In a renovated warehouse in the heart of Manhattan’s Silicon Alley, Gordon Gould sits in a cavernous loft space called “The Pit.” His surroundings exhibit none of the traditional emblems of business success. He doesn’t have a corner office. In fact, he doesn’t have an office at all — or even a desk.
But Gould does have the one measure of success that matters: a piece of the action. Last February, the 27-year-old “information architect” left a comfortable job at Sony Corporation for a new-media startup called Thinking Pictures, Inc. That’s not unusual. America is in the grip of startup fever. Tens of thousands of young people — programmers, engineers, marketing specialists — are turning their backs on big companies and signing up with startups. What is unusual is that Gould negotiated a major equity stake — 3.5% — before he made his move.
“I’m young but I’m not dumb,” he says. “I know I’m a prime producer and I want my compensation to reflect that. If I’m going to spend 16 hours a day in an office, I want to be rewarded for the upside value my work generates. I want to feel that the company is partly my baby.”
There’s no mistaking Robert Heckman for Gordon Gould. At 56, he’s comfortable with the trappings of corporate life. But when Heckman sat back to consider his future, he reached the same conclusion as Gould. Last May, he left a comfortable job as director of marketing at Andersen Consulting to join the Thomas Group Inc. (TGI), a consulting firm based in Irving, Texas that works with blue-chip clients such as EDS, Rubbermaid, and Siemens.
Heckman wasn’t unhappy at his old job — far from it — but TGI offered something that privately held Andersen never could — a piece of the action. That’s because the firm is a rare species in the world of professional services — a small, fast-growing, publicly traded company.
Before joining his new firm, Heckman negotiated an option package for 50,000 shares at an exercise price of $14.75. He expects those options to create enough wealth to make him financially independent. Since TGI went public three years ago at $12.62, its share price has risen as high as $20. Its long-term prospects are bright. The company, now a $70-million-a-year operation, has been growing at a sustained annual rate of 33%. It expects to grow even faster over the next five years — and it will, if Heckman does his job. His title is vice president and chief growth officer.
“Stock options are the whole idea,” Heckman says. “If Netscape’s people perform, the company performs, the stock performs, and they build net worth. By the time I’m 60, I want to be able to stop working and do some things in the world of education. Stock will help me accomplish that goal.”
More than ever before, knowledge workers can see and feel the direct relationship between the work they do and the market value of their companies. A small team of programmers, armed with a great idea and a few workstations, can write a new software package that generates hundreds of millions of dollars of revenue. A small creative team can develop an advertising campaign so compelling that it puts their agency on the map — and leads to an enormous increase in billings. Not surprisingly, people with this much impact want to share in the value they create. They want a piece of the action.
“We are at a cultural turning point in our attitudes toward jobs, and knowledge workers are at the leading edge of that change,” says consultant William Bridges, an expert on careers and the author of Jobshift: How to Prosper in a Workplace Without Jobs. “Knowledge workers realize that getting a ‘salary’ doesn’t make sense for them. The value of what they contribute isn’t based on the time they put in. A person who has a brilliant idea in the morning while he’s shaving may be responsible for a breakthrough that vastly increases the value of the company. That person expects to be rewarded for those results.”
Stephen Combs, managing partner of Juntunen Combs Poirier, an executive search firm in San Francisco, couldn’t agree more. He says people’s expectations have changed because their relationship to work has changed. Work is no longer a job; it’s a way of life.
“The people I recruit aren’t employees,” Combs argues, “they are crusaders — whether the crusade is to launch satellites for Craig McCaw’s startup or to create the next great Web technology. They are experts with pride verging on arrogance. They want to make a difference.” And they expect to be compensated accordingly.
The First Option Is Stock Options
There’s a big difference between wanting a piece of the action and getting it. Even the most hard-charging businesspeople can turn downright docile when it comes to cutting a smart deal for themselves. But the old saying has it right: “You don’t get what you deserve; you get what you negotiate.”
Gordon Gould is a case in point. He was making $62,000 a year as manager of online services for Sony Worldwide Networks. It was a responsible — and demanding — job. Then something changed. “It became difficult for me to really invest myself in a project,” he explains. “I kept asking, Why should I work 16 hours a day to line someone else’s pockets?”
So Gould decided to explore his options. One month later, he had increased his salary to $70,000 and owned 3.5% of a hot startup with big-name clients including the House of Blues and Universal Pictures. Gould fully expects Thinking Pictures to go public, and he hopes his stake will allow him to start “surfing the world” by his 35th birthday.
How did Gould get his piece of the action? First, he knew to ask — actually, to insist. He vowed he would leave Sony only for a job with plenty of equity. “Companies capitalize on naiveté,” he says. “They get lots of 20-year-olds who don’t know any better. I figured you can’t get if you don’t ask.”
He also knew how much to ask for. Gould networked with industry players and professional colleagues to determine the terms on which key contributors were joining other Silicon Alley startups. Then he set his sights on the maximum — 5% of the company. “I negotiated from there,” he says. “I stressed to people that I wasn’t greedy, but that equity was important to me.”
