- The speaker was asked to teach a 50-minute course on management but only had time to cover one concept.
- The concept is about understanding how critical decisions will be interpreted from all points of view, not just the person you're talking to.
- The speaker gives an example of deciding whether to demote or fire an executive and explains the importance of considering the impact on the company and other employees.
- Another example is given about an excellent employee asking for a raise and the need to consider their perspective and how it will affect their loyalty and satisfaction.

- The speaker discusses the issue of giving raises to employees who ask for them versus evaluating employees' performance objectively.
- They argue that giving raises to those who ask encourages everyone to constantly ask for raises and creates a sense of unfairness among employees.
- The speaker suggests implementing a formal process for evaluating and granting raises to protect the company culture and ensure fairness.
- They also discuss the issue of stock options and the time frame employees have to exercise them after leaving a job.
- The speaker supports the idea of granting options that are exercisable for 10 years to prevent employees from losing their assets.

- The stock option expense was unpredictable and hindered the ability to forecast earnings.
- Employees should be treated fairly and not have their stock options taken away when they leave or get fired.
- The reputation of the company is at stake when employees feel they were treated unfairly.
- Companies dilute employee options by around 6-10% a year, but if an employee leaves, those options can be given to others already at the company.
- Losing all stock options can be a good incentive for employees to stay, but it can also result in keeping employees for the wrong reasons.
- Two alternative cultural statements: guaranteeing employees 10 years to exercise stock or setting clear conditions for stock to be meaningful.
- It is important to consider the perspectives of both employees who leave and those who stay when setting stock option policies.
- Toussaint, a former slave, had a vision to end slavery, take control of the country, and make it a world-class nation.
- Toussaint had to defeat local and foreign armies to achieve his goals.

- Toussaint, a leader in the Haitian Revolution, considered three perspectives when deciding what to do with conquered soldiers and leaders: his soldiers, the enemy, and the resulting culture.
- He wanted to build a productive and high-quality culture, so he did not allow pillaging or rape among his army.
- He incorporated the best people from conquered nations into his army to improve the culture.
- He faced the challenge of what to do with slave owners after the revolution.
- Toussaint wanted Haiti to be a first world country and needed the expertise of the slave owners to maintain the sugar economy.
- His solution was to end slavery, let slave owners keep their land, make them pay their workers, and lower their taxes.
- Toussaint's revolution was the only successful slave revolution in history, resulting in a booming economy and a world-class culture in Haiti.
- The key lesson is to see situations from the perspective of all constituents, even those you may dislike, in order to build a successful company or lead a revolution.

- The speaker emphasizes the importance of being honest with others while preserving their dignity.
- When asked about dealing with stress, the speaker mentions having a supportive spouse and focusing on what can be done rather than dwelling on past failures.
- The speaker discusses how Toussaint, a historical figure, gained the loyalty of French generals by not killing them, which shocked them and changed their perspective.
- When asked about incorporating Toussaint's ideology in those who were previously against, the speaker suggests showing a better way and elevating culture and mission.
- The speaker explains how their venture capital firm, Andreessen Horowitz, differentiates itself by helping founders develop into CEOs and building a network on their behalf.
- Putting oneself in others' shoes is difficult, especially in management, but the speaker advises pausing and considering all perspectives before making decisions.
- The speaker mentions the importance of practice and learning from mistakes, and highlights the skill of seeing a company through the eyes of employees as a mark of an elite leader.

- The speaker discusses the importance of considering different perspectives when making critical decisions in management.
- Examples are given of deciding whether to demote or fire an executive and evaluating employee raises.
- The speaker suggests implementing a formal process for evaluating and granting raises to ensure fairness.
- The issue of stock options and their impact on employees is also discussed.
- The speaker emphasizes the importance of treating employees fairly and considering their perspectives.
- The historical example of Toussaint and his leadership in the Haitian Revolution is used to illustrate the importance of considering all constituents' perspectives.
- The speaker advises pausing and considering all perspectives before making decisions in management.

Lecture Transcript: http://tech.genius.com/B-horowitz-lecture-15-how-to-manage-annotated

You are not the only one whom your decisions impact. Ben Horowitz, founder of Andreessen Horowitz and Opsware, discusses this important management perspective that founders miss, with, of course, the gratuitous rap lyric or two sprinkled in.

See the slides and readings at http://startupclass.samaltman.com/courses/lec15

So when Sam originally sent me an email to do this course, he said Ben, can you teach a 50 minute course on management?

And I immediately thought to myself, wow, I just wrote a 300 page book on management.

And III didn't actually have time to collapse the 300 pages into 50 minutes.

So like Mark Twain, I didn't have time to write a good short letter, so I'm going to write a long letter.

