eric ries

I’ve read Eric Ries’ blog for a long time but only had the chance to meet him in person for the first time today.  He really knocked me off my socks.  Not only is he incredibly smart but he’s also wise and has a super strong ethical compass.  He seems to be becoming – and I hope he will become – the great pro-meritocracy/entrepreneur advocate of our generation.  

A few things we discussed:

– We have both lived through the ups and downs of tech world of last decade+.  We know a downturn will come in the next few years (most likely not a true revenue/profit downturn but early stage valuation + coolness downturn) .  We talked about ways the tech world could mitigate the downturn effects being as bad as last time.  

– Personally I think one of the worst things happening now is that companies lie to employees and only tell them the # of shares they own and not the % they own.  # of shares is totally meaningless. Major NYC companies like Gilt Group claim that the # of shares outstanding is a “trade secret” which is a complete joke. Besides being unethical, I worry this deception will create another generation of employees (esp. on the East Coast) who think equity is a scam.  I spent the last 10 years recruiting hackers to work for me and my friends’ companies – convincing them equity was risky but not a scam.  Please let us teach the next generation it’s risky but not a scam.  

– Eric and I also talked about how we hope the 21st century will be about convincing people that they should think about owning part of their employer the same way people in the 20th century wanted to own their house.  It’s a capitalist platitude that property renters don’t take care of the property.  By the same token, “rented laborers” (people working for salaries) don’t take care of their companies.  We are both big fans of a new economy where workers own parts of their companies (“equity economy”) and firms are “small pieces loosely joined” (Coase’s theorem is dramatically over valued).

– Eric had the idea of creating a stock exchange where when you bought stocks you were force to hold them 4-5 years. The quarter-by-quarter mentality is one of the most pernicious concepts that drives our financial markets. I had a similar but probably vastly less implementable idea of trying to convince government to charge 90% capital gains on <4 year trades and 0% of >=4 year trades.  I pushed back on Eric and said MVP for his idea would be new stock type for new IPOs like Facebook instead of new marketplace – he seemed to enjoy his own framework being pushed back on him (to his great credit).

– Eric was nice enough to stay after and talk to Hunch employees along with a some friends of ours who hang out in our office (UpNext, HackRuiter).  I generally hate business speeches but he was probably the smartest and most interesting person I’ve heard in years.  I am not a total lean startup believer but probably 80% of the way there.  Eric stayed talking for an extra hour and was extremely generous with his time, talking to each employee about each of his/her questions in depth.

– It probably goes without saying that us “liberals” (me, Eric, Fred Wilson) who believe that hedge fund managers should pay the same tax rate as firefighters who run into burning buildings are in radical agreement about increasing the carried interest tax.  Unfortunately every other VC seems to disagree with us. Looks like we lost this one and so need to move on.  +1 for aristocrats.

– I was pleased to see Eric agree with me that one of the biggest myths in the innovation economy is the idea that exits are a “fixed pie”. (see this post of mine responding to Fred Wilson and Bill Gurley who as much as I love those guys fall into this trap).  We can increase the pie by 1) bringing more smart people into the entrepreneurship/innovation economy (leader here has been Y Combinator), and 2) being more scientific about how to help these companies succeed on less capital (Eric and Steve Blank seem to be leaders here).

Anyways, great meeting Eric, hope you enjoyed the synopsis.

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25 thoughts on “eric ries

  1. Tyler Arnold says:
  2. jdunck says:

    On the long-term market, you’d have a few things working against you — first mover (which companies would list first?) and long-term competitive advantage. In a word, holding for a predetermined length of time would make the market less efficient.I agree w/ the general premise though; trading on the market right now has nothing to do with value creation. Quants form the vast majority of trades, and any real notion of value becomes noise.Ignore the capital gains; what if the market just required you to reinvest any funds not held for the required length of time? You can sell X whenever you want, but must buy one of the other listed stocks. You get the money back out when the required time is elapsed.

  3. Tyler Arnold says:

    pay no attention to the percentage! look at all the free soda and your 40″ LED display and MacBook Pro with SSD!

  4. lhartwich says:

    I’m all for employee ownership, but I think it’s also important to note drawbacks like the lack of diversification. Having all your “capital” (i.e., human and financial) invested in the same thing can be risky business (Enron comes to mind). I think there is merit to Mark Twain’s famous quote, “Put all your eggs in one basket, and watch that basket”, but those who “qualify” are a rare breed (Warren Buffett for example). It doesn’t seem optimal for the “average” person.

  5. chris dixon says:

    @lhartwich fair point. but i’d argue an employee at a company is already highly betting on that company. might as well give them equity upside and sense of ownership in addition to “renting” them.

  6. lhartwich says:

    That’s a good point. Perhaps some sort of limit (e.g., max % of compensation) would be a good compromise? I don’t usually like arbitrary rules / limits, but in world where most people aren’t financially / business savvy, setting some sort of limit could be beneficial.

  7. Sean Grossman says:

    Chris – What reasons/excuses have you heard, particularly from start-ups or companies that fancy themselves as start-ups, for not issuing employees shares/options?

  8. C. Scyphers says:

    At our startup, I created a spreadsheet individualized for each employee showing their number of shares and percentages as well as the overall CAP table (minus the individual breakout for other employee’s equity) and showing the impact of investor money on their equity stakes. I have found it helps clarify both the standing of each member of the team as well as giving them very strong incentive to bootstrap for as long as humanly possible to avoid dilution.Actually, we run an open-book shop financially, excepting details related to specific individuals (salaries, equity and the like).

