And Tom Chiarella if you end up reading this please send me your bio so I can give you credit for your insightful article.

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http://www.esquire.com/features/ESQ0205NEGO_114_1

Buying a hot dog is an essential, unquestionable transaction, the lowest common denominator of American commerce. The sale of a hot dog delivers about the same amount of marginal satisfaction to the buyer, who gets — by my reckoning — about 40 cents worth of food, heated and assembled nicely for $1.75, and to the vendor, who makes something like $1.35 for three moves — unfolding a bun, tonging a hot dog, and splashing on some relish. No sales, no specials, no markdowns. Day in, day out, clear and glorious. No one screws anyone. The emptor is plenty caveat.

That’s why I wanted a deal.

I’ve always understood that certain transactions are designed to be pushed back and forth, made with the expectation of counteroffer, laid on the table in order to be hashed out for weeks or bickered over for mere minutes in the halo of a streetlight. I like getting my price, something that acknowledges my end, makes me feel my business is appreciated. In my time I’ve struck deals with landlords, car mechanics, electricians, house painters, cable guys, real estate agents, drug dealers, with bullies, bosses, pimps, pit bosses, and local politicians. These people expect no less; negotiation is their creed. But I wanted to test myself.

What if I opened every transaction to a haggle? What if I made my own bid on a TiVo? A counteroffer on dry cleaning? What if I treated the list price for a dress shirt as merely a suggestion? Could I insert myself into every transaction so that price wasn’t so much of an absolute? I wanted to know. For three months, I would haggle everything that came my way, insisting to everyone who would listen that price was a fluid force, a matter of argument.

And I started with a hot dog.

The vendor was working a cart on the corner of Forty-seventh and Broadway, across from the Edison Hotel in Manhattan. I stood in a nearby Starbucks and watched as he rolled the cart into place and laid out his garnishes before I approached.

I ordered my dog — his first sale of the day, I knew. He poked around in his vat and drew one out. Younger than I, this was a man working without thinking, without even looking my way. I decided on the direct approach, no bullshit, to make him snap to, just to see what it would get me.

“Any chance you’d knock a buck off that price?” I said. He stared at me so hard, I couldn’t focus on the city moving behind him. “First dog of the day?” I said. “You know, special sale?” He held the hot dog over its bun as if the next thing I said might make it drop.

“First what?” he said, not looking pleased.

“You know,” I said. “First-hot-dog special.” He glared at me. “Jump-start things. It would be good,” I said, without being certain of any retail equation that supported the assertion, “for everybody.”

“Fuck no,” he said. He looked me up and down. “Why? You don’t have money?”

I shrugged. Of course I had money. He knew that much. There was a five-dollar bill pinched in my fingers even now. I crumpled it down, hoping he wouldn’t see. It had been perhaps twenty seconds since the deal was put on the table. I had made so many mistakes that I simply wanted to rewind time to the point where I was back in Starbucks, thinking I had everything figured out. I could see a new strategy, a new family of strategies, becoming clear to me. Open with a little banter. Leave the money in the pocket. Wait till the dog is in the bun.

I pointed to the hot dog. “It doesn’t look all that good,” I said, hoping, I guess, that he’d take a look at what he was offering the world — a mere hot dog — and capitulate.

“What?” he said. “It’s a hot dog.”

“Looks good to me,” the woman behind me said, holding out her money.

The hot-dog man looked at me then and slapped closed the lid to his cart. “No deals!” he snarled, wrapping the hot dog in paper with a twist and reaching past me to the woman.

She held up her hands. “Not without peppers on it.”

You gotta have rules. I decided early on that paying a salesman twenty dollars on the side so that I could get the floor model of a microwave was less a negotiation than a bribe. Years ago, I bought my best leather jacket in the West Village and got $150 off when I offered to pay cash. When I asked the Russian salesclerk how that worked, why cash was so king, he shrugged. “We will mark the coat as stolen,” he said. “It is very simple. Boss will not care.” More like a felony than a negotiation, really.

And as I learned after the hot-dog incident, you gotta have a plan. Particularly when your next task is to haggle the single most inarguable, unapproachable price in this great republic, a price flashed on the streets, a price seemingly outside the influence of anyone — prince, pauper, and, as evidenced these last four years, president alike: the price of a gallon of gas.

This time, I did my homework. After driving past just about every station in my hometown in Indiana, and then most of the county, recording prices, noting locations, I headed straight to the most expensive station and parked in front of a pump.

I shouldered my way in the door, bells ajangle, announcing to the two clerks that I was ready to rumble. “Is that price firm?” I asked, hooking a thumb over my shoulder toward the pumps.

The clerk behind the counter deadeyed me. I was certain no one had ever asked her this before, but to use the word slack-jawed would be to understate her lack of interest. “What price?” she said.

“Gas. A gallon of gas. It seems high.”

She looked at my car, then back at me, sighed deeply, then leaned forward on her large bosom. “We can’t do nothing about that.”

I’d expected resistance. I had worked out my own special move for this occasion. I whipped out a Polaroid of the price a mere eighteen miles away. “Ten cents cheaper,” I said softly. “Just down the highway. Today.” My coup de grâce! My hand was visible in the shot, holding a copy of that day’s newspaper, fuzzy and unrecognizable.

She perked up then, passed the picture to the other clerk, and laughed a little. “Well,” she said, “it’s worth the drive.”

I sagged. “Are you saying you can’t knock off even five cents a gallon?”

She looked at me then, straight in the eyes. “Honey,” she said, “I’m just saying I’ll drive over tonight and fill up my own self.”

I was a little embarrassed. Worse, I really needed gas. So I slapped a five on the counter and said no more.

It was clear that I needed help. There are, of course, real professionals who can teach you to haggle. Universities now offer advanced degrees in mediation and conflict resolution. On multiple shelves at the larger bookstores there exists an entirely approachable literature of negotiation. Throw a rock. Hit an expert.

I chose to start at the top, training with the Godfather of Negotiation, Herb Cohen, author of You Can Negotiate Anything, a seminal classic of empowerment lit, and the recent Negotiate This! He’s got the requisite experience, having served as a consultant in the Iran hostage crisis and the NFL players strike, taught at Harvard and the FBI Academy, counseled Carter and Reagan alike. I journeyed to his Watergate apartment in search of help.

He sat before me, an old Jewish guy in a plain white T-shirt and short gym shorts, sitting surprisingly far back in his Barcalounger, sipping iced tea. It was like sitting at the feet of the master. Literally. From my perspective I could see mostly the bottoms of his shoes. He had recently stepped in gum.

“What people don’t understand is that a price itself is a kind of negotiating point,” he says, snapping through my all-day session in fast-forward. “They’re just making you an offer. In some ways, a price is a disadvantage to the seller, because if the sign says $99, the buyer might think it’s a steal. He might have been willing to pay $129. And the seller doesn’t get a chance at that extra $30.”

