Amusingly (and presumptuously), today’s report claims to define “True Twitter users” as active.  They say that a True Twitter User has at least 10 followers, follows at least 10 people, and has tweeted at least 10 times.

Why should we accept this definition?  Analyses like this often come from a position of functional ignorance.  I believe that only the company can have a “Truly” meaningful definition of “active” users, and there are often good reasons that the company shouldn’t waste time debating this definition with external observers.

This is especially true when a company has an evolving revenue model.  In those cases, “active” is only meaningful in the context of a business model cycle that some people call “Startup Metrics For Pirates” because of the acronym AARRR:  Acquisition, Activation, Retention, Referral and Revenue.  ”Active” is the second “A” here, and what matters in the definition is that customer acquisition efforts lead to active users, who participate in activity that they want to repeat and tell their friends about, which ultimately results in the company getting paid.

So if Twitter had zero customer acquisition costs, and tweeting was both addictive and viral (obviously, none of these things are strictly true), then the only definition of “active” that would matter is “user who tweets once.”  Or, if Twitter charged only users with 100K followers, and only users who had 100 followers in the first month ever get to 100K followers in their lifetime (again, not true), then the active user definition might be “user with 100 followers in first month.”  My dumb revenue models here are not the point; the point is that “active” only has meaning in context, and only the company understands that context, especially in a pre-revenue company.

Twitter, rather famously, has not publicly settled on its revenue model.  Undoubtedly they have dozens of ideas, and so they have many dozens of potential definitions of “active” – and they’re not obliged to share any of those ideas with you or me.  They don’t need to waste time with ignorant and disinterested people (myself included):  it’s no use picking over these definitions with people who are not deeply invested in the business (as employee or investor), and who therefore lack the information and commitment required to contribute productively to the discussion.

I call this the Chinese Menu approach (“Pick one from Column A, one from Column B . . .”): Group blogs together by thematic category, and then read only one blog in each category. Every once in a while, I’ll change up the one that I pick in each category, so I don’t get sick of the same meal time after time.

I add and drop blogs from categories all the time, and some blogs could be in multiple categories.  But the key is to just read one in each category.  This approach works well for me.  Switching up the meal selection once in a while helps keep me open to different perspectives.  I never miss anything truly essential, as great posts tend to be cross-linked extensively, or come to me by other means.  Incidentally, the same approach works ok for Twitter (though it’s not ideal).

In the startup world, failure is a badge of honor.  An honest postmortem of mistakes made along the way is greatly appreciated by the community.  For example:

• Eventvue
• Lookery
• Untitled Partners
• neotis wissensmanagement GmbH
• GameClay
• BricaBox
• MyCarpoolStation
• [unfunded idea]

The comments on each of those posts are overwhelmingly sympathetic, admiring and supportive.  Celebrating failure in context is a distinguishing aspect of our business culture versus many other countries.

In contrast, when the President of the US admits mistakes, the national and international coverage seems to imply that the admission itself its newsworthy and perhaps unwise.  Comments are largely vitriolic and incoherent.

Now, I think that failure can be overrated as an indicator of future success.  But I firmly believe that the openness to failure in business is one of the things that makes this country truly great.  It’s ironic and sad that this cultural gem does not extend into our political arena.

Watching the gyrating reports on the price paid for Apple’s purchase of music streaming service LaLa reminds me that acquisition prices are widely misreported and often misunderstood even when correctly reported.  Some people only want to know one number – the price paid – without caring about the many other numbers that are relevant to understanding who got what:  the company’s cash on hand, outstanding debt, financing history, and other numbers relevant to the capitalization of the company.

Even the best reporting often misses one important element of the analysis:  newly issued options (or other equity) shortly before the deal.  I like to call this the “options icing” – and it’s a very important concept for understanding what really happened.  For company founders, management and especially employees, it can mean the difference between a happy and tragic outcome for their startup.  The “icing” is both icing on the cake for employees, and also a good way to ice a bad cap table.

The options icing doesn’t come into play very often, but it is more common when the acquiror is a large, sophisticated tech company that historically rewards employees with equity incentive.  This kind of acquiror understands that the future success of the acquired product is less about the technology and more about the personnel continuing to prosper in the big company environment.

Let me make up an example.  A big company has got a problem if the market value of a 50-person company they want to acquire is only $20 million, while the investors have already put in $35 million into the company.  Typically, the investors have to be paid back first before anyone else gets paid, which means that employees would get nothing, which means that the big company would spend $20 million and get a bunch of seriously disgruntled employees, who will probably leave the company pretty soon after the deal. Even if the investors agree to restructure their liquidation preference, say by half, you still have very little left over:  $17.5 million to investors, $2.5 million for employees.  Let’s say that 1/2 of the employee stake is owned by 2 founders, and then you’re down to only $1.25 million for 48 other employees.  Nobody is happy with that outcome.

Here’s where the options icing comes in.  The company could issue a huge pool of options to employees who would be critical to carrying the product forward (in any scenario, whether acquired or not).  Say they issue $10 million worth of new options.  The magic here is that a smart acquiror will be willing to pay for some or all of those new options.  Even though the company is still only worth $20 million, the acquiror could be happy to pay $30 million if the options are issued to the right folks with the right terms.

