How a ton of good luck can be bad and a little bad luck can be good

The forthcoming book by venture capitalist Ben Horowitz, The Hard Thing About Hard Things, figures to be fantastic.  He recently blogged about one of his career experiences as a sort of teaser. 

In his blog he writes about an experience that, had he handled differently, might well have caused him to go jail.  Having the opportunity to hire a star CFO at one of his companies, he jumped at the chance.  The CFO recommended a change to the company’s stock option practices that could potentially have benefited the employees. 

But Horowitz was already a believer in a strong legal function and had his General Counsel review the suggestion.  The General Counsel believed that the practice was illegal and recommended against it.   Horowitz followed his General Counsel’s advice.  Years later, the same CFO would be accused of wrongdoing by the SEC for stock option granting practices at a prior company.  She was asked to leave the Horowitz company and ultimately did spend a few months in jail.  It sounded like a difficult period for Horowitz and one that left a long term impression.

This challenging episode is a great reminder to me that, in Corporate America, a little bit of bad luck can be good and a ton of good luck can be bad.  This seems counter intuitive at first so I will explain.

A few rough seas of the sort Horowitz experienced in his introduction to creative stock option practices can be a valuable learning lesson.  He had enough bad luck to forever remember the lesson but not so much as to sink his company.  I imagine that today Horowitz feels even more strongly that an effective General Counsel will report to the CEO.  That creative accounting isn’t necessarily a good thing.  And that lawyers who simply speak the truth and are heard are an executive’s best protection against going to jail.    

By contrast, companies, executives and boards that have had only good luck tend to lack these war stories.  They don’t have the tough learning experiences to draw upon.  It’s not so much that they are certain to be more reckless, but rather that they may not consider the importance of compliance or ever think about the events that could destroy their businesses or careers.  That is, all the good luck is a bad thing – it exposes their blind spots and allows them to become tolerant of sloppiness that hasn’t (yet) caused major problems.  As a result, a sort of quiet bliss makes them more susceptible to big failures that more seasoned, perhaps hardened, business people will know how to avoid.

"Top talent" not reading their own comp agreements

The controversial stock option arrangements at Skype have been receiving a great deal of attention in connection with the company's sale to Microsoft.

Detailed pieces have been written at TechCrunch, Bloomberg, CNN and Reuters.

The central twist of the Skype stock option arrangement is simple.  The company had the right to repurchase VESTED stock options from departing employees at the same price that the employees paid.  This means that departing employees, even if in the money on vested stock options, could walk away with nothing.

These provisions are unusual for most groups of employees.  There were other elements around the acquisition that were controversial, including several involuntary terminations.  The stock option treatment has been called everything from evil to likely fraudulent.  Whether one believes that these kinds of provisions are fair, there is little doubt that most prospective employees would look much less favorably at joining a company where such an arrangement exists.  It could be made up with higher salaries, but there should be a market penalty.

But, what is most interesting to me in the conversation is that most of the commentary acknowledges that the Skype arrangement was disclosed ahead of time.  The problem was that apparently the "top talent" at Skype didn't carefully read the legalese or consult a lawyer.  That's unfortunate.

"Employees had no idea what they were signing," according to TechCrunch.  According to Bloomberg, a product management employee at Skype whose blog entry triggered much of the attention "never bothered to read" a critical document relating to the stock option arrangement.

This is a remarkably clumsy habit that still seems to affect tech veterans in Silicon Valley.  How can these smart, accomplished business people simply ignore the specific elements of their own compensation arrangements?  How can they be counted on to serve their employers' interests in building the next great category winner if they aren't diligent enough to even protect their own interests?  

Sure enough, that product management employee at least is now singing a simple tune.  In his blog he advises, "LAWYER UP — it'll be worth your while to get an attorney to carefully review all employment documents so that you know what you're really getting into."