Exactly! I tell him about my pitch for the gallon of gas.

“Those women don’t care where you buy your gas. They don’t have any stake in it,” he says. “You have to speak to the right people — the people with the power to make changes. Besides, you didn’t offer them anything.”

How’s that?

“You’re offering them less money,” he says, “without giving them anything in return.” He holds a finger straight up in the air and wags it at me. “You always have something to offer. Loyalty. Future business. Increased volume. Whatever. You have to think about their needs. You have to create an offer that gives something rather than takes it away.”

After a couple hours of this, he wants lunch, and I offer to buy. His wife comes in as he stands. “You’re not going anywhere in those shorts,” she says.

Cohen looks at me, hands out, palms up. “You’re not buying lunch.” Then he looks at his wife. “I’ll put on a coat.”

“A coat!” she says. “Those are gym shorts!”

“They look fine,” Cohen says.

“They do not look fine,” she says. “They look awful, Herb.”

He points at me. “You aren’t buying lunch.”

“There is no lunch,” his wife says, “if you don’t change those shorts.”

Cohen concedes. I concede. Some things can’t be negotiated.

I am not a friendly person by nature. I am willing to make small talk, but only on select days. When the sun shines, when the hormones flow the right way. Other than that, I’m gruff and disinterested, a little demanding, and bored silly by empty chatter. But after speaking to Herb, I sought out and bonded with the stoned salesman at Best Buy and asked after the children in the clerk’s photo badge at Wal-Mart. “Humanize yourself,” Herb had told me. “Make them understand your life before you make an offer.”

So it was that while haggling over an eighty-hour TiVo at Circuit City, I blurted out, “It’s for my son!” And, realizing that that made me about as remarkable as a sneeze, I added, without thinking, “He’s narcoleptic!” A complete lie. First, I already have a forty-hour TiVo. Furthermore, my son is no narcoleptic. In point of fact, he might even be encouraged to watch a little less television. But I spun out a tale of a boy who needed to rewind television when he woke up from his sudden fits of sleep. It was all very sad, but we had learned to cope. The salesman called the manager. The manager told me there had been a kid like that in his French class in high school. I might need a bigger memory cache if my son slept more than thirty minutes at a pop. He made suggestions. “Does he fall asleep during sports, too?” he asked earnestly. Then he gave me a price, sixty dollars below list. I thanked him, told him I needed to talk to my ex-wife, then took the price and drove across the street to Best Buy, where I got them to knock off another twenty bucks.

I started using other strategies, too. Every time I stood at a counter, every time I stared into another pimply face, every time I set my purchase on the flat space between, I held up what I was buying as if I weren’t all that sure I wanted it. When I asked if a price on a tube of Crest was firm, I was met with the blankness that only a haggler knows. But I found that if you ask the right questions, there are deals to be had. I got 20 percent off a two-liter of Popov at CVS when I learned — simply by asking — of a sale that hadn’t happened yet, from a clerk I bonded with who seemed to feel that I had somehow missed an opportunity that was still six days away.

Within weeks I discovered that restaurants will typically give you four desserts for the price of three if you ask for a sampler. That a draft beer is generally good for a free refill with a little prodding. That you can get an extra 20 percent off at Ikea by pressing past the cashiers, past the floor salespeople, up into the bottommost managerial rungs, by comparing the price of one perfectly well priced dresser with its slightly less well priced but better-sized counterpart one floor down.

I was pleased with my success so far, but I wanted a bigger test, something with a whiff of exclusivity. So I decided to have a dress shirt made at Nordstrom. From the moment they laid the cloth over my shoulders, I began to discuss the pleasure of having a shirt that fit right. “Every man should have a custom shirt,” I said, standing in the cozy, paneled fitting room, cup of warm tea steaming by the mirror. “It seems more like a right than a privilege.” The tailor, pins fanned in mouth, concurred by humming. The salesman nodded, adding that he had three.

“Three is a start!” I said. “I’d like one for every day of the week.”

“That’s my goal, too,” he said.

“You should make me a package deal,” I said. “Give me a better price and sell me a week’s worth.”

A passing sales manager told me the price was firm, that the shirts never went on sale.

“Never?” I said. “You never make deals?”

“Rarely,” he sniffed.

That was my crack. “Rarely?” I said. “Or never?” He sighed then, having opened the door that little bit. I held out my hand and introduced myself. “I’m Tom,” I said, not having the heart to tell him I’m the guy who can always outwait a salesman. I was giving him something, I told him. I was selling him an idea: a week’s worth of shirts. I could see that he liked the concept. “Consider me your word of mouth,” I added. We settled at buy four, get one free.

Rarely, my ass!

Negotiation can be a fairly inexact science. You often end up with more than you want, or less, or something else entirely. I had wanted only one shirt, especially at $129. Now I was looking at five. But I would have a week’s worth, and, more than that, I’d made myself a deal. Try that on an off-the-rack shirt and they’ll probably tell you to wait for it to go on sale. But when you’re dealing with a product built on service, the price hangs in the air in front you. You bat at it a little and you can knock it down.

Take my front lawn. I didn’t particularly want it aerated, but when I saw a worker plugging my neighbor’s yard, it looked like the smart thing to do. Especially if I could get my price. I approached the lawn guy and peppered him with questions. What were the benefits? Breaking up the roots, loosening the soil, blah, blah, blah. I listened intently, without any interest — other than getting a better price than my neighbor. I asked him again and again, until it seemed he had a stake in this, that it was an argument he wanted to win. This was part of Herb’s strategy, too — allowing others the space to tell their story.

“Since you’re here,” I finally said, “could you give my lawn a quick once-over?”

“Once-over,” he said. “You mean free?”

Eventually he agreed to do what he called a seventy-five-dollar job for twenty dollars — if he didn’t have to do the hill in back and if I agreed to a winterizing contract. Only later did I realize the guy had locked me in to a $240 commitment for about thirty minutes of hard labor. It was, at best, a murky victory.

Beware of the counteroffer. That was the lesson there. And so I added it to the list I was developing, my own personal rules for negotiating. Never let them know how much you have to spend. Draw people into your life. Show your personality. Learn people’s names. Work your way up to the person who has a stake in the sale and the power to make a deal.

First among these rules was Cohen’s advice not to think of money as the only thing I had to offer. I found that trading favors proved relatively easy. I negotiated with the local street sweeper to make three passes in front of my house in exchange for calling my neighbors and having them move their cars. I got my coffee at the local diner in exchange for always parking in the lot of the liquor store across the street. I cut my dry-cleaning bill in half in exchange for returning two hundred wire hangers that had built up in my closet.

I began to stand around and think over the possibilities of a transaction before I leapt in. I would scratch my chin. The cashier might look at me then and query, “What can I do for you?” At times like this, I would look for openings.