The “right terms” include typical vesting terms, so the employees receiving options are incented to do great work for the acquiror.  From the employee’s perspective, this is fair because it is a whole lot better than the stick in the eye they would have been getting under the $20 million scenario.  From the acquiror’s perspective, this is a good deal because rather than flushing $20 million down the toilet, they are making a rational $20 million purchase, with a nice $10 million compensation package that addresses the compensation disadvantage that big companies face in competing with startups.

One of the key reasons that people work in startups is that you can really move the needle for the company’s value.  In financial terms, if you are part of a startup that creates, say, $100 million in value, then it’s a pretty neat feeling to have made nothing into $100 million, and you can get rewarded handsomely for that.  But if you are in a big company that is worth $100 billion, nobody will really notice, or even be able to tell, that you added $100 million in value – it certainly won’t make much of a difference in the stock price.  And that creates a compensation disadvantage for big companies that are trying to motivate their employees with equity grants.

But in the scenario above, the big company can pay for $10 million in stock grants to motivate a relatively small number of employees to execute on a product they clearly understand.  If these employees can turn that $20 million business into a $100 million business, they will be rewarded for it in a manner comparable to their rewards if they had remained an independent company.  That kind of compensation is generally not possible to award in a big company other than in this scenario because of internal “fairness” issues.

The beauty of all of this is that it is one of the few situations in this rotten ol’ world that deal dynamics favor the rank-and-file employees.  Most corporate dynamics, especially in big deals, have a tendency to screw the little guy.  But in order for this situation to be a good outcome for everybody, the rank-and-file employees have to be rewarded in a fair manner.  Coming back to my example above, the options icing can be win-win-win all around:  The investors can get a little tip for agreeing to the restructuring and the new equity; let’s say they get $18 million, just a bit more than they would have made otherwise.  That leaves $12 million for the employees – say the two founders take $3 million, more than twice as much as they would have made under the $20 million deal.  The other employees get $9 million, more than 7 times as they would have made.  The acquiror paid $10 million more, but as described above, this is money that really makes sense to spend, and it’s more like incentive compensation than it is acquisition consideration.

And this deal gets reported as a $30 million price paid.  But really from the right perspective it should be regarded as a $20 million deal.  Now, I am not saying that anything like this is what happened in the Apple-LaLa deal – actually the discrepancy in the reported numbers is too large to be explained by options icing alone.

A little while ago I suggested that online privacy concerns are best addressed by free market solutions, not governmental regulation.  I’ve discussed the topic with quite a few entrepreneurs, investors and professional marketers, and the overwhelming view in that group is that regular consumers just don’t care about online privacy.  ”They” say:

• privacy is too complicated a topic for consumers to understand
• no one reads privacy policies
• consumers can be distracted from privacy concerns with the offer of just about any shiny object

Much of that might be true – but I also took the time to talk to a bunch of “regular” consumers.  And these things are definitely true:

• consumers know that their privacy is being compromised by many online services
• consumers do not like being taken for granted
• consumers will avoid services that abuse their information, and will seek services that use their information properly

These two sets of “truths” are not mutually inconsistent.  To me, they add up to:   Online services can gain a competitive advantage by giving consumers the most sensible default choices along with the right advanced options for privacy – make it simple, but make it right.  I think Facebook believes this, and that’s why they keep tinkering with their policies.  They understand that a lot of their initial attraction was a result of making different privacy assumptions than more open services like FriendFeed and Twitter.  They know that even if no one ever reads their privacy policy, if they make the wrong choices about privacy, they will lose users.  As they saturate their available audience, they have to figure out how to strike the right balance among their different demographic bases, all the while competing with the advantages that more open services have.

These are extremely nuanced choices, but getting them right makes the barrier to competitive threat all the more defensible.  And these are product choices; this is something that many I’ve talked to misunderstand:  people think that this privacy stuff is just legal mumbo jumbo or regulatory mishmash.  That’s plain wrong – laws and regulations are just the cart behind the horse.  In a social product where community is paramount, policy choices are product choices.

The tech-über-alles crowd would have you believe that “de-indexing” from Google would be suicide for any publisher.  The assertion there is that Google drives the majority of web traffic, so if you’re not findable through Google, you might as well not be on the Internet.

But that assertion flies in the face of another observation from the technoscenti – social media like Facebook and Twitter are becoming increasingly important as traffic drivers (though this importance may be overhyped).  We may be heading towards a future where the links are shared through social media are more valuable than search links.

More importantly, and against the prevailing wisdom in some circles, content still matters.  People use media services because of the content on it.  Other factors are important too:  the features must be complete, the UI has to be easy, the price has to be right, yadda yadda yadda.  But would any of those other factors make up for terrible content?  No, content is, if no longer king, still the jewel in the crown.

If Bing is able to be the exclusive search partner for the right content, Google is dead.  Of course, what’s “right” can vary quite a lot from person to person.  For me, it’s as simple as two publications:  If the New York Times and Wikipedia are de-indexed from Google, I’m going to stop using Google in favor of the search engine that has those two.  I might think it’s unfair, I might think it’s a triumph of soulless MBAs over tech heroes, I might think it’s the desperate grasping of dying empires.  But I want the content I want, and those principles aren’t enough to prevent me from switching.

Bing doesn’t have to make deals with every content provider, just a dozen or so critical ones that will cause another 40% market share gain (they’re at 10% now).  Sure it’ll be expensive to acquire the best content, but Microsoft’s got more cash than Google.  Once it’s 50/50, it’s anybody’s ballgame but the advantage goes to the one who has the content.

