There is a lot of uncertainty globally with the coronavirus pandemic. With unemployment on the rise, this time is even more challenging for those seeking jobs. For many of us seeking jobs in the startup industry, we can’t deny that hiring will be slow – but we do believe that now could be a fantastic opportunity to join and be a part of a young company that may define the next generation. After all, it was during the last recession that iconic companies like Airbnb, Robinhood, and Uber were forged. For those looking for startup job opportunities, we find the AngelList job board to be a fantastic resource to identify your next dream job. But before taking the leap, it’s important for both employers and candidates to have a clear understanding of the unique opportunity and differences of evaluating a startup job. We couldn’t think of a better person to discuss how executives and candidates should think through startup hiring than with Prasad Akella, the CEO of Drishti. When Prasad Akella talks startups, any venture capitalist or entrepreneur should listen intently to learn from his vast experience.
Prasad describes himself as an accidental entrepreneur who has led the creation of two new billion-dollar markets, and is now working on a third market that may tip into the billions in an industry that accounts for 15% of GDP: manufacturing.
With nearly three decades of professional experience, working as a founder, executive, advisor, product manager and researcher from giants like General Motors and SAP to startups including his current venture, Drishti, Prasad carries a unique perspective about hiring and equity conversations with new employees.
As a former new employee (and employer) several times over, Prasad has coalesced an erudite understanding of how to have fair and meaningful conversations between potential new hires, CEOs, and hiring managers.
In this article, we’re going to discuss:
- What advice would you give to a younger version of your self applying at a startup today?
- Common responses or reservations from employees during initial equity conversations
- The best way to anticipate the candidate’s attitude towards equity offers
- Should hiring managers try to tailor vesting schedules and cliffs to particular employees?
- Handling pushback from employees fairly
- Should you ever reveal how much equity everyone else in the company has?
- Explaining the fair market value of an employee’s equity
- Doing periodic equity reviews
- How can CEOs and founders make for a better overall equity conversation experience?
- Biggest pitfalls managers at startups run into while making employment offers
About Prasad Akella
Prasad grew up in India in an engineering household. Prasad’s father, a professor in aerospace engineering, helped cement a lifelong drive to tackle the world’s greatest challenges with creativity, systematic processes, and good old-fashioned grit.
Prasad, like many ambitious teenagers in India, went to an Indian Institute of Technology (IIT), earning a Bachelor’s in aerospace engineering. Next, he would pursue his PhD in robotics at Stanford and, later in life, earn his MBA at the University of Michigan while working at GM. On an academic level, robotics was the intersection of many of Prasad’s interests: mechanical design, electrical hardware, and computer science. On a personal level, Prasad viewed it as the hardest thing out there, and therefore, the next big challenge.
The next decade proved to be anything but traditional for an engineering graduate. In 1992, Prasad went to Japan’s National Research Labs, working on manufacturing-oriented robotics. Prasad then joined General Motors, where he led the team that created a new market category of “cobots,” or “Collaborative robots,” a category projected to be up to a $10 billion market by 2025. Prasad was awarded GM’s highest technical award, the “Boss” Kettering award (GM’s equivalent to Google’s “Founder Award”) for his leadership of this effort.
“Working at GM was a formative experience,” says Prasad. “I moved from a scientist focused solely on R&D to becoming someone who could create and bring technology to market. I was fortunate to work with and learn from a couple of amazing academics, managers, and engineers as I worked on cobots. GM also paid for me to understand the world of business at Michigan’s Ross Business School.”
Prasad made his foray into software in 2000, on the product management team at the B2B eCommerce startup, CommerceOne. With the market imploding in 2002, Prasad chose to co-found Spoke Software, which was the pioneer in business-oriented social networks. Facing significant data problems in the product, Prasad became a data scientist working on “big data” before the terms “data scientist” and “big data” were buzzwords, and tools like Hadoop existed.