I bought candy on the cheap at the dollar store by making an offer ten minutes before it closed on Halloween. “I’ll give you ten bucks for what’s left,” I told the manager, who jingled her keys nervously.

“It’s a dollar store,” she said. “And that’s a lot of bags.”

I reached into the bin and counted. “Thirty-one,” I said. “I’ll clean you right out. No leftovers.”

She laughed and looked out the window. She was, I realized, like most people, a prisoner of her job. She had places to go, children in costumes. “I’ll bag it up,” I said, reaching into the bin.

“Okay,” she said. “But only if you help me take that bin to the back before you leave.” Gladly, I told her. Now she was talking my language.

These things fill your head. The smallest triumphs. The tiniest beats. Quarters add up. Dollars. Deals. And soon you don’t look at a sticker price as anything more than a warning sign in the road. Curve ahead. Dip. Yield.

Then came the moment when the lessons, long since internalized in the process of negotiating everything from a plate of ribs to a gross of no. 2 pencils, came together and saved me no small measure of cash, heartache, and aggravation. When the process of negotiating was less an exercise than a necessity.

I was on vacation when I took it upon myself to go swimming with the keys to my rental car in my pocket. I lolled in the waves for half an hour or so before I realized that I’d lost the keys, like a damned fool. We were renting a house on an isolated beach in south Florida. It was Saturday night.

When I called the roadside-assistance hotline and gave them the news of the keys, the woman gave a deep sigh. “That can be expensive,” she said. I took a deep breath myself. We both knew what we were getting into. A negotiation was about to commence. By this point, I was interested in just this kind of fight.

I knew right where to begin. “What’s your name?” I said.

“Darnita,” she said.

“Well, give me the worst-case scenario, Darnita. Just hit me straight between the eyes with it.” I wanted her to feel what I was facing.

She laughed. “Well, it’s a transponder key, which means it can’t be reproduced, so the car will have to be towed into a dealer on Monday. If they can make you a key — if — well, it’s going to cost a lot.”

“How much, Darnita?” I said.

“I hate saying this, but we had a Camry last week that billed out at $1,200 for a new key.”

Once I would have panicked. Once I would have allowed the anger to rise in my throat. I would have told her she was fucking crazy if she thought I’d pay $1,200 for a car key. But now I simply leaned back. I knew what I had to do. It would take me some time, but I decided in those first moments that I would flip this whole thing. I had the tools.

“Darnita, put yourself in my shoes,” I said. “I’m on vacation, and my rental-car company doesn’t have the sense to save an extra set of keys. I’m thirty miles from town, with four children and little food, and I don’t have a car until Monday. I mean, you can imagine the kind of panic I’m in, can’t you?”

“Oh, Lord,” she said. “We’ll have to do something.”

They replaced the car that night, even reimbursing me for a hundred-dollar cab ride. When they didn’t show, twice, to tow the other car, I used that against them. I’d call again; I’d tell it all in order with dates and times, the inconveniences. I would push past Darnita to her supervisors, to the regional manager, upward, ever upward. I would draw the picture for each of them. Me: silly but not selfish, having made an innocent mistake. Them: duty bound but helpful, able to, darn it, reach out to this one guy and offer him a break. I’d tell the story again and again, amplifying the suffering, downplaying the fault, subtly shifting my annoyance from my own carelessness to the stiff corporate response they mustered. I’d keep the anger to a minimum. I’d make them laugh. Darnita, Chantelle, Marilyn, Brent, David F., Steve. Up and up the line I went, giving each a picture of a vacation being stolen from me, and eventually I came to convince them it was their fault.

Finally, on the fourth day, I got a call from the regional manager in Tampa. “Look, Tom,” she said, after I greeted her by name. “We know this has been a nightmare for you. I’m just sorry it ever happened. We’re comping the rental for you, and we’ll be down to pick up the car later today.”

“And the keys?”

“Forget it,” she said. “We’ll take care of it. You’ve been more than patient. Everybody here says you’ve been terrific.” I found myself silent. But what transpired next surprised me most of all.

“We just want to say,” she pressed on, “thank you.”

Last week I was walking my dog in the large city near my town, in the hours before my son’s football game. I leaned back and dozed on the marble steps of a war memorial, enjoying the last bit of sunshine for the season. At one point, I opened my eyes and there was a man selling hot dogs on the sidewalk below.

So I stood. A hot dog was oddly appealing to me just then. The cart was loaded with fresh chopped onions, a warm tin of chili, a pile of shredded cheese. I approached and offered my money. He handed me my hot dog.

For one moment, I thought about making an offer on a second one. But I heard the words of the master, telling me to let it go. “Is screwing a working guy out of seventy-five cents really worth the time?” Herb had asked me during our session. “What’s the hourly rate there?” So I started slathering on the mustard instead.

“I’ve got something for you,” the vendor said, and when I turned to look, he was holding a hot dog.

I smiled and shook my head. “I’m good,” I said. “No thanks.”

But he was holding it out for my dog, who wolfed it out of his hands without pause. I laughed. The man seemed happy; the dog, ecstatic. Why not? It’s what I had been saying from the start. A free hot dog? That’s a good deal for all.

Ask The Wizard is Dick Costolo’s personal blog to help Internet entrepreneurs (particularly first-time entrepreneurs) navigate the waters of a startup. This is one of my favorite blogs to date and I highly recommend that you check it out and read his other posts.

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http://www.burningdoor.com/askthewizard/2007/07/series_a_financing_how_much_to_1.html

Series A Financing: How Much to Raise?

A Wizard reader writes (or I should say “wrote”, as this came in almost a month ago):

“My product is almost ready to go, it will make money in the early going as the model is pretty straightforward, but we need to raise money in order to scale the business. There are three of us right now. How much money should we raise in an A round, how long should we expect that to last, how long will investors expect it to last, and so on and so forth?”

Well, the obvious answer is that it all depends, but on the grounds most people would find that unhelpful, I’ll pretend it doesn’t all depend and address a few specifics.

First, let’s address the hypothesis that the company will make money soon after launch. Irrespective of whether we’re talking about profits or just top-line revenue here, I would caution that it almost always takes longer to ramp your top-line than you think it will. Everybody walks into a venture pitch with their three year financial projections that have a lousy first year, a strong second year, and a monster third year. The truth is that even most ultimately successful tech startups have a slow first year, a slow second year, and then you get your spectrum of third year results ranging from really-taking-off to continued-doldrums. It just always takes longer than you think to launch, grow, ramp sales, close deals, etc.