But in this case, I'm going to teach exactly 1 management concept.

And this management concept though, is the thing that I see CEOs mess up more consistently than anything else.

And from when they're very, very early to when they're very, very big as a company.

It's, it's the easiest thing to say and the most difficult to master.

And the concept in musical form, whoops, pardon me, very sensitive.

So musical form, This is from Sly and the Family Stone.

So that's, that's the musical version of today's lesson.

For those of you who are musical, you can leave now.

In management concept form basically it's this.

When you're making a critical decision, you have to understand how it's going to be interpreted from all points of view.

Not just your point of view and not just the person you're talking to, but the people who aren't in the room, everybody else.

In other words you really have to be able, when making critical decisions, to see the decision through the eyes of the company.

And the company as a whole, which means you've got to kind of add up every employee's view and then incorporate that into your own view, otherwise your management decisions are going to have very weird side effects and, and potentially very dangerous consequences.

And it's a really hard thing to do, because at the point when you're making a decision, you're often under a great deal of pressure.

First, I'm going to cover demotions, which is a very emotional thing.

Then raises, which is also an emotional thing.

Then we're going to evaluate 1 of Sam's blog posts.

Which is news to Sam, so I figured I'd tease him since he invited me to do a 50 minute management class after I wrote a 300 page book.

And then I'm going to talk about history's greatest practitioner at this.

And kind of how he used it to do something that nobody has done, had ever done before in human history and has never done since in human history.

But basically, complete mastery of, of the technique I'm going to talk about.

So, first business example, you've got an executive.

And this comes from an actual conversation, an actual real life situation that I was working on with the CEO.

He had a great executive, or like an executive who, just a great effort.

He was working harder than anybody else in the company.

Doing, you know, like everything he was supposed to.

Everybody liked him because he worked so hard and like he was a general smart person.

But he was just in over his head knowledge wise.

He did not have the knowledge and the skills to basically do what the company needed him to do or like really compete against the competition.

So he couldn't actually keep him in the job.

And, you know, so the question is, well, should I fire this person or can I just move him into a lower role and bring in a person above him and then like, you know, that'd be real cool?

So, let's look at how you kind of make that decision.

So you, in this, in this case, this was the CEO.

So you as a CEO, so 1, like, look, it's really hard if somebody comes to work every day, like, you know, at 6 AM and is like working till 10 PM and like doing it like harder than anybody in the company.

It's really hard to just say, well, sorry, like nice effort, but you don't get an A for an effort.

Nobody, nobody wants to have that conversation.

And then a demotion is kind of neat, because from the CEO's point of view, and this is, he's like, look, like we can keep him in the company, he works so hard.

He's a great example of like somebody who gives great effort.

And, you know, like, and then he's got a lot of friends in the company, and they're, you know, from a cultural standpoint, like it's a, it's a win-win, because like he gets

And, And, you know, like, and then he's got a lot of friends in the company and they're, you know,

from a cultural standpoint, like, it's a, it's a win-win because, like, he gets to stay.

And, and, you know, like, and then I can bring in somebody, I can solve my problem, but I, I don't have to create another problem.

And then, if you think about it from the executive's perspective, and what they would think, it's like, well, I, you know, I don't want to be demoted, but I really don't want to be fired.

Because if I get fired, that's a way harder, more complicated thing to explain to my next employer than I got demoted.

Like getting demoted is like, well, I didn't really get demoted, I got a new job.

And then, you know, the, the last thing is, It enables, you know, like theoretically, well, like you know, the company, you know, we value all our employees, we brought you in, we made a commitment to you as an employee, and like we value everybody, and it kind of will enable you to keep growing with the company, and so, you know, and this was the kind of initial conversation I had with the CEO, and, and I said, well, wait a minute.

I said, let me ask you this, like, what is the what's the equity package that this exec has?

I was like, well, like, does he have like, director level compensation?

Has he got like a vice president level compensation?

And, you know, that kind of gave the CEO pause.

He's like, well, he does have a point and a half.

And I was like, okay, so you're an engineer in your company.

How do you feel about somebody who used to be the head of sales who got brought in with a point and a half.

Now, mind you, you're an engineer, what do your engineers get?

Like, do they get 0.1%, 0.2%, what are they getting at this point?

So how are they going to feel about somebody who's not the head of sales with 1.5% of the company?

And I was like, yeah, uh-oh, because like how fair is that?

So are you going to take the equity away?

Are you up for going back and taking back his compensation?

And like, how productive do you think he'll be if you take away his compensation?

And then secondly, like, Will people give him the same respect now that you've demoted him because they knew him as this and now he's this.

And so like, I knew you when you were head of sales, now you're the regional manager and you're telling me what the to do?

