and certainly not as the CEO of a startup. I had let my board tell me that the opportunity I saw was a commodity that could be managed by a spreadsheet. And I didn’t stand up for what I had believed in.
It would never happen again.
Lessons Learned
- Great entrepreneurs see opportunities before others do.
- Ask, “Is it a commodity or an opportunity?”
- If it’s a one-of-a-kind that give you an advantage, it’s an opportunity.
- Grab opportunities with both hands and don’t let go.
- It’s better to beg for forgiveness than ask for permission.
- Carpe Diem
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You shouldn’t have had to fight for a good outcome here! That’s the thing that amazes me the most. A great board would have trusted your instincts at least long enough to advocate for the alternative.
I am aghast that you had no one on your board that stood up for your view of the universe.
You forget, it is amazing sometimes how those with money and love to feel power will go out of their way to force someone to do anything…wrong or right is just subjective.
Your ability to revisit painful mistakes and understand the root cause keeps this blog on my must read list.
Nice post, something similar happend to me once. I just overplayed my hand in such a situation.
Looking back, what would you have done differently? Rather sold it in a better to your board or negotiated with him in a different way?
I had the same opportunity handed to me recently. A great developer that I worked with at another company, left his current company and wanted to take some time off. As soon as I found out – I went to meet with him. After talking with him, he still wanted to do some contract work. I asked if he’d be interested in helping me and said for him to name his rate. With a small, lean startup – one person like him will make all the difference.
Steve,
Great post, and excellent lessons-
thanks,
Chris
Very nice read. I totally agree with you. I’ve made that mistake before and was almost crushed by a competitor. i’ll never let an opportunity slip away again…
always great to read advice that is wise. thanks
wyn
This is interesting to me in another light – negotiating salary and stock as an early startup employee. You have to ask yourself, “am I a commodity or opportunity?” and if you are an opportunity stand up for your worth. If not, take the best you can get, say thank you, and work hard to become an opportunity in the future.
I think big tech companies like Google and Microsoft are actually very good at seeing kick ass tech and product hires as opportunities, and treating/compensating them accordingly. Startups are the ones I see being pennywise (in the short term anyway) and pound foolish.
Steve,
Great lesson shared.
On the subject of forming advisory board and stock budget – i’ve been having trouble finding guidance / best practice on this subject.
Can you share links or thoughts on what is a reasonable budget and thinking process on selection?
David,
Venture Hacks has a great section on advisors here: http://venturehacks.com/articles/advisors
steve
Whoah… Wait a minute.
A VP of a division at Sun Microsystems who became CTO around mid to late 1990’s? (When Steve was at Rocket Science.)
Is anyone else thinking that the “advisor” Steve lost was Eric Schmidt???!!
yep
Your post is a Godsend! I interrupt my reading to write a talented developer that has done some valuable work for free for my startup, to whom I promised some equity and I wasn’t delivering. Thanks!
I don’t agree that you necessarily missed out. He himself said: “Thanks but no thanks. I’m now getting more involved in my new job as CTO and I’m too busy to go back and forth negotiating this.”
If he’s too busy to negotiate his compensation, I have a hard time believing he has the time to be a good advisor.
In my experience, advisory boards help sell investors, provide some confidence boost to the CEO, and that’s it. I know of no cases where strategic advice, hiring and sales connections, or inside information from the advisory board has had a material effect on the business. Can someone offer opposing evidence?
@chris, superstars don’t suffer fools gladly, i think he realized the negotiation phase revealed a underlying problem with the startup, like the dichotomy between sb’s enthusiasm and the ability to correctly value a resource, and decided that foupah would create more problems down the line, (ie hiring talent), and he wasn’t going to waste his superstar time with a potential mess. These lessons are painful, but it’s the pain that teaches us and makes us remember, so we don’t repeat these mistakes again.
It’s those precious painful lessons that are the most valuable, yet the hardest to share. Thanks Steve, may your wound make us all fiercer at pushing what we know are unique opportunities.
[…] You Negotiate Commodities, But You Seize Opportunities It took losing something important to understand the difference between a commodity and an opportunity. Along the way I […] […]
Interesting fodder, Steve!
It seems like there are really two issues here that explain why it didn’t work out: a) the board was treating him like a commodity (i.e. they undervalued him), and b) the advisor thought very highly of himself– more important than others on the advisory board, “too busy to negotiate” (in other words, he overvalued his worth).
Once one side digs in it’s heels on such perceptions of “value” the other reflexively does the same; stalemate ensues and no one wins.
I agree with Danielle that this comes into play a lot WRT startup hiring; scrappy startups tend to value the future potential worth of their company very highly. They also tend to ask for or expect everything for free or cheap (in general, this is a very good thing). However, a side effect is that they often “signal” to key hires, advisors, etc. that they are commodities.
I’m thinking of one instance where really key hires repeatedly walked because the startup low-balled them at the offer stage, thus ‘signaling’ a low perception of value. This startup ultimately became comprised of B and C players and never really went anywhere.
Nathan Beckord
[…] writing about startups often offers insights far beyond the startup world. Take this post, “You Negotiate Commodities, but Seize Opportunities“: I hadn’t just lost a potential advisor I had lost an irreplaceable opportunity. We lost […]
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[…] Steve Blank says: Great entrepreneurs see opportunities before others do. Ask, “Is it a commodity or an opportunity?” If it’s a one-of-a-kind that gives you an advantage, it’s an opportunity. Grab opportunities with both hands and don’t let go. Sundry recruiting, talent KashFlow’s Orbit Accounts launched What do you really need? Honestly. […]
That’s a lesson all entrepreneur’s, big or small, should learn and adhere to. Being able to differentiate a commodity from an opportunity can spell success to any business.
I’d keep this lessons in mind. Thanks for sharing. 🙂
That’s a lesson all business owner’s, little or huge, must adhere and find out to. Having the ability to separate a product from a chance can spell success to any business.