Tell People How to Work with You
I recently listened to an entrepreneur, let's call him Bob, share an interesting management approach. He created a document called What It’s Like to Work with Bob. The document, a few pages long, is essentially his operating manual—it helps people understand how he operates.
Usually, it takes time to figure out how to work effectively with someone. It’s a process of trial and error that could take months or years. In extreme cases, people never figure it out. Minor examples are preferred communication methods and meeting times. Maybe you like texting, but your team is used to Slack. When subordinates Slack you, you’re annoyed. Or they’re annoyed because you never respond (because you don’t check Slack). Maybe you like to focus in the morning and keep your calendar open for meetings between 2:00 and 5:00. It annoys you to be interrupted during your focus time. Or maybe you annoy your subordinates by declining their a.m. invites.
Bob aims to avoid the adjustment period altogether. His objective is to use the document, on day 1, to set clear expectations and tell people who he is and how he operates. His subordinates will understand how to work with him after a few minutes of reading his document (and maybe a clarifying conversation) instead of months or years of trial and error.
I really like Bob’s approach. Setting clear expectations early can save lots of time and prevent unnecessary friction and frustration during the getting-to-know-your-work-style period. I can see this approach leading to healthier, deeper, and more productive work relationships from the start. It no doubt also helps in quickly recognizing working relationships that aren’t likely to work (which is OK too).
I like the operating manual approach and plan to create one!
Public Company Accountability
I recently caught up with someone who works for a publicly traded tech company. I asked him what the most material change he’s observed coming from leadership is. I expected something like closer scrutiny of expenses, but he said something else. He said there is the highest level of accountability across the board.
Leadership is communicating that goals must be achieved every quarter. There’s no more “We got close, but we’ll hit it next quarter,” because the reaction to missed goals by public market investors could be dire. He shared that when the numbers aren’t on track to achieve goals, leaders are double-clicking into the details looking for answers and holding everyone accountable. He said the result of this heightened accountability is an organization extremely focused on what matters most.
When companies focus, they can accomplish the impossible. I’m curious to see public tech companies’ results over the next quarter or two. I suspect the increased accountability will lead to some unexpected positive outcomes for some public companies. If that happens (and that’s a big if), those positive outcomes could change sentiment toward those companies and increase investor demand for ownership in them.
Free Cash Flow
An entrepreneur friend keeps close tabs on how public software businesses with recurring revenue are valued. He feels confident that in a high-interest-rate environment, free cash flow will play a bigger role in the valuation of these and other types of public companies than it has in the last decade.
It occurred to me that most people likely don’t know what free cash flow means. Free cash flow is a measure of how much cash a company generates (or consumes) that’s available for management to use at their discretion. For example, they may use it to pay dividends or for share buybacks. It’s important to note that free cash flow is different from net income (net profit)—mainly because of accounting rules. For example, some things that add to or subtract from net income don’t involve the company spending or receiving cash (e.g., depreciation). Companies can lack profitability but still generate free cash, and vice versa.
Here’s the formula: free cash flow = operating cash flow – capital expenditures
Operating cash flow can be found on the statement of cash flows. I won’t get into the details, but it’s basically how much cash company operations generate. It’s different than capital cash generated or spent from investing and financing activities. If a company sells widgets, it measures how much cash it consumed or generated just from selling widgets, not from investing the company’s cash or raising debt or equity.
Capital expenditures can also be found on the statement of cash flows. This is usually a measure of how much capital was spent on assets that will be depreciated over a period. Think buildings or pieces of machinery. Buying assets isn’t an operating expense, but it does reduce cash available for management to use and thus reduces free cash flow.
Free cash flow is a good concept for entrepreneurs to understand.
A Key Insight from Former Stitch Fix President
I had the chance to listen to Mike Smith, Cofounder and General Partner at Footwork, share his experience as an startup operator and new venture capital fund manager. Mike was one of the first five hires at Stitch Fix and helped that company scale to over $2 billion in annual revenue and have a successful IPO in 2017, when he was President and COO. He and his partner also raised a $175 million debut venture capital fund. And he was part of the team that helped build out Walmart.com. Mike has a wealth of experience and, obviously, has been part of some successful outcomes.
Mike shared a ton of great insights. One that he emphasized as important to his success was this: He’ll take less talent and more team. Mike believes that large outcomes are the result of a team effort. He wants to work with people who are good team members and willing to work hard, rather than genius individual contributors who create difficult team environments.
I enjoyed hearing Mike talk about his experiences and share this insight. I can’t wait to see what he builds at Footwork.
Maker’s Schedule vs. Manager’s Schedule
Y Combinator released a video entitled “How Future Billionaires Get Sh*t Done.” It’s a good one for founders. One of the things it touches on is time management. They reference a popular blog post Paul Graham wrote years ago titled “Maker’s Schedule, Manager’s Schedule.”
I like Paul’s characterization of a maker schedule versus a manager schedule. When you’re trying to do something hard, big blocks of uninterrupted time are critical. Any interruption, such as a meeting, can make the entire day unproductive. Half-day blocks make sense for people on a maker schedule. On the other hand, when you’re managing people, you meet a lot and work in thirty-minute or one-hour windows, stopping and starting often throughout the day.
