Steve Shu – Page 36 – Stephen Shu, PhD

July 7, 2005

Professional Peer Support Networks Are Very Useful To Leverage In Both Ventures And Larger Companies

I participate in a group of about 50-60 CFOs that focuses on the software sector, finance, and operational issues. Participants range from sole proprietorship consultants to CFOs in public companies and venture-backed Series A-ZZ firms. Online inquiries by group members can be restricted to an intranet-based discussion (potentially using a group blogging service down the road).

When working for ventures, you need to try to leverage informal networks as much as possible (including using counsel). As examples of the high-quality things that the peer group can help you get data points on (sort of a "wisdom of the crowds" thing provided that you watch out for biases), here are two results polls related to:

pricing of underwater options
whether VPs, CXOs, etc. can be contractors

Topic #1 – Managing options-related issues caused by taking on a down-round (Note: content created by facilitator and trimmed and edited by me a bit with "[]" added for confidentiality and readability):

Most people who have dealt with this historically have chosen to cancel underwater options and reissue them in 6 months and 1 day. This was the cleanest solution that avoided triggering variable accounting. Employees are "naked" for 6 months, but good communications plans help avoid any associated morale issues.
After further research, [CFO] found a very interesting solution working with [deleted] auditors – a new alternative that leverages the changing regulations around expensing stock options. There is no such thing as variable accounting if you adopt FAS 123R – Expensing Stock Options, which all private companies need to do by 2006 [deleted]. In essence, if the company adopts FAS 123R now, it can reprice the underwater options immediately. The company simply needs to recognize an expense for the delta in value of the options (via Black-Scholes) caused by the repricing, and expense it over the remaining vesting period of the options.
To make a long story short, the company will solve the problem by adopting FAS 123R six months before it otherwise would have done so. There may be some administrative pain to being on the cutting edge of implementing this, but the company avoids a lot of overhead and administration for education seminars and general employee confusion. Accounting absorbs some pain sooner than it would inevitably face, but the rest of the organization gets to focus on business execution.

Topic #2 – Whether VPs, CXOs, etc. can be contractors (each bullet point is a snip of a selected response from peer support group participants):

A couple of years ago I did a consulting engagement for an early-stage company on a 1099 basis and the guy who ran the company introduced me to people as "my CFO" because that’s how he viewed me and what I was doing. However, I listed the position on my resume as "CFO (Consulting)" in the interests of accurate disclosure. If the principals involved have no objection to use of a particular title and the 1099 person is filling the role, I don’t see why not.
Absolutely, in the past we have contracted out VP of Sales Position, albeit the person worked for us full time, however he preferred to have his consulting firm (sole proprietorship) pick up the billing and expenses.
I also had a similar situation a few years ago. An attorney advised me that the risk if any resided with the company as a result of an individual being held out as an officer of the company, which carries with it the presumption by outside parties dealing with the individual that the person has the usual authority associated with a company officer. In many contract situations this is likely not the case.
I am assuming this is a question for a resume. Guess I would look at it from a personal credibility perspective. If I were consulting and acting as CFO, I might put CFO (consulting, acting or contract) down, but not just CFO. If I put myself into a hiring manager’s role and asked how I would respond once I found out that it was not a direct employee position (and I would probably find out), I would probably react more favorably to the accurate representation. The risk is getting left behind in the initial cut of the search, which will partly depend on what someone did in the role.
We had the same type of situation with an interim CEO. It really depends, in my opinion, on the responsibilities and authorities granted by the Board. A title of C-O, to the outside world, implies an authority, regardless of whether the person is a W2 or 1099 employee. That, to me, would govern whether the individual assumes the title.

Note: None of the information in this post should be construed as legal nor accounting advice. Information presented here is a summary of personal perspectives of various CFOs and finance folks.

July 7, 2005

Are Incubating Initiatives And Running Pilots Specializations?

I would claim that they are. But incubating things … that doesn’t sound like the typical specialization of finance, accounting, sales, or information technology. In fact, have you ever seen a "department of incubating things" in a company? Wouldn’t someone who specialized in such an area get spread too thin?

Valid observation and concerns. To support my claim though, I would make the following anecdotal comments:

I never focused much on incubating and running pilots until I cut my teeth at management consulting firm PRTM that had a niche in implementation and execution with high-tech firms (although I worked for a number of operating companies prior to management consulting). Incubation is akin to project management and risk management in an operational context.
To orient oneself as incubating something, one needs to be prepared that things could be very rocky at first. Customers will be pissed. Workers will be pissed. Roles won’t be defined. People don’t know exactly what to do. There will be no technology support in many cases. Fraying, fringes, and bad things will be showing all over. To solve these problems, project management, discipline, and cross-functional skills are needed.
Incubation tends to attract those with an appetite for variety as opposed to those unable to commit to a steady-state/harvesting-type business.
Sometimes the role of incubating things can be found throughout corporate consulting groups, business development, or product management functions. Common best-in-class features in these functional areas include understanding the asset base of the company and figuring out how to create quantitative and qualitative value though combining things or breaking them down. This is in contrast to cost center-oriented functions.
More often than not, people discount (or completely ignore) the role of piloting initiatives. Just jump right into deployment and rollout from the unit testing phase of a product. That has got to be the wrong answer at least some of the time.

July 6, 2005

Leadership According To A Leading Investment Bank

Hat tip: Ken Thompson. The managing directors and senior leaders at prominent investment bank Goldman Sachs have published the firm’s nine leadership principles. Although I can’t say that I follow the i-banking closely, this list is not the sort of thing I’ve ever seen before out of the i-banking sector. Anyway, my favorite one in the list is "Debate Freely, Decide Quickly, and Commit". I chose this one because it is something pretty critical in entrepreneurial endeavors. No time to have a weak stomach when being a maverick or pioneer (or supporting the mavericks – which is really my focus).