“We should have been LinkedIn,” says Prasad. “When we raised our first round of funding, most VCs on Sand Hill Road hadn’t even heard of a social graph, much less what to do with it. Zuckerberg had just graduated high school, Hoffman was navigating eBay’s acquisition of PayPal. We built a 35 million node graph, using machine learning algorithms that were in some cases far more sophisticated than LinkedIn has even today—a full 20 years later. We didn’t execute well enough and we were ahead of our time.”
The experience, however, was not for naught. In the next decade, Prasad would work various roles learning the trade: from sales to development at various startups, then to SAP, where he rose to be the VP and Head of Global SME/SMB Marketing a ~$2B SMB portfolio of on-premises and SaaS solutions.
“In retrospect, I have gone between large and small companies, taking on new functional roles to broaden my skills,” says Prasad. “A big company gives you perspective, scope, and view. A small company forces you to be narrow and execute with minimal resources.”
With these experiences under his belt, in 2017, Prasad founded Drishti, a company seeking to transform manufacturing by combining the insights from data with the process discipline of a Toyota Production System. To usher in the 4th era of manufacturing that he is calling “AI-powered production.”
What advice would you give to a younger version of your self applying at a startup today?
I was 29 when I got my PhD; I knew nothing about startups then. So, my advice to my 29-year-old self would be: explore your options rapidly. Determine if a startup is the right choice for you. This is critical, as I come across many youngsters who see green dollars, but don’t have a clue about the fit. Yet they want to launch a startup!
I’d encourage my younger self to go to a large company known to teach young professionals how to function in the business world: structure problems, work on geographically distributed teams, communicate well and think scale. And, then, go to a startup—which is perforce focused on its growth, not yours. You will know where you want to be in just a few months!
The minute you have confirmed that you want to be in a startup, and to be successful in them, it’s critical to have a number of “at bats”—to get going right away. The odds are heavily stacked against you so you need to learn. I’d target larger startups listed in Andy Rachleff’s blog on wealthfront.com. And, once there, work crazy hard to learn as much as you can and develop your own sense of winning patterns.
If you believe that you have the leadership skills and want to be a CEO one day, I’d consider building a “T-shaped” experience base: the leg of the T is an area in which you are an expert while the top of the T represents functional areas in which you have broad experience. If, as CEO, you lack these experiences, you won’t be able to empathize with the issues your team is facing. If you don’t have the depth, you don’t have a home from which to operate and solve problems.
What are some of the most common responses or reservations from employees you’ve encountered during initial equity conversations?
It depends on the level of familiarity our new employees have with option grants and equity as a compensation tool. For example, our India team tends to be younger and haven’t been exposed to equity because the Indian startup market hasn’t done too well in the recent past.
So, most of them don’t understand (and, sometimes, trust) equity, and most of the reservations and questions in equity conversations stem from that information gap. In my experience, this lack of understanding breaks down into three main categories:
- Candidates don’t understand the financial instrument being discussed,
- Candidates don’t understand how to value said instrument,
- Candidates don’t understand the risk that comes with said instrument.
Second, there’s a significant level of fear across the board – and especially when you are new to the startup world – around getting a raw deal. And unfortunately, there are plenty of examples of that happening at startups.
As a result, hiring managers need to flexibly engage with candidates at different stages in their careers and various levels of sophistication about equity. That means personalizing the communication of the offer so it speaks directly to that candidate.
What’s the best way to anticipate the candidate’s attitude towards equity offers?
Equity offers indicate a certain level of risk. To determine their comfort with equity, I ask candidates a series of questions that help me understand their ability to handle risk:
What are their goals, and do they align with my company goals? Working in a startup environment is hard. Beyond skill, it requires passion. I ask each candidate several questions to help me truly understand both his/her goals for the role and his/her excitement level for our mission. At Drishti, in addition to AI, we’re deep in manufacturing, so candidates have to be passionate about the manufacturing world (unsexy!) in addition to AI (super sexy!).
Do they understand risk-reward ratios? One of the first statements I make to prospective candidates is, “Startups, including Drishti, tend to pay you less than the market demands for your skills. And you’ll likely be working 16-hour days.” As you can imagine, this doesn’t appeal to many candidates, because they want the upside of being in a startup without the risk and hard work. The biggest reaction to this statement tends to come from folks who have been working in large companies their entire careers. They’re used to jobs being clearly defined, with a certain salary and low risk. Savvy risk-takers will often counter saying, “Tell me what my option grant might be.” This tells me I’m talking to someone who is willing to consider taking a risk.