That’s a good segue for the rest of the question – how much to raise and how long should you expect the money to last. Everybody has different thoughts on this subject, but I would say there are two helpful guidelines. First, raise enough money to last about a year or a good six months after your next big milestone. Some people like to say “raise just enough to get you to and then you will be able to do a B round at a bigger valuation”, etc., but you want to give yourself some reasonable stretch of time to be product and strategy focused after the A round before you have to hit the road again to raise more money. It’s no fun having to think about starting to raise money again only a few weeks on the heels of closing the previous round. Second, you always need more money than you think you need, especially if this is your first startup. You can have a nice detailed spreadsheet that accurately reflects market salaries, rent, and more, but you will still require more money than you think.

Those of you reading Marc Andreessen’s excellent blog will note that my advice is out of step with his advice to “raise as much as you can”. Now, Marc has co-founded a couple of hugely successful public companies and has invested in countless others and his latest post has the words “my company” and “billion dollars” in the title, so if you find yourself wondering whether you should put more credence in his words or mine, I will repeatedly point you in his direction (you start one monster company, maybe you were lucky, maybe you were in the right place at the right time. You found two billion dollar companies? You officially know what the hell you are doing. Nobody is that lucky.) Nonetheless, I’ll disagree with him on the funding amount question, especially for first time entrepreneurs, for a couple of reasons. Now, if you’re Marc or somebody like him, I don’t disagree that you should raise as much as you can on your first institutional round. Marc isn’t getting involved in a new company hoping he can eventually exit for $60 million dollars, that’s just not an interesting scale to somebody that’s created a couple companies worth well over a billion dollars. I also realize the astute first time entrepreneur in my audience is thinking “but I’m not looking to sell my company for 60 million either! My idea is huge, and I think it’s a home run and I want to go for it!” That’s obviously the right attitude, and it’s an attitude you will need, and it’s the attitude that your investors will want to see from you. Nonetheless, I don’t think it makes sense for most entrepreneurs to raise big A rounds, because you don’t want to price yourself out of interesting opportunities in the first year or two. By raising too much money, you force your hand on the kind of company that you have to build, whether you want to or not. Let’s look at two scenarios for a very promising startup with technology that may be of strategic interest to several profitable public companies (note to self – write a future post about the importance of not planning for or even thinking about exits like this):

Scenario 1: You raise 1 on 3 pre in an A round, so you’ve sold 25 percent of your company for a million bucks and you have a co-founder with whom you’ve evenly split equity, and you have a 15 percent options pool from which you quickly allocate 5 percent that fully accelerates on a change of control.

Scenario 2: You raise 10 on 40 pre in an A round, so you’ve sold 20 percent of your company for 10 million and you have a cofounder with whom you’ve evenly split equity and you have a 15 percent options pool from which you quickly allocate 1 percent that fully accelerates on change of control.

Six months into your post-A round, you are approached by Awesome Corp and they would like to buy your company for $20 million. Company that pursued Scenario 1 is in the following situation: founders each own 35% of the company. Founders each make $7 million dollars, investor takes out $5 million for a speedy 4x, and the options holders pull out the remaining million dollars. Ignoring taxes for the moment (much like ignoring friction in freshman physics, this is impossible and problematic, but humor me), this is a nice outcome for everybody. Your investors, it might surprise you, won’t be particularly thrilled, because it’s important to keep in mind that they are not in this business for IRR, they are in it for multiples, and a 4x on a fantastic new company with only $1 million invested is not that exciting. Still, at a 4x after six months, they’re probably not going to block the deal. It’s nice to make 400% returns in a short period of time. Now let’s look at the same offer if the company pursued Scenario 2. Ruh-roh. Do you think our founders are going to be cashing in any Awesome shares anytime soon? No, they are not.

But wait, don’t the founders actually own MORE of the company? Won’t they actually make MORE money individually? Why yes, they do own more of the company, but that was just a little trick I played on you. It makes no difference, because the investors, who have put up $10 million dollars, stand to take out $4 million dollars, and investors have this thing where their LP’s get very mad at them if they invest 10 and get 4 back after only 6 months. If our founders go look at their Articles of Incorporation and the term sheet they undoubtedly signed from the investors when they raised this round, they will see that the investors have blocking/veto rights, and the investors will veto this deal in a heartbeat. More likely, the company would never even get to this point, because the people at Awesome are going to look at the company cap table and realize that this deal doesn’t get done. The founders have set themselves on a course in which the only two possible outcomes are home run or failure.

I did my math above in 14 seconds and have no time for proofreading these days, so mea culpa if my percentages are off but you get the picture.

I would suggest that there are some very nice middle ground areas for the entrepreneur that hasn’t previously made a bundle of money, and many of these middle ground areas are still large enough to provide venture returns to institutional investors. By overcapitalizing your company, however, you can put yourself in situations where a potentially huge personal outcome is made impossible.

Fine. Let’s say you are only interested in huge home run or failure. The middle ground is for suckers, you say, and you are no sucker. You are an all or nothing hombre. Shouldn’t you now raise as much as you can in an A round? After all, you are in this to rock the world and make a huge difference and build the best damned company you can build.

No, I still don’t think you should raise as much as you can, for several reasons, but I’ll just highlight the most important. You will spend what you raise. If you raise $10 million, you will quickly ramp up to a burn rate of $800k a month, because the investors don’t want their money to sit in a bank account earning interest with 36 months of runway while you hire employees 2 and 3. The amount of money you raise sets you off on a course at a specific pace. Your board will want to know why you aren’t deploying capital. You will hire a marketing team because you can afford to hire a marketing team. You will hire a vp of sales before the product is ready because you can afford to hire a VP of sales. Companies that raise $10 million dollar A rounds don’t raise $5 million dollar B rounds, they raise $30 million dollar B rounds. If you have not accurately predicted how quickly you can grow the top line, you will quickly find that the cap table has gotten away from you, and you will have less flexibility to build the company the way you might like to if the market zigs when you thought it would zag. You want to give yourself the flexibility and room to react to market forces so that you can build the best company possible.

Final notes: It’s possible that by “raise as much as you can”, Marc is implying that the two first time cofounders with an idea that might sell for 20 million in six months will only be able to raise a million bucks. That’s fair enough and probably true. Still, even though I’m putting words in his mouth, I’d just caution that investors will always want to put more capital to work in a great company. Second, I hope that this post isn’t interpreted as “you should raise as little capital as possible” or “make sure you don’t invest too aggressively in your company”. Undercapitalizing your company is just as dangerous as overcapitalizing your company, with the added tragedy that undercapitalized companies sometimes miss out on their opportunities to be the gorilla in a huge market. You want to be capital efficient while making sure you are funding the growth of the business. If customer wins are accelerating and revenue is up 100% quarter to quarter, don’t try to get too cute about finessing growth on the cost side….ramp into growth and hire ahead of demand. More on that in another post.

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http://www.askthevc.com/2007/08/what_are_the_costs_associated.php

Q: I have what I think is a really basic startup question, but I’m having the toughest time getting a straight answer, so here goes.