I’m pretty sure that Google is not going to sit back and smugly assume that Murdoch’s gambit will fail.  They’re going to get involved, they’re going to try to start locking down their own partnerships.  If I were them, I’d start with Wikipedia, one of the most important search result destinations on the web – it’s in the top five results of just about any search you do.  Sure, they’re a non-profit, but non-profits need money too.

I was born in New Jersey, grew up about 45 minutes outside of the city, and went to school and started my career in NYC.  I’ve been out in the San Francisco bay area for over a decade now, and I’m firmly rooted here with family and career, but the thought of going back to The City (the one and only “The City” – pretenders begone!) still occasionally buzzes in my head like a bee in a speeding car.  However, on a trip back to New York last week, I realized that one of the things that prevented me from moving back is my own very New York attitude.

Over the past few months, a few New York based technoscenti have carried a conversation about NYC as a startup environment.  Chris Dixon said conditions are ripe for a new NYC tech revival, Fred Wilson and Charlie O’Donnell agreed but noted that NYC has been a strong tech scene for years, and Dixon and Wilson came together to agree again that the NYC startup sector is special.  All this caused me to reflect on why I left the city that I love to pursue a tech career in Silicon Valley, and why I’d do it again.

It all goes back to why I went to NYC in the first place.  I was learning the law, I wanted to be a dealmaking lawyer.  And while there’s law and lawyers all over the world, the pinnacle of the practice is in New York.  Routine transactions in New York would be considered fantastically complicated almost anywhere else, and complex transactions in New York are so far above other places that they can’t be considered the same category of endeavor at all.  So if I was going to be a lawyer, I had to try to do it in the belly of the beast.

And it was a great time, but after a few years I realized I wanted to be more connected to the creation of something from nothing, rather than the financial engineering of something into vast amounts of money.  That meant working in startups, because startups aren’t about money but about value creation (a distinction often lost on New Yorkers).  So I shifted the path of my journey, but I retained that New York attitude of wanting to play on the biggest possible stage, and in the startup world, that meant going to Silicon Valley.

There are other great startup scenes in the world, and New York is certainly a special startup environment.  But if you’re a stage actor, you don’t go to New York dreaming of playing Off Broadway; you dream of your name in lights on the Great White Way.  Because I grew up as a New York dreamer, dreaming of a startup career meant leaving New York for the biggest and baddest startup scene in the world.

It’s all a bit ironic, and I’m not saying this “big stage” attitude is right.  In fact, it’s almost certainly not a healthy way to live.  A healthier attitude would be less entranced with the size of the stage, and more focused on the production and your role within it.  I think that’s the attitude held by Chris, Fred and Charlie, and I really look forward to seeing those guys continue the public conversation (and private work) about making New York into one of the great startup locales in the world.  For those interested, Elie Seidman is another good new voice in the thread, and of course Joel Spolsky is a longtime stalwart for software engineering in NYC (or anywhere).

The shocked reaction misses an important point:  Everyone believes that investments in companies like Twitter are likely to fail, including the investors in Twitter.  For the most part, people who invest their money in companies like Twitter are not putting their life savings into a single company; they are investing their portfolio (or an allocation of it) into high-risk, extremely-high-return-potential companies.  For that high-risk portfolio, it could be rational to invest in companies with a 90% chance of failure, if there is sufficient return for the other 10%.

Now, there aren’t many actual portfolios that are (intentionally) structured with any allocation to a class of investment with a 90% failure rate.  But it would be completely typical if every single non-employee investor in Twitter made their investment from an allocation that has a greater-than -50% failure rate.  In other words, most Twitter investors believe that it’s likelier than not that Twitter will fail.  (Here, “failure” means that the investment will fail to reach the modeled return, not that the company will completely go out of business.)

It’s easy to say that Twitter will probably fail, but how many critics are confident that there is a less than 10% chance at a 10X return?  Investors in Twitter don’t bank on Twitter, they plan that either Twitter or one of the other companies in that allocation of their portfolio will make an outsized return.  Many of those investors have been right time and time again about their projected portfolio performance, which means that as a reward they will continue to invest in companies that are likely to fail.

But these people seem to talk on and on about privacy with some seriously flawed assumptions.  They assume that everyone agrees on what privacy is, and that everyone wants privacy in exactly the same way.

I’ve become enamored of the comparison between privacy and religion.  Even without being religious scholars, most people have a basic notion of what the word “religion” means.  And most everyone understands that different people can have very different views about how to practice their religion, or whether to practice any religion at all.

Privacy is the same way, isn’t it?  There is some shared understanding of what the term means, but the specifics of the meaning and practice of privacy can be very different among different people (especially across generations).  Some people don’t believe privacy is important at all, choosing to live without it.

Both religion and privacy deserve the protection of our laws, and for very much the same reason:  the practice of these matters according to one’s own belief is essential for building and maintaining a sense of meaning in life.  In simpler terms, a personal view of these things are required elements of the pursuit of happiness.

Our laws protect religion (and atheism) without saying that “religion” must include a single deity, or prayer at sunset, or robes or hats or ritual.  It’s a mistake to think we should protect privacy by defining exactly what data people should consider private.

Breaking my tradition of linking privacy posts to ’80s songs, because this early ’90s song has perfectly apt lyrics:

Every whisper
Of every waking hour I’m
Choosing my confessions
Trying to keep an eye on you
Like a hurt lost and blinded fool, fool
Oh no, I’ve said too much

The New York Times thinks so:  just since I’ve been paying attention, I’ve noticed – 1 2 3 4 5 6 7 8 – eight articles about the threat to consumer privacy posed by increasingly effective online behavioral ad targeting.