You're telling me I need to make that call?

I'm going to be the next VP of sales at the next company.

And so when you look at it at the end, like, you may think you're dealing with 1 person.

You may think that this is a demotion or a firing of 1 person.

And what does it mean according to that 1 person?

But what you're really doing is you're saying, look, what does it mean to fail on the job?

Particularly a very, the highest paid, highest compensated job in the company from an equity standpoint.

And then like, what's required to maintain your equity?

Like, is it good enough to put in an effort, or do you have to get a result?

And in different situations at different levels, like these answers will come out differently.

And if this had been a person not that was an executive brought in from the outside, but was somebody who you maybe promoted past where they should have been and didn't ever get that equity.

Like maybe you make a different decision, but you've gotta understand what it's gonna mean to everybody, not just the person you're talking to.

Example 2, an excellent employee asks for a raise.

Good employee, this isn't like a, like the last employee, this is like a really good employee.

So, look, your first thing is, like, they're really good.

They asked me because they think they deserve it.

And like, you know, I know that if I give them this raise, like it's going to be all love coming my way.

to be, if I give you a raise, we're good, you know, like we're boys.

So like, you know from your perspective, you know what you want to do when somebody asks you for a raise.

And then, if you look at it, okay, well, what about from their perspective?

What, how would they like take it if you gave them the raise.

And now you have to remember the employee firm, for them to get to the point where they've asked you for a raise.

This is not something they just like woke up 1 morning and like I'm going in and asking for a raise, right?

Like This is something where they've thought about it a lot.

They've, you know, compared their other options.

They may have an offer from another company.

You know, they're, it's something their spouse probably has been talking to them about.

And so if you give it to them, They're very likely to feel very good about it.

Like they may be like paranoid about like why you giving me a raise, but very unlikely much more they'll feel like I'm sorry, I have to just let the whole thing play.

And that's, for those of you who don't know, that's Bobby Shmurda and Roddy Rebel doing the shmoney dance.

But that's likely the reaction you'll get.

So there's a lot of momentum to say, yes, look, you know, they, they read Cheryl's book, they leaned in and I'm going to reward them for, for doing all that, which is, You know, and, and by the way, that book is very good advice.

I don't want you to be misinterpreting me.

However, you know, there was going to be a however.

What about, you have to think about it through the point of view of the employee who did not ask for the raise.

So, the employee who didn't ask for the raise, they may be doing a better job than the employee who did do, ask for the raise.

And, in their mind they're going, okay, So I didn't ask for a raise and I didn't get a raise.

And they asked for a raise and they got a raise.

That means 1, like, you're not really evaluating people's performance.

You're just going, well, whoever asks, gets.

So that means like, I either need to be that guy who asks for the raise.

Like, and I, you know, that's just not how I feel.

You know, like I do my work and I, I don't necessarily want to ask for a raise.

Or like I, I just need to quit and go to a company that like actually evaluates performance.

And then, you know, so you could really make the person who doesn't get the raise feel like pretty pissy about it.

And don't think that when somebody's walking down your company doing the schmoney dance that other people aren't going to notice, like.

So they're going to be fired up about that raise.

They're saying, you can say, oh, this is highly confidential that I'm giving you this raise.

And then the cultural conclusion is going to be, everybody in your company is going to feel that they now have a fiduciary responsibility to their family to ask for a raise all the time.

Because if they don't, then they may be missing out on a raise that they would have otherwise gotten.

And like you talk to any experienced CEO and they will tell you this is true.

Like if you give out raises when people just ask you for them, like that, you will have a lot of people asking you for raises, that is called encouraging behavior.

And really the right answer on raises is you have to be formal.

And you, you have to be formal to save your own culture.

And I know this is always, this is the thing that causes people running startups.

Fits, because it's like, well, I don't want like a lot of formalities.

We want to do yoga We want only smoke organic weed Sorry, that's like a Peter Thiel Peter got very focused on who was smoking weed a little while ago.

But like, the process actually protects, it protects the culture because what it does is it says look, we're going to look at all the inputs, we're going to have a formal way of saying anybody who wants a raise come talk to me, like, I'm not going to give you a raise, But I'm happy to hear your story.

I'm gonna talk to all the people you work with so I get like a understanding of it.

I'm gonna evaluate all the work that you've done.

So I know like where I actually write you and what my actual opinion on.

But like, yeah, maybe if I were fast moving, I'll do it every 6 months or even maybe once a quarter.

And at the end of that process, I will tell you what your raise is.

And I will tell you if you're getting 1 or if you're not getting 1.

And I, you know, when I used to be CEO and I had like executives, it's, it's, the bigger you get, the harder this gets because the more aggressive the people working for you are.