We’re starting a website and want to form an LLC for the business, thing is, we live in Texas but will soon be returning to Nevada. Should we do all the registration (dba, llc formation and anything else required) in Nevada or form it here in Texas and then transfer once we move? In general, what are the costs of changing the state of incorporation?

A: (Jason). It’s not too bad – usually a couple of hours of lawyer time, so it should be sub $1000. If you want to be incorporated in your state of residence and you are fairly certain that you are going to move, I’d skip the headache and just incorporate in Nevada and be done with it. It’s not a big deal to be incorporated in a different state than where you reside.

See our prior post on states of incorporation, as well.

Brad Field  has been an early stage investor and entrepreneur for over 20 years. Prior to co-founding Foundry Group, he co-founded Mobius Venture Capital and, prior to that, founded Intensity Ventures, a company that helped launch and operate software companies and later became a venture affiliate of the predecessor to Mobius Venture Capital.

Jason has over a decade of experience in the venture capital and technology industries in a multitude of investing, operational and engineering roles. Prior to co-founding Foundry Group, Jason was a Managing Director and General Counsel for Mobius Venture Capital, where he also acted as its chief administrative partner overseeing all operations of the firm.

To see their full bios visit the About Us page on their blog AsktheVC.

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http://www.askthevc.com/2007/01/how_to_incentivize_employees_i.php

Question:  How would you financially incentivize key employees during the startup stage of a company? We’re an LLC so it’s hard to give units (but possible). The alternative is similar to “phantom shares”, but it’s expensive to setup.

Our Take:  First, I realize that “incentivize” isn’t a word (At least MS Word says it isn’t), but I can’t find a better substitute, so hold your grammar hammer comments. Your question is a tough one. While LLCs provide some tangible tax and operation benefits to a young company, the issues of employee equity ownership usually pull entrepreneurs to change their company to a corporate structure. (As an aside, most VCs can’t invest in LLCs per their fund documents – FYI).

Creating a phantom plan is an expensive pain. The two best ways are either granting / selling / giving units or setting up a “liquidation preference” for employees. One great thing about a well-setup LLC that it can be a very flexible document and one can normally amend the unit allocation table simply by amending that page and getting signatures from current unit holders. In other words, one doesn’t have to completely amend the document. The bad news is that you can’t very well impose vesting, so you end up amending the page often. The other bad news is that you are giving direct ownership of the company away.

One other technique that we’ve used is to not issue units, but in the allocation section of the LLC agreement, specifically say “in the event of a sale of the company, the payout will be X.” “X” can be most anything that you want. Perhaps it’s 50% to the founder, 30% to other co-founders and 20% to Jack, Jill and Mary, the company’s employees. Note that this “liquidation preference” is completely independent of unit ownership. If you want to get really creative, you could have the employee part of the allocation pay to an employee plan and then the plan pay out to the employees, so you only need to amend the plan and never mess with the LLC or feel the need to disclose this document to employees.

Bottom line, it’s a bit trickier than running a standard C-corp. Consult your attorney on this one.

 ..

http://paulgraham.com/investors.html

August 2006, rev. April 2007

In a few days it will be Demo Day, when the startups we funded this summer present to investors. Y Combinator funds startups twice a year, in January and June. Ten weeks later we invite all the investors we know to hear them present what they’ve built so far.

Ten weeks is not much time. The average startup probably doesn’t have much to show for itself after ten weeks. But the average startup fails. When you look at the ones that went on to do great things, you find a lot that began with someone pounding out a prototype in a week or two of nonstop work. Startups are a counterexample to the rule that haste makes waste.

(Too much money seems to be as bad for startups as too much time, so we don’t give them much money either.)

A week before Demo Day, we have a dress rehearsal called Rehearsal Day. At other Y Combinator events we allow outside guests, but not at Rehearsal Day. No one except the other founders gets to see the rehearsals.

The presentations on Rehearsal Day are often pretty rough. But this is to be expected. We try to pick founders who are good at building things, not ones who are slick presenters. Some of the founders are just out of college, or even still in it, and have never spoken to a group of people they didn’t already know.

So we concentrate on the basics. On Demo Day each startup will only get ten minutes, so we encourage them to focus on just two goals: (a) explain what you’re doing, and (b) explain why users will want it.

That might sound easy, but it’s not when the speakers have no experience presenting, and they’re explaining technical matters to an audience that’s mostly non-technical.

This situation is constantly repeated when startups present to investors: people who are bad at explaining, talking to people who are bad at understanding. Practically every successful startup, including stars like Google, presented at some point to investors who didn’t get it and turned them down. Was it because the founders were bad at presenting, or because the investors were obtuse? It’s probably always some of both.

At the most recent Rehearsal Day, we four Y Combinator partners found ourselves saying a lot of the same things we said at the last two. So at dinner afterward we collected all our tips about presenting to investors. Most startups face similar challenges, so we hope these will be useful to a wider audience.

1. Explain what you’re doing.

Investors’ main question when judging a very early startup is whether you’ve made a compelling product. Before they can judge whether you’ve built a good x, they have to understand what kind of x you’ve built. They will get very frustrated if instead of telling them what you do, you make them sit through some kind of preamble.

Say what you’re doing as soon as possible, preferably in the first sentence. “We’re Jeff and Bob and we’ve built an easy to use web-based database. Now we’ll show it to you and explain why people need this.”

If you’re a great public speaker you may be able to violate this rule. Last year one founder spent the whole first half of his talk on a fascinating analysis of the limits of the conventional desktop metaphor. He got away with it, but unless you’re a captivating speaker, which most hackers aren’t, it’s better to play it safe.

2. Get rapidly to demo.

A demo explains what you’ve made more effectively than any verbal description. The only thing worth talking about first is the problem you’re trying to solve and why it’s important. But don’t spend more than a tenth of your time on that. Then demo.

When you demo, don’t run through a catalog of features. Instead start with the problem you’re solving, and then show how your product solves it. Show features in an order driven by some kind of purpose, rather than the order in which they happen to appear on the screen.

If you’re demoing something web-based, assume that the network connection will mysteriously die 30 seconds into your presentation, and come prepared with a copy of the server software running on your laptop.

3. Better a narrow description than a vague one.

One reason founders resist describing their projects concisely is that, at this early stage, there are all kinds of possibilities. The most concise descriptions seem misleadingly narrow. So for example a group that has built an easy web-based database might resist calling their applicaton that, because it could be so much more. In fact, it could be anything…

The problem is, as you approach (in the calculus sense) a description of something that could be anything, the content of your description approaches zero. If you describe your web-based database as “a system to allow people to collaboratively leverage the value of information,” it will go in one investor ear and out the other. They’ll just discard that sentence as meaningless boilerplate, and hope, with increasing impatience, that in the next sentence you’ll actually explain what you’ve made.