Jeremy Liew is concerned that the recent public interest push for privacy regulation will threaten startup media companies, suggesting that the ad networks should band together to lobby against online privacy regulation.  He says “While it is always hard to argue against privacy, the impact of this level of restriction would be enormous for companies relying on online advertising.”

It’s not that hard to argue against privacy, it’s just . . . delicate.  And I think simply saying that a lot of money is at stake isn’t enough of an argument.  So I’ll try to make a better argument for why privacy legislation of online advertising is likely to cause more harm than good.

I’m actually a huge fan of the Electronic Frontier Foundation and Consumers Union, and I think their hearts are in the right place on this.  I’m generally in favor of legislation that protects consumers from predatory practices in the marketplace.  But although privacy is a special value, it is not something that is well served by detailed regulation.

The problem is that privacy means many different things to different people, so everybody’s expectations can be quite different in terms of both substance and process.

The substance of privacy is the content of what you want to keep private.  Some people don’t care if you know whether they are male or female, but they don’t want to reveal their age.  Some are ok with gender and age, but not job and income – etc, etc.

The process of privacy is about the availability, collection and use of the information.  Some people want to opt-in to every interaction, some prefer to have opt-out control.  Some are ok with information used in the aggregate but not the individual, or even vice versa.  Some are ok with information being used by private parties, but not the government, or for a day or a month, but not a year or a decade.  Etc ad nauseum.  Few of us are ever thinking about exactly the same thing when we think about privacy.

Privacy may be a fundamental right, but it’s more like the right to freedom of religion than the right to trial by jury.  The latter is a specific procedural right, which we want everyone to have in a very clearly defined way.  The former protects an abstract and highly personal set of values, which each person may regard in a different way.

In the US, we don’t protect religion by telling people what it means; we protect it by saying that the government won’t promote any particular form of religion, and people can exercise any form they choose.  The failing of the public interest proposal on online privacy is that it presumes to define privacy for everyone.  That’s a dangerously unsophisticated view of a standard that varies from person to person and evolves across generations.  A time-traveler from before the Internet would not recognize what the average Facebook user calls “privacy.”

So how do I think privacy concerns should be addressed?  Well, by the market, of course. Don’t get the wrong idea:  despite my love of entrepreneurism and therefore capitalism, I don’t believe that the market is infallible, nor do I believe a free market must be unregulated.  But where you have complex consumer preferences and an infinite variety of potential solutions, a market is often the best way to satisfy the most people.  Think again back to religion:  people basically make their religious choices in a free market as well.

Consumers should have a large variety of choices about how their personal marketing-relevant data is collected and used by advertisers.  The role of governmental regulation here should be limited to traditional consumer protections about clear and full disclosure, contracts of adhesion, and anti-competitive practices.

The government just needs to make a level playing field.  People do care about privacy, and companies that can address those concerns correctly and creatively will make a lot of money.   And that matters not just because it’s a lot of money, but because it’s a case where consumer interest and the pursuit of money can be aligned.

[Apparently I've decided that my posts on online privacy must be titled by reference to 80's hits.]

But my thinking about this whole conversation is best summed up by the immortal (and surprisingly moral) William Munny:  Deserve’s got nothing to do with it.  People talk about venture capital compensation as if there is some moral justification for what they make, or conversely a moral reason why they shouldn’t make their money.

Now, I don’t belong to the amoral school of thought that says that people “deserve” whatever the market will pay them – sometimes the market is wrong, sometimes the conditions are unfair, so sometimes there are outcomes that are morally unjust.  However, this is not one of those times.

Venture capitalists negotiate their compensation terms with extremely sophisticated investors.  Those investors are willing to pay VCs an amount that still gives the investment portfolio an expected return that is correct at the time of projection.  Sometimes the investor projects incorrectly, but that’s not a moral misjudgment, it’s just people not being good and/or lucky at their jobs.  And if the VC sector underperforms expectations, compensation will get adjusted over time.  Deserve’s got nothing to do with it – this is a case where the market is perfectly capable of taking care of itself.

Dixon emphasizes that the most important thing about equity grants is the percentage of the capitalization granted, and Wilson adds that the implied valuation of the grant (number of shares times share price of most recent financing) is also useful.  While these things are true, my objection is that the probable audience for this advice is composed of prospective startup employees, and the use that they will make of this advice is to try to choose a job based on the value of the equity grant.

This is a bad idea for two reasons.  First, valuing an equity grant is only secondarily about determining the percentage of the company – it is primarily about determining the exit value of the entire company, an exercise at which professional investors in the field routinely fail. (Fred himself will tell you that 2/3 of venture investments in a successful fund will break even or lose money.)  If you are thinking about joining a startup, and you have 2 choices, you are very unlikely to have any rational basis for believing that 0.1% of one startup will be worth more or less than 0.2% of the other.

Second and more importantly, if you want to work in a startup, you should not choose where to work based on compensation.  You need to pick the project and the people that get you most excited, period.  Without a belief in the mission and an authentic fit with the team, you will not be successful anyway, so any compensation will be a waste of your time and their money. If you have other employment options, you should explain that to the place you want to join, and if they want you they will make the comp work within their range, and you should accept.  Or, if you simply want to work at the place where you will be paid the most, you should not work at a startup. (Don’t be offended, this isn’t a test of character or a judgment of your soul – if you’re not a startup person, that doesn’t make you any worse or better than the people who are.)

