musings about entrepreneurship & life…
Article originally published on August 2012 in The Next Woman.
There is a new business model available today. It involves recruiting talent at low or no cost. I know several talented people who are currently “doing internships” at both new and established companies in exchange for “experience”, “recommendation letters” and “peanuts”. Whether this model is sustainable or whether it generates economic development in the long run remains to be seen. I see this model as the highway for developed nations to become third world nations. In developing nations, the tendency is for talent to be worth peanuts. If this wasn’t the case, outsourcing wouldn’t exist.
Nowadays, it is extremely important to refine one’s negotiating skills. After having made a plethora of errors by jumping too soon into a deal, these are my recommendations:
1. If you believe that you are missing an opportunity by not engaging in a situation where free labor is required, think again. The concept of brand applies not only to Apple and McDonalds but also to human beings. If you don’t put worth to your skills, no one will. Your talent, education and experience are very valuable and no economical situation should alter that.
2. If you decide to sign in for the “free version” of yourself, make sure that the opportunity indeed enhances who you are, your connections and ultimately your skill set. Many internship opportunities available out there are just another profitability measure for companies, not an avenue for you.
3. Before jumping into a business transaction “just to get experience”, take your time and think through where the opportunity lies. If someone is asking for your services, ask for a partnership opportunity, an equity percentage or simply a return for your effort. I personally have put myself in situations where attractive opportunities blind my judgment. There is no replacement for early clear communication and early clear agreements in place.
4. If being able to afford grain-free dog food is not one of your concerns and you are indeed attracted to the startup world, do yourself a favor and get familiar early on with concepts such as: capitalization tables, convertible notes, preferred vs. common stock, vesting period, and overall financial requirements of the company that you plan to join. It is extremely important to do as much research as it is possible to estimate the amount of capital the company will eventually need to make their options/stock go from being worth zero to being worth something (called a valuation). The more money investors put in, the more your options will dilute. A typical startup devotes about 20% of the total option pool to ESOP (Employee Stock Option Plan). Investors and founders get the rest. In today’s lingo, they are the ones taking the “risk”. Useful blogs include those written by Seth Levine and Brad Feld.
5. For example, equity is offered to startup employees not just for joining but also for long-term commitment to the company. As such, you pro-rate the equity over this period of time called “vesting period”. The length of this period can vary between 3-5 years. If you are unaware of how many shares are outstanding or what the vesting period really means, you won’t be able to estimate the number of shares that you can get should you decide to leave the company before your vesting period is up. Obviously, this argument assumes that the startup does really well and doesn’t make use of Boyle’s Law… If you squeeze a balloon too much, it pops!
6. If you are a startup founder, think before asking someone to work for peanuts. Peanuts usually don’t generate loyalty, unless of course, you are the next Larry Page or Mark Zuckerberg. The goal of creating a “startup nation” should be to enhance economic activity and generate well for all. While investors love to have lean ventures (as it results in more return to them), at some point in the game, startup founders and those recruited by them need to be able to afford the fancy San Francisco apartment that they share with eight other people. Survival salaries only work for so long. In many instances, a year is way too long.
7. Paul Graham, a programmer I admire, has written the only useful mathematical way that I have found so far to estimate how you can receive equity in a venture in exchange for what you bring to the table. I highly recommend reading “The Equity Equation” article.
8. After more than one unsuccessful attempt to negotiate agreements to my benefit, I created what I call “The Video Camera Test”. If you are trying to learn negotiating skills, there is no better companion than your I-phone or Sony recorder. Prior to negotiating anything, practice your posture, idea flow and eye contact in front of the recorder. The amount of information that you will gather is unbelievable. My mantra is, “if I can’t convince myself, I won’t be able to convince anyone else”. As with any other type of presentation, practice is key.
9. During a negotiation agreement, I believe that it is always OK to say: Let me think about it. It is very important, even in fast moving environments such as the startup world, to think before committing to a step. You don’t want to jump in the bus and then have to figure out how to get off once the bus is on the way. Window jumping is not easy, is costly and is preventable if you just give appropriate importance to your pace of thought processing.
10. An opportunity is defined as a “favorable juncture of circumstances”. One of those circumstances should be compensation for what you bring to the table.