Because to get to be an executive, it turns out you often have to be pretty aggressive.

In this world, and in most companies like that, so you get to that level.

You know, I would go look, you can lobby me all you want, you know, after the process is done and I give you your raise.

Because I already went through my process.

I've got so much money and you got what, like, I believe is right.

And having a process like that basically gets people to be actually more comfortable.

They're more comfortable because they don't have to always be on edge about like, am I asking for what I deserve or am I getting like aced out because of who I am, what I look like.

I'm not buddy buddy, I'm not at the golf course with you or I'm not doing whatever you like to do or, you know, I don't have to worry about any of that.

I know your process is like you're gonna evaluate everybody and then you're gonna give them what's fair.

And so that's a, a much better way to handle that and it means that you're actually understanding what everybody thinks, not just the people you're talking to at the moment.

Okay, so now we're going to get into some fun stuff.

Which is actually, there's some very good things in it.

And then there's some things I'm going to discuss.

Most employees have not, only 90 days after they leave a job to exercise their options, unfortunately this requires money to cover the strike price and the tax bill, and I'll explain this a little more later, just.

For the year of exercise, blah, blah, blah.

This is often more cash than an employee has.

And so the employee often has to choose between like, leaving the job and walking away from the vested options, i.e.

The money that she has because she can't afford to exercise or being like locked into staying at the company basically for all the wrong reasons.

It's a particularly bad situation when an employee gets terminated and I'll get into that and that's a really key point.

The best solution I have, I've heard is from Adam D'Angelo, a very, very smart guy at Quora.

The idea is to grant options that are exercisable for 10 years from the grant date, which should cover nearly all the cases you know, whatever happens with the company.

There are some tricky issues to this, blah, blah, blah.

But it's still far better than just losing the assets.

I think this is a policy that all start-ups should adapt.

So our question is, well likewise, Sam, right?

Is this a policy that all start-ups should adapt?

So let me first explain again what the policy is.

So currently, the way almost every stock option package in Silicon Valley works and in all of startup world is this.

That your stock, you get stock, it vests over a period of time.

But if you leave the company, when you leave, you have, and it depends on the company, but I think it's 90 days to exercise.

And if you do not buy your stock in that period, it's gone.

Which, depending on when you entered the company, could be a big problem.

So a lot of companies today that are valued a lot, like if you take like a really valuable startup, like say an Airbnb or an Uber or something like that.

When they bring you in, they go wow, you know, like if you look at your 409A price and to the preferred price, like the stock we're giving you right now, the options are already worth like $10 million.

And you're like, whoa, $10 million, I'm rich.

But what they don't necessarily tell you is, in order for you to get that money because the preferred is worth $10 million.

Your options probably are going to cost you like $2.5 million when you leave.

And if you don't have that $2.5 million in 90 days, It's gone.

And so Sam was like, wow, that's fucked up.

So the first question that you have to ask yourself on something like this is, well why is that even, like, this has kind of been around since like the 80s, so why is a rule like this around for 30 years?

And it turned out, Sam and I don't even, I, I don't know whether he like figured this out or just intuited it, but he was right.

So, up until 2004, there used to be this law called APB opinion number 25.

That law was the old way to account for stock options.

And, you know, it's also the law that all the guys went to jail on.

So I, I got a lot of people who caught a case on APB 25, so I'm glad it's gone.

Cuz it was a very confusing law and a lot of people did not understand it and they literally went to jail.

But when that was the law, if you gave somebody 10 years to exercise their options, you would never have been able to go public and You would never have been able to go public and you would never have been able to be acquired.

Because you basically were taking an expense that was tied to your stock price.

So basically, the more your stock went up, the more compensation expense you'd have to take.

And the worst thing about it would be, is you wouldn't know what it was going to be.

So you could never forecast earnings, ever.

Because your earnings would be a function of all of your stock price, and so the more your stock price went up, the more money you would lose.

And in those days, people did not look through stock option expenses.

And that's why everybody's agreement was written at 90 days.

So Absolutely, it's the right thing to question it being there.

This is like more complicated than the first 2 examples, but a very important 1.

Then so your perspective on this, if you've got employees, is You want to be fair.

Like nobody wants to like, hey, you get all this stock in 4 years, psych.

And especially like when you fire someone.

But, you know, guess what, I'm also going to take all your money too.

But you also, and this is the thing that you've got to keep in mind, you also have to think about the people who are staying, and you want to reward the people who are staying.

Now the employee, The perspective of the employee who leaves, and this is really critical because this is your reputation.

Right, like I worked, like you know, a year's work, like where does my years pay?

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How to Manage with Ben Horowitz (How to Start a Startup 2014: Lecture 15)