Your primary goal is not to describe everything your system might one day become, but simply to convince investors you’re worth talking to further. So approach this like an algorithm that gets the right answer by successive approximations. Begin with a description that’s gripping but perhaps overly narrow, then flesh it out to the extent you can. It’s the same principle as incremental development: start with a simple prototype, then add features, but at every point have working code. In this case, “working code” means a working description in the investor’s head.

4. Don’t talk and drive.

Have one person talk while another uses the computer. If the same person does both, they’ll inevitably mumble downwards at the computer screen instead of talking clearly at the audience.

As long as you’re standing near the audience and looking at them, politeness (and habit) compel them to pay attention to you. Once you stop looking at them to fuss with something on your computer, their minds drift off to the errands they have to run later.

5. Don’t talk about secondary matters at length.

If you only have a few minutes, spend them explaining what your product does and why it’s great. Second order issues like competitors or resumes should be single slides you go through quickly at the end. If you have impressive resumes, just flash them on the screen for 15 seconds and say a few words. For competitors, list the top 3 and explain in one sentence each what they lack that you have. And put this kind of thing at the end, after you’ve made it clear what you’ve built.

6. Don’t get too deeply into business models.

It’s good to talk about how you plan to make money, but mainly because it shows you care about that and have thought about it. Don’t go into detail about your business model, because (a) that’s not what smart investors care about in a brief presentation, and (b) any business model you have at this point is probably wrong anyway.

Recently a VC who came to speak at Y Combinator talked about a company he just invested in. He said their business model was wrong and would probably change three times before they got it right. The founders were experienced guys who’d done startups before and who’d just succeeded in getting millions from one of the top VC firms, and even their business model was crap. (And yet he invested anyway, because he expected it to be crap at this stage.)

If you’re solving an important problem, you’re going to sound a lot smarter talking about that than the business model. The business model is just a bunch of guesses, and guesses about stuff that’s probably not your area of expertise. So don’t spend your precious few minutes talking about crap when you could be talking about solid, interesting things you know a lot about: the problem you’re solving and what you’ve built so far.

As well as being a bad use of time, if your business model seems spectacularly wrong, that will push the stuff you want investors to remember out of their heads. They’ll just remember you as the company with the boneheaded plan for making money, rather than the company that solved that important problem.

7. Talk slowly and clearly at the audience.

Everyone at Rehearsal Day could see the difference between the people who’d been out in the world for a while and had presented to groups, and those who hadn’t.

You need to use a completely different voice and manner talking to a roomful of people than you would in conversation. Everyday life gives you no practice in this. If you can’t already do it, the best solution is to treat it as a consciously artificial trick, like juggling.

However, that doesn’t mean you should talk like some kind of announcer. Audiences tune that out. What you need to do is talk in this artificial way, and yet make it seem conversational. (Writing is the same. Good writing is an elaborate effort to seem spontaneous.)

If you want to write out your whole presentation beforehand and memorize it, that’s ok. That has worked for some groups in the past. But make sure to write something that sounds like spontaneous, informal speech, and deliver it that way too.

Err on the side of speaking slowly. At Rehearsal Day, one of the founders mentioned a rule actors use: if you feel you’re speaking too slowly, you’re speaking at about the right speed.

8. Have one person talk.

Startups often want to show that all the founders are equal partners. This is a good instinct; investors dislike unbalanced teams. But trying to show it by partitioning the presentation is going too far. It’s distracting. You can demonstrate your respect for one another in more subtle ways. For example, when one of the groups presented at Demo Day, the more extroverted of the two founders did most of the talking, but he described his co-founder as the best hacker he’d ever met, and you could tell he meant it.

Pick the one or at most two best speakers, and have them do most of the talking.

Exception: If one of the founders is an expert in some specific technical field, it can be good for them to talk about that for a minute or so. This kind of “expert witness” can add credibility, even if the audience doesn’t understand all the details. If Jobs and Wozniak had 10 minutes to present the Apple II, it might be a good plan to have Jobs speak for 9 minutes and have Woz speak for a minute in the middle about some of the technical feats he’d pulled off in the design. (Though of course if it were actually those two, Jobs would speak for the entire 10 minutes.)

9. Seem confident.

Between the brief time available and their lack of technical background, many in the audience will have a hard time evaluating what you’re doing. Probably the single biggest piece of evidence, initially, will be your own confidence in it. You have to show you’re impressed with what you’ve made.

And I mean show, not tell. Never say “we’re passionate” or “our product is great.” People just ignore that-or worse, write you off as bullshitters. Such messages must be implicit.

What you must not do is seem nervous and apologetic. If you’ve truly made something good, you’re doing investors a favor by telling them about it. If you don’t genuinely believe that, perhaps you ought to change what your company is doing. If you don’t believe your startup has such promise that you’d be doing them a favor by letting them invest, why are you investing your time in it?

10. Don’t try to seem more than you are.

Don’t worry if your company is just a few months old and doesn’t have an office yet, or your founders are technical people with no business experience. Google was like that once, and they turned out ok. Smart investors can see past such superficial flaws. They’re not looking for finished, smooth presentations. They’re looking for raw talent. All you need to convince them of is that you’re smart and that you’re onto something good. If you try too hard to conceal your rawness-by trying to seem corporate, or pretending to know about stuff you don’t-you may just conceal your talent.

You can afford to be candid about what you haven’t figured out yet. Don’t go out of your way to bring it up (e.g. by having a slide about what might go wrong), but don’t try to pretend either that you’re further along than you are. If you’re a hacker and you’re presenting to experienced investors, they’re probably better at detecting bullshit than you are at producing it.

11. Don’t put too many words on slides.

When there are a lot of words on a slide, people just skip reading it. So look at your slides and ask of each word “could I cross this out?” This includes gratuitous clip art. Try to get your slides under 20 words if you can.

Don’t read your slides. They should be something in the background as you face the audience and talk to them, not something you face and read to an audience sitting behind you.

Cluttered sites don’t do well in demos, especially when they’re projected onto a screen. At the very least, crank up the font size big enough to make all the text legible. But cluttered sites are bad anyway, so perhaps you should use this opportunity to make your design simpler.

12. Specific numbers are good.

If you have any kind of data, however preliminary, tell the audience. Numbers stick in people’s heads. If you can claim that the median visitor generates 12 page views, that’s great.

But don’t give them more than four or five numbers, and only give them numbers specific to you. You don’t need to tell them the size of the market you’re in. Who cares, really, if it’s 500 million or 5 billion a year? Talking about that is like an actor at the beginning of his career telling his parents how much Tom Hanks makes. Yeah, sure, but first you have to become Tom Hanks. The important part is not whether he makes ten million a year or a hundred, but how you get there.