Can this person handle ambiguity? By nature, startup roles are cloudy. Especially in early stage startups. Sometimes people take on multiple roles at one time; for others, their roles evolve into something entirely different from where they started. People who aren’t comfortable with ambiguity on a daily basis – which is indicated by them asking a lot of questions about day-to-day operations (e.g., the reporting structure, which department is responsible for what task, etc.) – may not be well-suited to startup life.
Should hiring managers try to personalize or tailor vesting schedules and cliffs to particular employees?
There should only be one vesting schedule in the company. I have long learned to be deliberate about setting the norm and sticking to it. This leads to a fair situation and, more importantly, everyone being focused on the mission.
How do you handle pushback from employees fairly?
I’m not much of a negotiator, and I lay that out from the start. My intention is to be fair and generous with people, while recognizing that the bulk of the compensation is in the option grant.
I like to ensure that people have a decent quality of life, even as I balance the cash flow of the company. If there’s pushback, I assess the situation: Depending on the stage of life this person is in, are there commitments that need to be met? If so, I work with them to find a mutually agreeable solution. If I find someone who doesn’t understand how expensive early capital is, I bow out.
As it turns out, there are fairly standard industry norms that one can get a sense of in the market – where equity is a function of your role, when you joined, how senior you are, how much you are willing to invest yourself, etc. I try to adhere to these norms as best I can. The system of checks and balances kicks in from the fact that hopefully there’s one day when people know how much money the others have made, and I’d hate to have anyone say I was unfair. Second, all grants are reviewed by the entire board, and any deviations are challenged.
Using these two guidelines, I try to ensure the compensation package is fair to the person, as well as to everyone else in the company.
Should you ever reveal how much equity everyone else in the company has? If not, how do you deal with questions from employees asking? (ie. “why is John, a junior developer, getting more equity than me, a senior developer?)
There isn’t a scenario that I can think of where it’s a good idea to reveal other people’s equity. It’s the same principle as revealing salaries to each other: It’s generally acknowledged as unacceptable, and there don’t seem to be benefits (though there are plenty of drawbacks) to doing it. If John chooses to share his compensation with Mary, that’s John’s choice. I have no comment on it.
How do you best explain the fair market value of an employee’s equity?
The fair market value (FMV) of equity comes from a standard (409a) valuation of the company and its business performance. Accountants specializing in valuation go through a methodical process to determine what the FMV is; U.S. law requires that this process be done annually.
Think about your home and the homes in your neighborhood. When you call the realtor when you decide to sell your home, he or she does a competitive market analysis (CMA) and estimates what the value of your home might be. No one is promising to pay you that amount. Yet.
FMV is no different than CMA. In one case, the realtor is doing it, and in the other, the accountant. Both are estimates of the value of the asset that you hold.
Would you recommend doing periodic equity reviews to touch base with employees in the future?
The practice of periodic equity reviews, known as a top-up, is important because it helps reward people who are going above and beyond the call of duty with more grant options. Let’s say Nina Joined a company three years ago, and she’s been working extremely hard to drive success. It’s not uncommon to grant more options in recognition of her contribution to increasing the company’s value, which I might do during a periodic equity review.
It’s a win-win, because she has more company equity that vests over a longer period (and the company is more likely to keep her employed and engaged for a longer period), and she comes out ahead because she has a larger grant to monetize.
There are two questions I ask before doing an equity review:
- Is Nina contributing to the company, or not? If she’s taking on three jobs that weren’t originally part of her role description or expanding beyond her job description in other ways, she deserves recognition and appreciation.
- Is this package on par with everyone else? There are a lot of considerations to this question; I don’t advocate that every person with a certain title has the same equity package. I also consider when they joined, as well as what their performance, behavior, attitude, cash compensation, and many other factors have been. So parity is determined through an impact lens, not just straight comparison of options (and cash compensation).