Dixon actually gives really good advice in his post, for those who are paying attention:  ”If management tells you the number of shares and not the total shares outstanding so you can’t compute the percent you own - don’t join the company!”  As I’ve said before, the reason to have a detailed conversation about equity comp with your manager is to test management’s clarity and forthrightness in general – not because you have any hope of making a correct equity valuation.

I would be willing to bet that neither Dixon nor Wilson has ever made a choice of company to join or invest in based on equity percentage.  They made their choices from their interests in the market, the product, the team – and then later, after a decision to join/found/invest has essentially been made, they did some optimization around the equity.  Choosing the other way around is about relying on luck, not successful choices and preparation.

[Bully for you if you know the reference for the title of this post!]

But the parallels are too strong in watching Twitter make a controversial attempt to trademark the term “tweet,” bringing them into a cycle of uncomfortable conflict and limited accommodation with their own developers.

Second Life faced exactly the same issues – a passionate and well-meaning developer community using many terms associated with Second Life that the company hoped to protect as trademarks.  We ultimately came up with a comprehensive policy that was and remains a subject of derision in the SL community (see comments to the linked blog post).

It can be very difficult to engage in a productive conversation about trademark law, because even the basics are hard for nonlawyers (and some lawyers) to absorb, and yet because we’re just talking about using the English language, it seems like anyone who speaks English good should be able to comment intelligibly.  [Yes, the usage error in that sentence was intentionally ironic.]

I think everyone – the company and the commentators – could make better progress by ignoring the legal issues, and just focusing on the marketing questions.  Now, marketing is another one of those disciplines that requires a lot of expertise, and is nonetheless discussed with fervor by anyone who has a couple of IQ points to rub together.  But I think the marketing questions here are simple enough even for me to understand.

1st question:  Is there a name for the product or service that the company should be able to control?  The answer to this question is almost always yes for at least one name – companies are generally better off when they control the primary name for their offering.  Once you reach that answer, following trademark law in order to implement that answer is a straightforward process, and having good customer communication around that process is a requirement.

2nd question:  When there are words associated with the product or service that facilitate the use or adoption of the service, is that facilitation improved or hindered with greater company control over those words?  Marketers and lawyers almost always have the same bias for control (though for different reasons).  The bias itself is always wrong – I don’t mean that it’s always wrong to have that control, I mean that it’s always wrong to approach this question with bias.

Does it really do any good for Twitter to own the word tweet?  Some brand marketers and lawyers will raise the specter of genercide (basically, losing control over your brand name), but this fear should not be the primary analysis unless we are talking about the primary name.  When we are talking about those strongly associated words that help spread the gospel of the company, the analysis should not be of the law and certainly should not come from a place of fear.

The analysis should dispassionately examine whether unrestricted use of the words will help spread that gospel.  And it will often make sense to have less control over these words, not more.  If religion were a business, it would probably make sense to trademark “The Holy Bible” – but trademarking “Christ” would probably make for a lot fewer Christians.

Of course not, you can’t tell from a slideshow how a company really operates.  Employee comments are helpful, but not conclusive – Netflix has public reviews at Jobvent, Telonu and Glassdoor, which show a mixed approval rating.  But from the outside you never know if the complainers are malcontent underperformers, or if the fans are deluded Kool-Aid drinkers.

At Linden Lab, we spent a lot of time on company culture, creating and periodically revising the Tao of Linden.  That document was similar to the stated Netflix culture in emphasizing a high degree of both choice and responsibility.  I loved the culture we built, as did many employees, but I can’t say that it’s a culture that works for everyone.  And I won’t say that there’s any single best way to run a company (though there are many undeniably wrong ways).

I’ve worked in some centralized, command-and-control environments, and cultures based on internal competition and depersonalization to the point of dehumanization.  And I’ve had plenty of fun in most of these places.  I’ve come to believe that the single most important thing about a company culture is whether or not management truly believes the culture matters.

Every management team will give at least some lip service to company culture.  The companies that stop at mere lip service end up with hollow words engraved in the lobby – these are the truly miserable places to work.  The companies that put real time and thought into their culture, in the firm conviction that a great culture is required for enduring success – these are always great places to work, almost independent of the actual values of the culture.

Commitment to the culture, a genuine determination to fight the good fight to make the company a place with a certain cultural identity – this always leads to a great place to work for some set of people.  A culture of choice and cooperation works well for certain kinds of people.  A culture of command and competitiveness works well for others.  Even a culture based on greed and amorality can work, depending on the industry.

Which is not to say that anyone can work in any culture – in fact I’m saying just the opposite:  you should understand what preferences and constraints your own personal values carry, for this determines what kinds of cultures you will enjoy.  And then it will be easy to identify the companies that express your cultural values.  The hard part will be determining whether the leadership is really committed to fighting the good fight.

It must have irked Facebook that the tech blogosphere has been obsessed this year with Twitter Twitter Twitter – Facebook’s growth has been just as impressive, arguably more so since it’s rarer to grow a large base much larger than it is to grow a small base into a medium-large base.

So in the past year, Facebook has tried to buy Twitter and has copied features of both FriendFeed and Twitter.  And this acquisition appears to be about bringing the values of FriendFeed to Facebook.  Among those values are an emphasis on product openness and sharing beyond your circle of friends.

