An entrepreneur's education in the fine art of begging
My landlady, Fouzia Zaheer, is a traditional Muslim who won't let me cook pork in my apartment. But in other ways she is totally mainstream. When I called her about a sublease last summer, I explained that I was moving from New York City to the Bay Area to start a dot-com company. She promptly offered to shave $200 a month off my rent in exchange for some options. Fouzia hadn't a clue what my company would do (at the time neither did I, since our business plan for outsourced viral marketing was still under development), so I don't know how she calculated the valuation. I told her that my board of directors wouldn't go for it, and she reluctantly agreed to put me on a dollars-only rent plan. I know. Très old economy.
That lease was the last cash contract I would sign before disappearing down the Silicon Valley rabbit hole. Out here, as everyone knows, stock options are rapidly replacing dollars as acceptable currency. The anecdotes may be apocryphal (the restaurant owner who took options as payment for a chicken-and-ribs dinner; the building contractor who struck it rich on an equity-for-Sheetrock deal), but they are also representative. There isn't a real estate agent, design firm president, or headhunter that doesn't want part of his or her fees in equity. As the generous host says to the guest taking out his billfold: "Your money isn't worth anything here."
Vendors not only want equity but also generally get it, thanks to the peculiar power shift that has turned customers from kings into humble supplicants. In Silicon Valley the vendors hold the upper hand because so many dot-coms are vying for their services. I had thought the job of selling my company's business plan ended when our venture capital backers signed on. Silly me.
I received my first lesson in begging Silicon Valley style last September. Having decided that my company, called Gazooba, needed public relations representation, I called a firm recommended by one of our investors and innocently asked for a proposal. When the PR guy stopped laughing -- which took longer than you might expect -- he handed me a tray with the reality check. No, no, he explained, it was our job to show him why his firm should deign to work for Gazooba. He is, after all, a guy who logs 50 calls a month from start-ups hungry to see their names up on that household-name marquee, of which he usually takes on just one as a client. Still, the PR guy assured me, we were not without a shot. In fact, he would personally come to our offices and give us the once-over. We should have ready our business plan, management bios, investor list, and a demo -- implicitly, we should be prepared to dazzle. I rushed to get the red carpet out of storage.
The PR guy arrived with his positioning guy, an industry veteran exalted by his success at finding the proper holes for some big-name dot-com pegs. I made sure that the two of them sat on the window side of our conference room, a stratagem common in Japan and presumably based on the premise that your guest feels less powerful if you control the entrance. Throughout the meeting I felt like a non-gym-bequeathing parent asking the deans of a premier Manhattan private school to enroll my child. My palms got downright dewy when the PR guy started grilling me on why we didn't have a working demo yet. ("Our alpha release is just around the corner. We'll try harder next time, really we will!") But finally, on the strength of our investor list and business plan, he agreed to take us on.
After congratulating us on our amazing good luck, the PR guy informed me that, naturally, he would take part of his compensation in the form of stock options. Suddenly, two years of East Coast business school training flooded my brain. Options, we'd been taught, are a tool for ensuring long-term commitment from employees. "Why should I give you guys the right to buy my stock cheap?" I shrieked silently. "We pay our bills. Isn't that enough? For God's sake, isn't that enough?" Outwardly, I smiled and nodded. "Yes," I said humbly. "We're very lucky indeed."
If you think it's humiliating to grovel before vendors, imagine what it's like to wear out the knees of your khakis begging potential employees to join your team. But with the job market the way it is, companies are forced to put on mini road shows for every fresh-out-of-college programmer or administrative assistant. I don't begrudge them, really. Stock options granted to new employees usually vest over four years with a one-year cliff (no vesting at all until one year from date of hire). That means that employees have fewer opportunities than contractors to diversify their portfolios and often have to postpone selling their souls and wallowing in unseemly wealth until they're at least 26.
In October, our contract recruiter, Bernadette Bosinger (who has Gazooba options of her own), homed in on a database architect at Oracle Corp. who she thought would be perfect for our team. Database architects, or DBAs, are the rock stars of dot-com engineering departments, and CEOs like me are their adoring fans, screaming for their autographs on our offer letters. That DBA initially turned down our generous package, opting instead to return to his native Canada to launch his own company. In December, however, Bernadette heard that the DBA's Canada deal was on hold and that he was still in the United States. She also learned that the real decision maker in the DBA's family was his wife, rumored to have nixed offers from several hopeful start-ups.
We sprang into action. The Gazooba holiday party, to be held at a Vietnamese crab house in San Francisco, was only a few days away. I sent the DBA and his wife an invitation. They arrived at our office before the festivities, and while Zen, my cofounder and chief technology officer, conducted his version of a charm offensive against the DBA (waxing poetic about various data replication schemes), Bernadette and I demystified the stock dilution paradox for the missus. "As we do future rounds of funding," explained Bernadette brightly, stepping over a Sega Dreamcast system (engineer bait) on her way to sketch some shapes on a whiteboard, "your percentage of the pie gets smaller, but the value of the pie increases, so you come out ahead." Mrs. DBA nodded, but it was one of those I-see-the-light-but-I'm-not-feeling-any-heat nods. We hadn't hooked her yet.
Bernadette took me aside. "OK," she whispered, "it's time for Magic Andy to make some moves." (Bernadette calls me Magic Andy when she's urging me to pull off some spectacular feat. I've reached the point where I find it more endearing than creepy.) "Leave Mr. DBA here with Zen. Take her to the party and make sure you take I-280: the traffic is miserable. That should give you time to get her all warmed and fuzzed up on Gazooba. Woo her, Magic Andy. Woo her like you've never wooed before."
So as we drove toward the fog-bound Sunset district, I spoke with Mrs. DBA about her hopes, her dreams, and, yes, by golly, her fears. At last she confided that her greatest concern was that she might lose her husband to the start-up grind. The two had met in a medieval-reenactment society, but now he was spending so many weekends at the office, they scarcely ever got out for a leg of mutton or a simple joust with friends. "Would it be possible," she asked me, "for Gazooba to pay for a DSL line so he could telecommute?"
At the end of a terrific meal, Zen and I, along with our third cofounder, Shanti, presented gifts to each of the guests. We gave the positioning guy a game of Twister in recognition of the contortions his clients go through to achieve competitive advantage. Bernadette got a sheriff's badge for laying down the law on how much we pay out in cash and stock to attract quality employees and contractors.
Finally, turning to the DBA and his wife, I held out their gift -- a Magic 8-Ball. As I removed the black orb from its box, I asked the question preying on everyone's mind. "Should you join Gazooba?" I intoned, staring intently at the words crystallizing in the 8-Ball's window. "The 8-Ball says 'Yes, definitely.' And ... oh, look! It also says we've budgeted a DSL line for your home!"
Andy Raskin is the cofounder and CEO of Gazooba Corp., based in Redwood City, Calif.