Let’s assume most employees are generally unequipped or unprepared to have an equity conversation. How would you recommend they go about any preliminary preparations? How can CEOs and founders make for a better overall equity conversation experience?
Early in the company, and when new in India, we lost eight candidates in a row in two months. When I sat back to analyze what was happening, I realized we weren’t closing candidates in the final stage. We weren’t communicating the potential of Drishti’s options and that the market was, therefore, discounting the value of the potential upside of joining Drishti. So we recrafted how we presented the offer, and have dramatically increased our close rates. It comes back to this idea that every individual has a different level of understanding about equity and how to measure it, and requires that the hiring manager present it in the right form and at the right level of detail.
To do this, I decided to present the offer with maximum possible transparency when needed. I worked with a member of our board to model the potential value of our options, and used this information to create a projection that clearly articulates the difference between what candidates are being paid today and what they could make at Drishti. This approach has been much better received by candidates than the previous approach.
What are the biggest pitfalls you’ve seen new managers at startups run into while making employment offers that have a mix of compensation and stock options? How can they be avoided?
I’ve seen new managers at startups make a number of poor decisions:
- They are too conservative: The company has only so many options in the option pool, and there’s always a fear of them running out. If that happens, managers are forced to go back to the board and dilute the existing investors (preferred and common) by adding more options. To avoid this, many new managers will give fewer options than is fair in the beginning. If this happens, a periodic equity review becomes crucial.
- They don’t tap their resources: We are very fortunate to have phenomenal investors – in the U.S. and in India – through whom we have access to detailed compensation data. This data guides us in structuring offers. Not surprisingly, compensation models are very different in the U.S. and India. New managers should feel comfortable asking for this information, which investors have easy access to.
New managers should also feel comfortable reaching out to their board to get a quick read on the fairness of the offer. A good example is in the case of the first salesperson coming on board, where framing the compensation and commission is particularly important to the company’s future. It’s also key to get multiple opinions, especially if you’re relying on the advice of an angel investor who hasn’t launched a company in many years and may not be up-to-date on contemporary norms.
- They don’t go through a formal valuation process regularly: I’ve found that many people don’t know that they’re required by law to go through an annual 409a valuation process. Or, they skimp on the cost, forcing higher strike prices for early employees.
Prasad looks back at his professional and entrepreneurial journey with a fond excitement. In closing, he leaves us with three golden nuggets of personal life lessons he gained in his career so far.
Take care of your people and they will take care of you.
“Steve Holland, my first manager at GM, taught me that professional relationships transcend business,” says Prasad. “Before I left GM in 2000, he and I came to the conclusion that what I wanted to do was not going to happen at GM. He called his grad school friend in the Valley and asked if they have a job for me. Steve told me that his job is to take people who work for him where they want to go in their lives.” I tell my team members, “The minute the thought of leaving Drishti crosses your mind, call me. I will work with you to find you a spot that aligns with your career goals. If I can’t find you a spot here, I will help you find your next gig.”
Sharing is caring–and empowering!
Most founders often want to hang onto as much equity as possible. They think that because they came up with the idea and started the company, the bulk of the equity is theirs. It’s become clearer to me over the years that ideas are cheap, execution is hard. And that founders need to surround themselves with people who can help execute on the idea. So, it is critical to give them enough equity to make them players in the game. Give them the latitude and ownership. You get more by giving more. I’ve seen lots of friends that are CEOs and founders that don’t understand how powerful the notion of shared ownership is. Ashish Gupta, my friend and co-founder, taught me this important lesson.
Demand the best of yourself.
Ben Smith, our CEO and a co-founder at Spoke, demonstrated by example how critical it is to demand the best of yourself, because in doing that, you demand the best of your people. He worked just as hard as the rest of us, if not harder. So the question for me is: “How do you demand the best of your people in a positive way?” Especially given that it is very rare that the road to success in a startup is paved asphalt. So, I tend to set high goals, since people want to rise and meet those goals. I tend to ensure that I am making meaningful demands in a fundamentally decent way. I am always pleasantly surprised by the amazing work that results!