13. Tell stories about users.

The biggest fear of investors looking at early stage startups is that you’ve built something based on your own a priori theories of what the world needs, but that no one will actually want. So it’s good if you can talk about problems specific users have and how you solve them.

Greg Mcadoo said one thing Sequoia looks for is the “proxy for demand.” What are people doing now, using inadequate tools, that shows they need what you’re making?

Another sign of user need is when people pay a lot for something. It’s easy to convince investors there will be demand for a cheaper alternative to something popular, if you preserve the qualities that made it popular.

The best stories about user needs are about your own. A remarkable number of famous startups grew out of some need the founders had: Apple, Microsoft, Yahoo, Google. Experienced investors know that, so stories of this type will get their attention. The next best thing is to talk about the needs of people you know personally, like your friends or siblings.

14. Make a soundbite stick in their heads.

Professional investors hear a lot of pitches. After a while they all blur together. The first cut is simply to be one of those they remember. And the way to ensure that is to create a descriptive phrase about yourself that sticks in their heads.

In Hollywood, these phrases seem to be of the form “x meets y.” In the startup world, they’re usually “the x of y” or “the x y.” Viaweb’s was “the Microsoft Word of ecommerce.”

Find one and launch it clearly (but apparently casually) in your talk, preferably near the beginning.

It’s a good exercise for you, too, to sit down and try to figure out how to describe your startup in one compelling phrase. If you can’t, your plans may not be sufficiently focused.

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http://blog.pmarca.com/2007/06/how_to_hire_the.html

Jun 6, 2007

There are many aspects to hiring great people, and various people smarter than me have written extensively on the topic.

So I’m not going to try to be comprehensive.

But I am going to relay some lessons learned through hard experience on how to hire the best people you’ve ever worked with — particularly for a startup.

I’m going to cover two key areas in this post:

Criteria: what to value when evaluating candidates.

And process: how to actually run the hiring process, and if necessary the aftermath of making a mistake.

Criteria first.

Lots of people will tell you to hire for intelligence.

Especially in this industry.

You will read, hire the smartest people out there and your company’s success is all but guaranteed.

I think intelligence, per se, is highly overrated.

Specifically, I am unaware of any actual data that shows a correlation between raw intelligence, as measured by any of the standard metrics (educational achievement, intelligence tests, or skill at solving logic puzzles) and company success.

Now, clearly you don’t want to hire dumb people, and clearly you’d like to work with smart people.

But let’s get specific.

Most of the lore in our industry about the role of intelligence in company success comes from two stratospherically successful companies — Microsoft, and now Google — that are famous for hiring for intelligence.

Microsoft’s metric for intelligence was the ability to solve logic puzzles.

(I don’t know if the new, MBA-heavy Microsoft still does this, but I do know this is how Microsoft in its heyday worked.)

For example, a classic Microsoft interview question was: “Why is a manhole cover round?”

The right answer, of course, is, “Who cares? Are we in the manhole business?”

(Followed by twisting in your chair to look all around, getting up, and leaving.)

Google, on the other hand, uses the metric of educational achievement.

Have a PhD? Front of the line. Masters? Next. Bachelor’s? Go to the end.

In apparent direct contraction to decades of experience in the computer industry that PhD’s are the hardest people to motivate to ship commercially viable products — with rare exception. (Hi, Tim! Hi, Diego!)

Now, on the one hand, you can’t question the level of success of either company.

Maybe they’re right.

But maybe, just maybe, their success had a lot to do with other factors — say, huge markets, extreme aggressiveness, right time/right place, key distribution deals, and at least in one case, great products.

Because here’s the problem: I’m not aware of another Microsoft that’s been built by hiring based on logic puzzles. And I’m not aware of another Google that’s been built by hiring PhD’s.

So maybe there are other hiring criteria that are equally, or more, important.

Here’s what I think those criteria are.

First, drive.

I define drive as self-motivation — people who will walk right through brick walls, on their own power, without having to be asked, to achieve whatever goal is in front of them.

People with drive push and push and push and push and push until they succeed.

Winston Churchill after the evacuation of Dunkirk:

“We shall not flag or fail. We shall go on to the end, we shall fight in France, we shall fight on the seas and oceans, we shall fight with growing confidence and growing strength in the air, we shall defend our Island, whatever the cost may be, we shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender.”

That’s what you want.

Some people have it and some people don’t.

Of the people who have it, with some of them it comes from guilt, often created by family pressure.

With others, it comes from a burning desire to make it big.

With others, it comes from being incredibly Type A.

Whatever… go with it.

Drive is independent of educational experience, grade point averages, and socioeconomic background.

(But Marc, isn’t a 4.0 GPA a sure sign of drive? Well, it’s a sign that the person is driven to succeed on predefined tests with clear criteria and a grader — in an environment where the student’s parents are often paying a lot of money for the privilege of having their child take the tests. That may or may not be the same thing as being driven to succeed in the real world.)

Drive is even independent of prior career success.

Driven people don’t tend to stay long at places where they can’t succeed, and just because they haven’t succeeded in the wrong companies doesn’t mean they won’t succeed at your company — if they’re driven.

I think you can see drive in a candidate’s eyes, and in a candidate’s background.

For the background part, I like to see what someone has done.

Not been involved in, or been part of, or watched happen, or was hanging around when it happened.

I look for something you’ve done, either in a job or (often better yet) outside of a job.

The business you started and ran in high school.

The nonprofit you started and ran in college.

If you’re a programmer: the open source project to which you’ve made major contributions.

Something.

If you can’t find anything — if a candidate has just followed the rules their whole lives, showed up for the right classes and the right tests and the right career opportunities without achieving something distinct and notable, relative to their starting point — then they probably aren’t driven.

And you’re not going to change them.

Motivating people who are fundamentally unmotivated is not easy.

But motivating people who are self-motivated is wind at your back.

I like specifically looking for someone for which this job is their big chance to really succeed.

For this reason, I like hiring people who haven’t done the specific job before, but are determined to ace it regardless.

I also like specifically looking for someone who comes from some kind of challenging background — a difficult family situation, say, or someone who had to work his/her way through school — who is nevertheless on par with his/her more fortunate peers in skills and knowledge.

Finally, beware in particular people who have been at highly successful companies.

People used to say, back when IBM owned the industry: never hire someone straight out of IBM. First, let them go somewhere else and fail. Then, once they’ve realized the real world is not like IBM, hire them and they’ll be great.

And remember, an awful lot of people who have been at hugely successful companies were just along for the ride.

Career success is great to look for — but it’s critical to verify that the candidates out of hugely successful companies actually did what they claim in their roles at those companies. And that they really get it, that the real world is a lot tougher than being IBM in the 80′s, or Microsoft in the 90′s, or Google today.

Second criterion: curiosity.

Curiosity is a proxy for, do you love what you do?

