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.

Why the TechForward victory over Best Buy is so glorious

In some respects, Best Buy's theft of trade secrets from startup TechForward is a fairly routine matter.  Small company pitches idea to large company.  Large company signs an NDA.  But large company likes the idea so much that it basically makes the idea (and the methodology behind it) its own.

The context around the resulting litigation, however, described in a blog post by a venture capitalist whose firm funded TechForward, is fascinating.  For me, it's also uplifting.  "Send your business plans to these guys" inspiring, in fact.  And not merely because TechForward won the lawsuit.

First and foremost, the venture firm, First Round Capital, really understands the importance of the little guy in the technology world.  In deciding to fund a lawsuit against Best Buy, where many would have just moved on, First Round was speaking with actions, not just words, about sticking up for the entrepreneur.  First Round partner Josh Kopelman wrote, "If big companies believe they can violate agreements with immunity because a startup can't afford to sue them, it is bad news for every startup in the ecosystem."

There are a couple other great learnings from this story.  NDAs, those throwaway documents so many business people sign without reading or don't bother to sign at all, can really become a critical agreement that governs the course of a relationship - always make sure you get them reviewed by counsel and signed.  Finally, the litigators that some business people like to point to as "the problem" were, in this case, the solution - while the Best Buy business people were crass and manipulative, the TechForward lawyers saw that justice was done.

Congratulations to the teams at TechForward and First Round Capital.  And thank you, from all of us who work with emerging technology companies.