But what if users don’t want to be more open?  Could it be that Facebook grew so fast because its users regarded the service as a safe place to share their lives with only a close circle of friends?  If Facebook becomes more like Friendfeed, will the service become less attractive to a mass audience?  (I’m certainly going to have to rethink my social media use.)  Maybe it’s only folks like the 250 that believe that everyone wants to share everything all the time.

Oh sure, Facebook has and will have a variety of privacy settings that give people choices about what to share – but these are terribly confusing and difficult to use.  More importantly, a company has to choose a single dominant brand image.  Will Facebook remain the place where friends can share their lives?  Or will it continue to morph into a knockoff of its less popular competitors?

Early indications are that Facebook will integrate FriendFeed’s staff, which is likely to lead to shuttering the FriendFeed service.  I think that could be a lost opportunity.  Facebook might do well to reaffirm its core brand as a more private place for friends, and retain FriendFeed as a brand extension that focuses on open data and public sharing.  That way they can serve the mass market and the avant garde with different product philosophies and branding.

I’m working through a start up analysis based on a web-based software app. What is “options consistent” with a start up?

The short answer:  show the prospective employee a 5-figure number, and convince the employee that it makes sense.

The long answer:

This is highly dependent upon the type of startup and the position of the employee. I’ll answer for a typical situation of a VC-backed startup and a developer from entry-level to senior (sub-exec) level. You could have a very different answer for startup that was not VC funded, or an executive level position. You might even have a slightly different answer for non-developers, certainly in the areas of marketing, administration, customer support. (I’m putting aside for the moment the question of whether it is “right” to treat execs or different functional areas differently.)

Many propspective employees seem to take a highly illogical view of evaluating startup options. They compare the raw number to that in their other offers, or to offers that their friends received. (“Well I think I deserve at least 30,000 shares in this company, because my friend Jonny got 20,000 shares in his company, and he’s an idiot!“)

This seems nonsensical because the value of the options must be calculated with respect to the specific company situation, especially in terms of the company’s existing capitalization and prospects for liquidity and growth. Having 20,000 shares in a company that has 10 million shares outstanding is, absent other facts, five times more valuable than 20,000 shares in a company that has 50 million shares outstanding. That’s simple enough, but it is by far less important than the other main factor. Having 20,000 shares in a company that is about to go public might be much more valuable than having 20,000 shares in a company that has just started.

Might be. Or might not.  What if the company that has just started is the next Google, as they all think they are? The problem here is that you have to evaluate both distance to liquidity and prospects for growth. Figuring out which startups will be successful and when and how big they can get is extraordinarily difficult – these are things that professional money managers routinely get wrong. A prospective employee has very little hope in getting this evaluation right.

So let’s look at it from the other side: how do companies decide how many options to offer employees? Typically a company budgets a particular target of dilution from issuances of options over 12 to 18 months. For an early stage startup, this target is often around 15-20% of total capitalization (including the options pool). A one-year hiring plan in that stage might call for something like one new executive, 3 senior employees, and 12 employees from entry to mid level. So the company would budget its options accordingly, obviously also aligning grants with external market conditions.

A prospective employee who wants to know whether an offered grant is “fair” really has no better method of evaluating this than by asking the company to explain how they came up with the number. Ideally as an employee you’d want to ask:

• What’s the fully diluted capitalization?
• How far is the company from liquidity? What type of liquidation event does the company anticipate?
• What are the company’s business prospects for the current year?
• What is the options range for my position, and where am I in this range relative to other recent hires?
• How far into the hiring plan is the company for the current year? How many and what positions will be hired?

And you ask these questions not because you can actually value the company based on the answers.  You ask as a test to see if the hiring manager has thought through the offer, and sounds as if there has been rational thought behind your compensation.  You want to work at a place where the management can provide sensible answers to these questions, independent of whether the answers can add up to a company valuation.

Many candidates do not feel comfortable asking these kinds of questions. Worse, some companies will not answer them, and will view the asking of such questions as a sign of impudence.  I’d say you should think twice about working for any company that would be insulted by the asking of these questions, but unfortunately that company attitude is not uncommon.

As a result, the best guideline to fall back upon for many prospective employees is back to good old Jonny:   What have I been offered at other companies, and what are my friends getting at their companies?

Which turns out to be not such a dumb way of evaluating offers, because many companies use more or less the same budgeting processes and have similar investor and advisor networks. So most companies end up in a similar range of options for similar positions. For most mid-to-senior positions, this will be a 5-figure number, and as long as that number can be justified to the employee, then you can move on to more important questions, such as why anyone would want to work at this company in the first place. There should be a lot of answers to that question, and the options offer should be only a very small piece of the puzzle.

The first phase was a sort of prehistory where virtual currency was a gameplay feature of massively multiplayer online games – points that players could gain through the completion of tasks, and use to acquire in-game items that were valuable for further progress in the game. Although points have been a feature of most videogames since the inception of the medium, the relevant new thing about MMOGs was the operation of a “persistent” online economic environment. That meant that even when particular players weren’t online, the service constantly maintained an environment where items of value could be acquired and traded. Much of the trading of items for value was “off-service” – often against the game rules – but this was the first step in virtual currencies breaking free of gameplay rules.