  9. jdunck says:

    @C. Scyphers How do you obscure salary numbers, or do you just have enough employees that it isn’t obvious what the disparity is?

  10. C. Scyphers says:

    @jdunck — For a given employee, I collapse everyone else’s information into a single line (imaginatively named “Others”). We don’t have that many people in the loop (between 4 and 7, depending on if you want to count FTEs only or everyone who is involved).Sure, everyone could sit around a table, compare notes and figure things out using deductive math (I got 10%, he got 15% and she got 25%; ergo Scyphers has 50%), but I don’t particularly think they will. Even in that circumstance, the table would be relying on each person to be completely honest.It’s a risk, but I believe it’s one worth taking.

  11. dyng says:

    Hi Chris – big fan of your blog and couldn’t agree more about Eric Ries. I got the chance to see him twice this week and was really impressed with him as a person beyond just the Lean Startup movement he’s championing.I also wanted to point out that Gilt has a really great and honest executive team and I never had problems finding out things like stock compensation and total outstanding shares etc.

  12. Peter Chang says:

    I used to work at a well-known valley startup and they would never answer the question of how many total shares were outstanding. All management would always give the run-around. While I could tell there was avoidance on their part, my prior impression was that the founders were generally honest people so I thought that this is the accepted way of doing things (something of a caveat emptor ideology where burden is upon employees to understand this stuff and if you don’t then you’ve put yourself in a position to be taken advantage of). Another friend in the valley who had a background in VC and private equity was applying for a director of BD position and had to fight to get the number of outstanding shares given the same excuse (“we don’t give out that number.”)

  13. ikunaltandon says:
  14. bryanbuckley says:

    If you are smart enough to do engineering or software you should be smart enough to know the differences between # and %. That’s just algebra man. A more subtle thing is the % share you get needs to be in some way insured/guaranteed. Make sure you can’t get diluted against your will.

  15. Adrian Scott says:

    One thought: Firefighters get tax-free compounding of their investments — on the pension side, if you think about it. I don’t feel sorry for them. There’s also not a big enough feedback loop driving efficiency and performance and eliminating waste in the govt sector.

  16. jrwashburn says:

    @lhartwich “…in a world where most people …” is the start of the slippery slope. Believing that you need to set limits and boundaries because you know better…because most people aren’t savvy enough….because they wont really understand, or believe, or get it, or whatever…. That is the reason people are lied too. That is at the root of the justification (unless they are outright fraudulent intentionally) of someone keeping shares outstanding to themselves, or setting arbitrary limits. The idea that I/We know better than you/them is due for bankruptcy.

  17. Peter Chang says:

    Thanks Bryan for the little math lesson although I’d say it’s arithmetic and not algebra. I think most engineers who are relatively early in their career don’t think about the percentage of stock they own. But let’s say they did. What are the industry norms? This answer is not readily available (especially if you have ot take into consideration factors like age of company, number of employees, your value to the company, etc).Also when youre less experienced and 1 of 25 engineers it’s not like you can really make demands like your shares not be diluted.

  18. C. Scyphers says:

    @bryanbuckley @Peter Chang re: non-diluting shares — in my experience, if you have engineers with non-diluting shares, they better have words like “Nobel Prize” or “Inventor of SMTP” in their resume, otherwise investors will take a very dim view of such arrangements.After all, investors are going to want shares in the company in exchange for their case; if everyone in the company is non-dilutable, that might be a bit of a challenge…

  19. bryanbuckley says:

    @freshfunk I would think a good norm is about 0.5%. That’s what small time (tens of thousands of dollars, or other services rendered) angel investors get for a young start-up (ballparking) and certainly it’s case by case. It may be tough to agree on a number.. but if I get offered 5% equity, I will counter with 0.5% non-diluting. @cscyphers Investors and founders have clauses against dilution. I think other early stage employees that are valuable (who cares about resumes? I would care about their value adding ability) deserve the same guarantees. After all they, in a sense, are larger investors than the other investors (VCs or angels)

  20. lhartwich says:

    @jrwashburn, I hear what you’re saying, like I said, “I don’t usually like arbitrary rules / limits”. I do however disagree with your assumption that most people understand finance / business enough to make the right decisions. In my experience, that just isn’t the case.Look for example at Enron. The snakes that ran that company convinced many employees to invest all of their net worth in Enron. The result was a bunch of honest people losing everything. That’s what I’m trying to avoid.

  21. generationg says:

    Hi ChrisCan you expand a bit on “Coase’s theorem is dramatically over valued”? I’m a student and fan of Coase but not seeing a) which of his ideas you’re referring to here or b) what they might have to do with “small pieces loosely joined”Best,Graham

  22. adamberk says:

    About the long term shares… I’ve been thinking about a way to do this for a while now. The first thing that should happen is that all public companies should automatically have 2 classes of shares. Class A has voting rights, Class B does not. Right off the bat, the market would determine the value of a vote by taking the spread of the two classes of equity. Then you could do something like a minimum holding period for class B shares. My guess is that the premium for the vote would be far less than the discount needed for the lock up… So then you would end up with a sort of LEAP/EQUITY hybrid situation… is that possible? Rather than have an individual selling options resulting in a zero sum game, could the company itself issue “locked up” stock to the public at a discount each month and then let those shares trade on an equity market (or not trade). Isn’t that sort of what companies do when they let employees keep buying stock at a discount… very interesting discussion!And that’s just the stock stuff (which is less interesting than the other lean stuff:)

  23. Ivan Kirigin says:

    See this post from Paul Graham about wealth being created, not dividedhttp://www.paulgraham.com/gap.html

  24. Chris Selland says:

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