As an aside, a thought of my own that came to mind, but I wasn’t sure where it mapped in the list, is that I have a personal taste for leading by doing. For example, if one wants to show how money can be made in a venture, then go close a deal and sell the product, make key introductions, or structure the deal where things are falling apart and the negotiation settlement zone is narrow. If one wants to show how money is being left on the table, then prove it in the field. If one thinks that product development is less than optimal, then line up both the confirming and disconfirming evidence with customer prospects, customers, and competitive information. If you need people to work overtime and make a contribution beyond the normal call of duty then you have to put in the time too. If the team is under financial pressure and cutbacks are in order, make sure that you are in the front of the line to be cut.

July 5, 2005

Practicalities of Early Boards (Profits and Non-Profits)

In the past few weeks, I’ve been asked by three folks about the legal and practical requirements of implementing a board in an early-phase organization. There is a lot of information around on the subject of corporate governance – probably the most notable resource that comes to mind for me is National Association of Corporate Directors. There are also books on the subject (e.g., Corporate Governance), but there can be a lot to wade through depending on how deep you want to go.

Here’s my introductory $0.02 on the subject:

The board’s primary purpose is to work on behalf of the ownership of the organization both a) to see that the organization achieves what it sets out to do and b) to provide a monitoring framework that ensures what management is doing is acceptable.
Boards then, can be viewed as the balance point between the shareholders (which own) and the management (which controls day-to-day operations).
Laws and articles of the organization may dictate the minimum requirements, but generally speaking, two key roles that are basically the minimum to organizations (profit and non-profit) are the chairperson and the secretary.
The chairperson is often referred to as the servant leader of the board – that is, the integrity of governance starts with the board, and the chairperson is basically a facilitator.
The secretary has responsibility for accurately documenting (guardian of) what the board has done.
In some situations, the secretary may also play a key role in helping the chairman put together board documents and doing behind-the-scenes work to facilitate the board meeting (so that it is a non-meeting in many cases). Tends to be more true in environments where more legal mechanics and knowledge of confidential organizational infrastructure is required.

Early-phase organizations may have some wiggle room (e.g., number of directors, amending by-laws) as to how governance works for numerous reasons, e.g., the management largely represents all of the shareholders.

Some key things that I would consider (in the case of wiggle room) include:

Speed and convenience – larger boards may slow you down unless one of the following counterbalances the effects.
Leverage – boards can be a way to get help at no to minimum cash cost. Here some key things to capitalize on are the board directors’ networks, skills (e.g., legal or accounting), etc.
Advice – although this is one I personally put the less stock in because one can get some of this without a board director relationship, it depends on the makeup of the management team and desire of the owners. Board directors can complement the management team’s experiences.
Independence – as the owners of the organization differ in total composition as compared to management, the need for board directors to be non-management and independent increases.

As a final closing thought, fund raising is huge timesink that affects both for-profit and non-profit organizations. Some non-profits have even segmented their board into operating and fund raising groups. The former group looks at current operations, controller activities, etc. The latter group is more forward-looking and gets involved with the strategic direction and milestones for the group. Fund raising is something that should not be forgotten because it is buried in the notes I’ve outlined above (probably could be categorized as a way to get leverage). Consideration should be given as to how the board makeup should look based on putting fund raising in the proper perspective.

July 1, 2005

Interesting Technology Product Management Post

Hat tip: BusinessPundit. A interesting (but lengthy) post on technology product management by Raj Karamchedu which takes a stance that "Differentiation [is] A Phenonmena, Not a Concept". I think I directionally agree with Raj’s idea, and at a later date I’ll write down some additional thoughts later about applying Raj’s abstract concept to field-level tech situations.

June 29, 2005

Online Networking, Virtual Handshakes, & Real Deals

As some of you may know, for me blogging started out primarily as an electronic newsletter. It sidewinded into a book deal opportunity, online writing opportunities, marketing consulting engagements, start-up job offers, angel investor inquiries, and my recent position at 21Publish as COO. Three of these opportunities (which I closed) are international relationships. There are a number of other opportunities baking as well, some related to blogging, others not.

If you are interested in another source of information on doing business online, the concept of a "virtual handshake" and a book by the same name, is being promoted by Harvard Business School alum and CEO of Nitron Advisors, David Teten, at a blog here.

An excerpt of the book is here. Here’s a snip of that excerpt that provides some great context about why you should consider learning more:

Most professionals meet new people and maintain relationships the same
way they did 50 years ago—with phone calls, letters, and face-to-face
meetings. However, today you can use social software to build and
leverage a much larger and more effective network. Even if you do not
use these technologies yourself, your competitors are—to gain an
advantage over you, or at a minimum to learn more about you. Whether
you choose to participate or not, social software will impact you. 84
percent of American Internet users have used the Internet to contact or
get information from an online group–more than have used the Internet
to read news, search for health information, or to buy something.

June 27, 2005

More On Product Management and Product Marketing (and Requirements Design Skills)

Will Hsu (no relation to Steve Shu methinks … although the story is that customs reversed the "H" and "S" in my family’s last name) has a good post and emerging blog on product management and product marketing musings. Will is part of the product marketing department at eBay. I’m all for those that blog about product management and marketing disciplines.

Will’s post has some interesting perspectives on using more formalisms as part of requirements definition within the product management discipline. Having spent a good portion of my career in the telcom and software space (and writing requirements using all sorts of formal and informal methods), I think that it’s great when formalisms can be used (where the mix of technology, culture, and customer permit).

In the tech sector, good requirements skills also carry over to management consulting and sales discipline. Consider the following cartoon (source: unknown, click to enlarge):