The second phase started when online services that were not solely game-oriented used virtual currencies to encourage trading of service assets – this time trading currency for service items wasn’t against the rules, but specifically designed to encourage sales within the service. Korea’s Cyworld was a pioneer in this use, with “Cyholics” using “acorns” as a medium of exchange for digital presents that users could buy for themselves and each other. Chinese Internet portal Tencent built QQ coins into a $900 million economy, while in the U.S., Second Life users are heading towards $450 million (in U.S. Dollars) of Linden Dollar transactions. The authorized use of virtual currency within these services led naturally to implicitly or explicitly authorized use of their virtual currencies outside of the traditional boundaries of the service, demonstrated by Chinese users buying real-world items for QQ coins and Second Life users setting up 3rd-party currency exchanges and virtual goods stores. (As an illustration of the differences in culture, it’s interesting to note that the Chinese government eventually banned the use of virtual currency for “real” items, and that Linden Lab rebuilt or acquired the third party services.)

In the third phase, we have businesses that were natively built as a platform for virtual currency to be used on other services (rather than a feature of an economy within a more comprehensive service). Some have stayed closer to virtual currency’s MMOG roots, like PlaySpan and LiveGamer, while others have tried to ride the wave of social media apps platforms, like TwoFish and SocialGold. SuperRewards and OfferPal brought a new twist by using marketing offers as the underlying value to the virtual currency.

This part takes a little bit of explaining. For any currency to gain favor with a user base, there must be some underlying value to the medium of exchange – from a consumer point of view, this is sometimes expressed as a demand that the currency be “backed” by something of value. In ye olden days, governmental currency was backed by precious metal; in theory you could turn in your dollars to the government in return for equivalent value in gold. Most governmental currencies came off the gold standard decades ago, and are now backed by the declaration of the government that the currency is legal tender. The meaning of this declaration is a little murky both in theory and in practice.

Suffice to say that there are virtual currencies that emulate most of the historical models of real governmental currencies. e-Gold tried the gold-backed model, to disastrous result. Some virtual currencies are run as essentially stored value systems for governmental currency, so ultimately they are backed by the same declaration of the government. QQ coins to some extent, and Linden Dollars to a greater extent, are free-floating media of exchange that are backed by the commercial viability of their operators – a private rather than governmental declaration of value (this is not as revolutionary as it may seem, since in many ways it’s similar to airline miles and other customer loyalty programs).

By using marketing offers as the underlying value, virtual currency operators can sidestep some of the difficulties involved in demonstrating that a currency is sufficiently “backed” to satisfy customer demand for stable value. This technique introduces significant complexity and cost by introducing many additional parties to the value chain, but now SuperRewards has demonstrated (to its investors if not yet a skeptical public) that this kind of backing does create a valuable virtual currency. OfferPal is not far behind, and of course is now far ahead in terms of its ability to maintain an independent business.

So what’s coming for the fourth phase of virtual currency business models? That’ll have to be the subject of another post. But for now the developments to watch are the competition between Facebook and MySpace in their own virtual currencies, app developer currencies from companies like Zynga, and the continued progress of OfferPal.

Despite this dystopian vision, I think the current level of public concern about the privacy invasion of targeted advertising could be described as significantly beneath swine flu and slightly above Lyme-disease bearing ticks.

But this year, the largest online advertisers and ISPs have really begun to show their power over consumer behavioral data.  The New York Times has been utterly obsessed with this topic, to the point where it’s somehow news when a company decides not to use a targeted ad system.  (I wonder if it there could really be such a thing as behavioral tracking so creepy that even advertisers won’t use it.  The cynic in me says that the system probably just didn’t work well enough to justify the cost.)

Consumers who are asked about privacy generally want greater control over their marketing data, but don’t know how they can achieve it.  In sympathy to this consumer demand, the industry’s leading ad networks have banded together to establish best practices for use of consumer data.  (This sympathy was perhaps supplemented by the interested attention of the FTC.)

Industry self-regulation is a time-honored method of appeasing and forestalling government regulation.  There are areas where this works just fine (in terms of industry commercial interest, if not art) – comics, movies and video games – this tends to involve public morality.  And there are areas where greed and the public interest seem destined to cycles of boom and bust and bust – some industries just don’t seem capable of operating without eventual crisis in a deregulated environment.

So will the ad industry’s attempt self-regulation turn out more like the entertainment industry’s successes with the morality police, or the financial industry’s pathological self-destructiveness?

On the one hand, the dynamics of targeted advertising share some characteristics with complex financial instruments:  advanced algorithms, proprietary trading systems, a leveraged financial return from a slight mathematical edge.  On the other hand, consumers are not in bed with advertisers in the way that they were with their bankers and brokers and realtors.  A little willful blindness made everyone happy for a while in finance, but that same blindness in advertising only covers growing consumer unease.

There are startups that tried to give greater consumer control over marketing data, but none really got a lot of traction.  The problem may have been that the problem wasn’t big enough yet.  Until everyone’s singing like Rockwell, it could still be too early.

I couldn’t begin to have an opinion without some basic context about advertising, so I gave myself a crash course.  Here’s the 3 most important things I learned:

1.  Advertising has multidimensional sectors.

Two of the fundamental axes in advertising are the lines between brand and direct response marketing, and between online and offline ads.

I can’t do the differences justice here, but essentially brand marketing is intended to make you feel a certain way about a product, while direct response is intended to make you take an immediate action regarding a product.

The concepts seem simple, but whenever new media arises, it can be quite tricky to determine what kind of advertising is suited to the media.  When the Web first burst into mass acceptance, some advertisers treated this new medium as a branding opportunity, plastering their logos and flashy campaigns wherever they could.  Google was among the first to realize that direct response principles fit the Web much better than branding – deliver ads against search results and you have a natural audience to act upon that hyperlink.