Finally, Gould got in at the right time. He was the third full-time employee of Thinking Pictures, and he joined the company before it received a major infusion of venture capital. That’s important. “Companies give away stock left and right at the beginning,” says Timothy Sparks, a partner with Wilson Sonsini Goodrich & Rosati, Silicon Valley’s most prominent law firm. “They get more sophisticated as time goes on. And once the venture capitalists arrive, they oversee the process.”
There’s no question that stock options are the quickest way to get a piece of the action. They’re also the riskiest. Before you catch startup fever, keep in mind four real-world cautions from the experts.
Only 1 in 10 startups ever goes public. And most companies that do go public never amount to much. This sobering reality has two simple — but frequently overlooked — implications. One, be aware of the risks. Two, join the company that you believe is most likely to win rather than the one that simply offers the most equity. “For every Netscape there are 20 dogs that are barely barking or are long gone,” warns Sparks.
The number of zeros in your stock-option grant means nothing. What really matters is the percentage of the company you own. It’s a simple arithmetical point, but one that many people overlook. “I see it time and again with engineers,” says Silicon Valley lawyer Mark Radcliffe. “They get caught up in the zeros.”
For example, a company Radcliffe represented was eager to land a particular engineer, so it offered him options on 50,000 shares. But the recruit was adamant that he receive 100,000 shares because that’s what a colleague recently got from another company. Radcliffe explained that this other company had twice as many shares outstanding, and that his offer was more generous, but the engineer wouldn’t budge. So the company, still in its infancy, did a four-for-one stock split and gave the engineer his 100,000 shares. The new recruit was thrilled. Radcliffe was amazed. “He got a smaller percentage than we originally offered!” he says.
Timing is everything. Tim Sparks says the ideal time to negotiate with a young company is 6 to 18 months before it does an initial public offering. At this point, the risks of failure are reduced (although by no means eliminated), and there’s still a chance for you to make a score. “A year before the IPO, the stock value is 5% to 10% of what it will be at the public offering,” Sparks says. “There’s just an automatic ramp-up in the share price. You have more information about the company’s viability, and you can still buy in on the cheap.”
You’re not the only person in the company. So you shouldn’t make demands as if you were. “Equity” — as in fairness — is a defining issue for all startups. Your individual negotiation is always conducted in the context of what other people are doing. “Let’s say a company just hired a vice president of engineering and gave him 1% of the equity,” explains Dennis Crow, an executive recruiter and partner at Pierce & Crow of Greenbrae, California. “Then they hired a vice president of marketing and gave her 1% of the equity. You want to be vice president of sales, and you say, ‘I want 1.5%.’ There’s just no way the company can break the mold for you. It would destroy morale.”
That means your drive to negotiate for a piece of the action should be tempered by a commitment to your new colleagues and the company as a whole. “You can’t go in with a me-against-the-world attitude,” says Crow. “You are really negotiating into a family. Remember, whatever you negotiate is public information at the moment of the IPO.”
When Options Aren’t an Option
Negotiating for equity is the most direct way to get a piece of the action. But options simply aren’t an option for everyone. Most professional-services firms are still privately held companies. Lots of talented people work for business units and small teams inside big companies — diversified organizations whose market value rises and falls based on factors beyond their control.
Is it possible to get a piece of the action in those situations? Absolutely. The good news about the spread of startup fever is that it creates a favorable negotiating atmosphere for everyone — even for people who aren’t in a position to pursue the holy grail of stock options. All it takes is some tough-minded negotiating and a few concrete models from which to fashion creative proposals.
Sun Microsystems is experimenting with one such model. Once a high-flying startup, the workstation giant now has annual revenues of more than $7 billion and about 17,000 employees. Its core strategic challenge, says Ken Alvares, vice president for human resources, is retaining its top performers amid Silicon Valley’s IPO frenzy. “This is the most competitive industry in the world right now — for products and for people,” he argues. “All our best people get calls from startups. They say, ‘We’ll give you a million options, let’s rock and roll.’ That’s what we’re up against.”
For a while, Sun simply fought fire with fire. It offered stock-option grants to engineers being wooed by stock-happy startups. Over time, though, Alvares and his colleagues realized that one-upping the competition was a losing proposition. “You’ve got to make people want to stay before someone comes in with a competing offer,” Alvares says. “Most people psychologically disengage [after a bidding war]. Even if they accept our counteroffer, they usually leave within two years.”
Sun’s new model approximates the startup experience inside what is now a giant corporation. Sun identifies projects that it considers critical to its future. It then creates “shares” in those projects — complete with documents resembling stock certificates — and distributes them to engineers working on relevant project teams. At the end of a fixed time period — usually three to five years — Sun will turn these shares into cash based on the profits the projects generate.
Alvares believes this program creates many of the right incentives for people who want a piece of the action. It puts a premium on timely performance. The “payout clock” starts ticking when a project begins, which creates pressures to deliver the product on time. After all, the longer a product is on the market (rather than in the lab), the greater the profits it generates — and the more valuable each engineer’s shares. The program also matches rewards to results. If a team of engineers delivers a great product, the members will win big even if the company as a whole has a disappointing year.