Anyone who loves what they do is inherently intensely curious about their field, their profession, their craft.

They read about it, study it, talk to other people about it… immerse themselves in it, continuously.

And work like hell to stay current in it.

Not because they have to.

But because they love to.

Anyone who isn’t curious doesn’t love what they do.

And you should be hiring people who love what they do.

As an example, programmers.

Sit a programmer candidate for an Internet company down and ask them about the ten most interesting things happening in Internet software.

REST vs SOAP, the new Facebook API, whether Ruby on Rails is scalable, what do you think of Sun’s new Java-based scripting language, Google’s widgets API, Amazon S3, etc.

If the candidate loves their field, they’ll have informed opinions on many of these topics.

That’s what you want.

Now, you might say, Marc, that’s great for a young kid who has a lot of spare time to stay current, but what about the guy who has a family and only has time for a day job and can’t spend nights and weekends reading blogs and staying that current?

Well, when you run into a person like that who isn’t current in their field, the other implication is that their day job isn’t keeping them current.

If they’ve been in that job for a while, then ask yourself, is the kind of person you’re looking for really going to have tolerated staying in a day job where their skills and knowledge get stale, for very long?

Really?

Remember — because of the Internet, staying current in any field no longer costs any money.

In my experience, drive and curiosity seem to coincide pretty frequently.

The easiest way to be driven is to be in a field that you love, and you’ll automatically be curious.

Third and final criterion: ethics.

Ethics are hard to test for.

But watch for any whiff of less than stellar ethics in any candidate’s background or references.

And avoid, avoid, avoid.

Unethical people are unethical by nature, and the odds of a metaphorical jailhouse conversion are quite low.

Priests, rabbis, and ministers should give people a second chance on ethics — not hiring managers at startups.

‘Nuff said.

One way to test for an aspect of ethics — honesty — is to test for how someone reacts when they don’t know something.

Pick a topic you know intimately and ask the candidate increasingly esoteric questions until they don’t know the answer.

They’ll either say they don’t know, or they’ll try to bullshit you.

Guess what. If they bullshit you during the hiring process, they’ll bullshit you once they’re onboard.

A candidate who is confident in his own capabilities and ethical — the kind you want — will say “I don’t know” because they know that the rest of the interview will demonstrate their knowledge, and they know that you won’t react well to being bullshitted — because they wouldn’t react well either.

Second topic: process — how to run the hiring process.

First, have a written hiring process.

Whatever your hiring process is — write it down, and make sure everyone has a copy of it, on paper.

It’s continually shocking how many startups have a random hiring process, and as a result hire apparently randomly.

Second, do basic skills tests.

It’s amazing how many people come in and interview for jobs where their resume says they’re qualified, but ask them basic questions about how to do things in their domain, and they flail.

For example, test programmers on basic algorithms — linked lists, binary searches.

Just in pseudocode — it doesn’t matter if they know the relevant Java library calls.

It does matter if they are unable to go up to the whiteboard and work their way through something that was covered in their first algorithms course.

A lot of people come in and interview for programming jobs who, at their core, can’t program.

And it’s such a breath of fresh air when you get someone who just goes, oh yeah, a linked list, sure, let me show you.

The same principle applies to other fields.

For a sales rep — have them sell you on your product all the way to a closed deal.

For a marketing person — have them whiteboard out a launch for your new product.

Third, plan out and write down interview questions ahead of time.

I’m assuming that you know the right interview questions for the role — and frankly, if you don’t, you probably shouldn’t be the hiring manager for that position.

The problem I’m addressing is: most people don’t know how to interview a candidate.

And even people who do know how, aren’t necessarily good at coming up with questions on the fly.

So just make sure you have questions planned out and assigned to each interviewer ahead of time.

I do this myself — always enter the room with a list of questions pre-planned — because I don’t want to count on coming up with them on the fly.

The best part is that you can then iteratively refine the questions with your team as you interview candidates for the position.

This is one of the best ways for an organization to become really good at hiring: by iterating the questions, you’re refining what your criteria are — and how you screen for those criteria.

Fourth, pay attention to the little things during the interview process.

You see little hints of things in the interview process that blow up to disasters of unimaginable proportions once the person is onboard.

Person never laughs? Probably hard to get along with.

Person constantly interrupts? Egomaniac, run for the hills.

Person claims to be good friends with someone you know but then doesn’t know what the friend is currently doing? Bullshitter.

Person gives nonlinear answers to simple questions? Complete disorganized and undisciplined on the job.

Person drones on and on? Get ready for hell.

Fifth, pay attention to the little things during the reference calls.

(You are doing reference calls, right?)

Most people softball deficiencies in people they’ve worked with when they do reference calls.

“He’s great, super-smart, blah blah blah, but…”

“Sometimes wasn’t that motivated” — the person is a slug, you’re going to have to kick their rear every morning to get them to do anything.

“Could sometimes be a little hard to get along with” — hugely unpleasant.

“Had an easier time working with men than women” — raging sexist.

“Was sometimes a little moody” — suffering from clinical depression, and unmedicated.

You get the picture.

Sixth, fix your mistakes fast… but not too fast.

If you are super-scrupulous about your hiring process, you’ll still have maybe a 70% success rate of a new person really working out — if you’re lucky.

And that’s for individual contributors.

If you’re hiring executives, you’ll probably only have a 50% success rate.

That’s life.

Anyone who tells you otherwise is hiring poorly and doesn’t realize it.

Most startups in my experience are undisciplined at fixing hiring mistakes — i.e., firing people who aren’t working out.

First, realize that while you’re going to hate firing someone, you’re going to feel way better after the fact than you can currently imagine.

Second, realize that the great people on your team will be happy that you’ve done it — they knew the person wasn’t working out, and they want to work with other great people, and so they’ll be happy that you’ve done the right thing and kept the average high.

(The reason I say “not too fast” is because your great people are watching to see how you fire people, and if you do it too fast you’ll be viewed as arbitrary and capricious — but trust me, most startup managers do not have this problem, they have the opposite problem.)

Third, realize that you’re usually doing the person you’re firing a favor — you’re releasing them from a role where they aren’t going to succeed or get promoted or be valued, and you’re giving them the opportunity to find a better role in a different company where they very well might be an incredible star.

(And if they can’t, were they really the kind of person you wanted to hire in the first place?)

One of the good things about our industry is that there are frequently lots of new jobs being created and so you’re almost never pushing someone out onto the street — so don’t feel that you’re dooming their families to the poorhouse, because you aren’t.

You’re not that important in their lives.

I can name a number of people I’ve fired or participated in firing who have gone on to be quite successful at other companies.

They won’t necessarily talk to me anymore, though .

Finally, although this goes without saying: value the hell out of the great people you do have on your team. Given all of the above, they are incredibly special people.