When you’re an early-stage founder, you’ll have to do both. As a founder, switching between mental modes too often, I struggled before I eventually learned to use lunch as a natural separator. I was on a maker’s schedule before lunch and a manager’s schedule after.
Founders should consider the maker-versus-manager concept for themselves and their team. Getting people to understand it and adopt the right schedules can have a big impact on the company’s productivity!
Is Retaining Junior Talent Corporate America’s Latest Challenge?
I caught up with an old colleague recently. He’s in corporate America at one of the large accounting firms. I asked how things are going, and he said they’re having a hard time retaining junior team members. A few things he shared with me:
- Home – Many team members moved home during the pandemic. Most were single and wanted to be near family during a time when they couldn’t have their normal social life in Atlanta. They’ve enjoyed being around family more often, and instead of returning to Atlanta they found jobs in their hometowns and quit.
- Balance – Work–life balance is top of mind for junior employees. They want to do more than work crazy hours. They want a meaningful and fulfilling life and are willing to walk away from demanding jobs that make balance impossible.
- Interaction – Junior team members haven’t had as much time to establish meaningful relationships, and they want more in-person interaction than experienced team members do. This has made it easier for them to cut ties and pursue other opportunities.
The Great Resignation is a phenomenon that lots of companies are experiencing and trying to deal with. My former colleague’s experiences, while anecdotal, shed light on the question of what part of the workforce may be affected most. I’m curious to see if this trend continues and how employers will adjust to retain and attract junior talent.
Alignment: A Great Management Tool
An entrepreneurial friend told me about some early challenges at his company. The team wasn’t being efficient or consistent about completing work. This created at least two problems. First, the longer it took to complete the work, the less satisfied the customers were (and the less likely they were to refer other people to the company). Second, the longer each job took, the more it cost because employees were paid by the hour. After months of talking to his team, he found the solution.
He changed the compensation structure. He began compensating his team for completed jobs. The fewer jobs they completed, the less money they made. The more jobs they completed, the more they made. My friend noticed an immediate impact. His team’s productivity went through the roof. Over time, his team made more money and his business saw increased revenue and profit. Customer satisfaction increased too.
Keeping a team aligned is difficult. Everyone moving in different directions or moving at different speeds is stressful for the founders and could even sink the business. If everyone is moving in sync and in the same direction, the employees can have more autonomy and the business can reach new heights.
Compensate Fairly to Enhance Your Prospects for Success
I love talking to founders about their plan to assemble a team, especially the compensation part. It can be a leading indicator of what’s to come. I regularly speak with early founders who have a big vision for their companies but haven’t thought through team compensation.
Building something great takes a great team. Great team members want to be compensated for the value they bring, and rightfully so. Great people have options—if one company won’t pay them what they’re worth, someone else will. There are two ways to compensate people: cash and equity. If cash is readily available, then paying market salaries will make it possible for a founder to assemble a great team. If cash isn’t abundant, then a combination of cash and equity is typical. It allows the founder to hire more people with limited cash and lets employees have an ownership stake in the company. They get some cash now and benefit from the upside potential of the company if it does well.
If you’re looking to do great things, you need great people. If you don’t compensate people fairly, your chances of attracting a great talent plummet along with your likelihood of achieving your big vision.
Equity Compensation for Top Talent
One of the pivotal decisions I made at CCAW was to hire other high-level thinkers in critical areas. We hired people to lead operations, technology, and product. CCAW was bootstrapped, so we didn’t have tons of cash available to attract the caliber of talent we needed. After much thought and many discussions, I decided to offer some of them equity compensation in the form of stock options. If we achieved certain milestones, their equity compensation would vest and they would have the opportunity to own part of CCAW. This was a good way to align all our interests. We worked toward the same goals.
Equity compensation is a very powerful tool. It can help you land high-caliber talent you otherwise couldn’t afford. When I chose to offer it, I created an employee equity pool. This meant that a certain percentage of CCAW ownership was available for the company to use to compensate employees. Before that, I was the 100% owner of the company. After creating the equity pool, I owned less of the company. I was OK with that.
Founders who want to build big companies will likely need to compensate talent with equity (unless they have substantial cash with which to offer market-rate salaries). Founders who are considering the equity route should research how much equity compensation is appropriate for the stage of the company and the experience level of each candidate. Offer too little equity, and the candidate might reject your offer. Offer too much, and you may not have enough equity left to offer other critical hires.
Company equity is complicated, but it’s something founders should consider understanding sooner rather than later.
The Office Won’t Be the Same
I’ve been having conversations with friends who’ve returned to the office. I was curious to understand what they’re experiencing and how they feel about it. One friend summed up what I’ve been hearing: “There’s no way I can go back to doing five days, but one or two feels good.” Going back to pre-pandemic office life isn’t resonating with friends, but neither is no in-person interaction. Face time for certain situations and just to stay connected in general has value.
I know the return-to-the-office situation is fluid, but I’m interested in seeing how this plays out. My gut tells me that decisions made during this period are likely to shape how we work for the foreseeable future. We’re in a period of change that will have a lasting impact.