“Engineers who participate in this program can end up making a lot of money,” Alvares declares. “But only if they stick around. If they leave, they lose. That’s a not-too-subtle reason for doing it. We want our people to feel that they can stay here.”
Saltz Shamis & Goldfarb, a midsize accounting firm in Solon, Ohio, has developed a different model to give its people a piece of the action. Unlike the Thomas Group, Saltz Shamis has no plans to go public. So the firm has devised “phantom shares” to simulate the behavior of publicly traded stock. Saltz Shamis unveiled the program in January 1995. To date, 30 of its 45 eligible CPAs have chosen to participate. Their combined stake now represents 1.5% of the firm’s total capital, and Saltz Shamis is willing to allow their overall stake to reach 10%.
The phantom-stock program requires that people put themselves at risk — although the risks are minimal. Participants must spend at least $3,000 of their own money to make an initial lump-sum investment. They can then make additional investments, in units of $1,000, every January. Saltz Shamis guarantees an annual interest payment of 8% on the funds its people invest. The principal value of the shares rises or falls based on a tangible performance metric: the firm’s annual cash receipts. So far the investment in phantom shares has paid off. The shares appreciated by 33% in 1995, and they’re expected to grow by 40% in 1996.
Why did Saltz Shamis adopt its innovative program? “Because of the changing nature of the workforce,” replies Jay Nisberg, a management consultant based in Ridgefield, Connecticut who advised the company on the phantom-share plan. “Everyone is looking for high-potential people. But they’re the hardest people in the world to reward and retain. This plan is absolutely cutting-edge. It’s designed to motivate these people.”
Is There an Agent in Your Future?
The piece of the action you negotiate usually reflects the techniques and mind-set you apply to the negotiations. Which raises an intriguing question. Top athletes wouldn’t think of negotiating a contract without a high-powered agent. Neither would movie stars or big-name writers. As more and more businesspeople clamor for a piece of the action, will “superstar” programmers and product designers start using agents to represent their interests?
It’s not as far-fetched as it sounds. In fact, it’s already happening. The digital-entertainment business stands halfway between agent-obsessed Hollywood and the represent-yourself worlds of computer hardware and software. Today it is absolutely routine for software developers writing computer games and interactive CD-ROMs to use “cyberagents” to negotiate on their behalf — usually in return for a 10% cut.
Heidi Sinclair is one such cyberagent. She is a top executive at International Creative Management Inc. (ICM), Hollywood’s most powerful talent agency. But Sinclair’s roots are in the computer business, not entertainment. Before joining ICM, she was vice president of corporate strategy at Borland International and an executive at Lotus Development. Does she expect to be representing some of the people she used to work with?
“There’s been a shift in mentality, and it started in the game community,” Sinclair replies. “Programming ‘stars’ are rising to the surface and beginning to cut deals. This approach can extend very directly into other parts of the digital world, whether it’s application software or operating systems — wherever you find really key players and hot developers.”
Cyberagent Stefanie Henning has worked at ICM for four years. She has about 30 clients, including game writers, new-media producers, software programmers, and computer-graphics artists.
“I started representing programmers because they were really frustrated,” she says. “They weren’t getting any financial participation in the products they were creating. We pulled them out of the big companies and structured more of a ‘work-for-hire’ environment. Programmers were in such demand that we had lots of leverage in creating back-end participation opportunities for them.
“Now we’re in a different stage,” she continues. “We’re taking individual programmers and building companies out of them. You have a technical director overseeing a group of programmers, and they work on three or four different projects. We try to build participation within each project.”
In the world of digital entertainment, a piece of the action seldom involves equity. Rather, the primary currency is royalties tied to the marketplace performance of specific games. For example, one of Henning’s clients is a company of 10 programmers called Evolutionary Publishing in Santa Monica. Most of its games cost $2 million to $3 million to develop. It typically receives an upfront programming fee of 10% to 25% of the game total budget, back-end royalties based on sales, and bonus payments for reaching certain volume shipments.
Peter Marx, 32, a founder of Evolutionary Publishing, thinks such deals make perfect sense. “Computers are the one place where someone with a relatively small amount of resources and equipment can develop a program that can change the world,” he says. “If that happens, you deserve to be compensated. It’s the American way.”
But why does Marx need an agent to negotiate for him? “Let’s face it,” he says, “computer programmers are relatively antisocial creatures. And Hollywood is intimidating. I’ve always used lawyers on my deals, but Hollywood is different. For programmers like us, it’s nice to be able to hide behind an agent.”
Stefanie Henning agrees. “It’s very hard for people to negotiate good deals for themselves,” she says. “An agent serves as an outside ‘business affairs’ person. It’s not like you pay us an hourly fee. We make money only if you make money.”
Eric Matson is a member of the Fast company editorial staff. Rusty Weston provided additional research for this article.