But the Web continues to evolve, giving continued opportunities to make the wrong choices about ads.  When social networks like Facebook reached mass popularity, many advertisers tried to deliver targeted direct response advertising to demographics discovered through the social graph.  But “banner blindness” and the very social intent of these sites combined to make pure direct response ads ineffective.  The better strategy for advertisers in social networks is to build a community and create engaging viral media to enhance the brand.

So the lesson here is that advertisers have to make very savvy choices between brand and direct response advertising as the evolution from offline to online continues.

2.  Online and offline ad spending patterns are currently inverted.

In the excitement about the growth of online advertising, it’s easy to forget that offline is still much bigger, with online making up roughly $23 billion of a $137 billion U.S. ad market.  These numbers are even more interesting when examined along the divide between brand and direct response.

According to one estimate, around 75% of offline ad dollars are spent in brand marketing, while 80% of online ad dollars are spent in direct response.  Because offline is so much bigger than online, that means that direct response offline (a.k.a. “junk mail”), makes up around $28 billion.  Yep, junk mail is bigger than the entire Internet ad industry.

Now here’s a point that’s a little more abstruse, but I hope it’s worth the time to understand it:  the advertiser’s spending pattern is inverted in online vs offline.

Offline brand advertising is expensive to create, but reaches a mass audience, so the spend per viewer is low.  Take a Super Bowl ad:  a 30-second commercial can cost $4 million (for air time and a lavish production cost), but with 95 million viewers, that’s only 4 cents per viewer.  Let’s call this low cost per viewer a mass spending pattern.

Offline direct response advertising total cost is lower, but higher per person reached.  For example, it can cost $50K to produce and mail a catalog to 10K recipients.  At $5 per person, that’s 125 times more expensive per person than a Super Bowl ad!  But it works because of the targeting – those 10K people have been identified by the advertiser as being likely to be interested in the product.  This low threshold, high cost per viewer is a targeted spending pattern.

The patterns are rewired online.  Search advertising and email campaigns are direct response in that there is a clear desired action (usually a click).  Though the cost of the keyword or email campaign can be relatively low, the distribution is very broad, so the cost per viewer is extremely low -  this is a mass spending pattern.

Conversely, doing effective brand advertising on a social network requires really identifying the target demographic and crafting a creative campaign to get that ballyhooed viral explosion.  That means relatively high creation cost and a specific audience, resulting in a high cost per viewer – this is targeted spending.

So offline, brand advertising is mass spending while direct response is targeted spending.  And online, brand advertising is targeted spending while direct response is mass spending. Or at least, that’s the way it is today . . .

3.  Successful advertising tactics will seek equilibrium.

Pundits are always rushing to declare failure, or any new method the death of all old ones.  But offline advertising feeds online, and online direct response may morph into “brand response.”  Advertising, like nature, restlessly searches for equilibrium.  The story above is heading towards a more stable balance so the value of the spending better matches the returns.

It’s not controversial to suggest that offline ad dollars will move online – that’s more an observation than a suggestion at this point.  And it’s also been an observable trend that offline direct response marketing is declining at an even faster rate than offline brand marketing, because Internet direct response has rapidly become effective for larger audiences.  But I’m adding two conjectures that aren’t easily observable today.

First, online brand marketing will grow at a faster rate than online direct response.  This means that social media like Facebook and Twitter (like them, not necessarily those two) will grow revenues faster than Google.

Second, online brand spending will revert back to the offline spending pattern of mass rather than targeted, and online direct response will similarly go to targeted spending rather than mass.  I believe that dominant social media sites and practices will arise that allow brand advertisers to reach a large audience at a low cost per viewer.  At the same time, increasingly effective data collection on Internet consumers will allow data holders to sell highly targeted direct response ads at premium prices per consumer.

What does it take to get from here to equilibrium?  In monetary terms, holding the total ad industry constant at $140 billion (not a safe assumption):

• $50 billion will move from offline to online
• $15 billion will move from offline direct response to online direct response
• Online direct response will grow by $20 billion, while the revenue per viewer seeks a relatively high number
  
• Online brand marketing will grow by $30 billion, while the revenue per viewer seeks a relatively low number
  

That is a lot of money sloshing around, in a lot of different directions.  I think it’ll happen within 5 years.

I still think no one matches Marc for the sophistication and deep experience of his posts.  But I think that once you have the background that he covers, if you are working on a startup you might want something that gives you more guidance about what you are facing day to day.  So here are a few possibilities for interested entrepreneurs:

ReadWriteWeb is running a serialized book called Startup 101 that describes the startup life cycle.  It has a number of factors against it:  the information is very broad and basic, it’s directed only at web startups, it assumes little to no experience in business generally.  Nevertheless it looks to be shaping up as a nice basic primer for first-time startup folks.

Venture Hacks has some good info, mostly about fundraising but also assorted other categories.  This is possibly the best resource for those who are mystified about how VCs think.

Eric Ries has made a name for himself around the catchphrase “The Lean Startup” – a solid summary of fundamental principles of running a low-burn, nimble business.  Much of this might seem fairly obvious to folks who have worked in modern web startups, but Eric has a really nice clean delivery of the concepts.

Steve Blank has shared the stage with Eric for “Lean Startup” presentations, so the two have a common mindset.  Steve differentiates himself with a much longer history of entrepreneurialism, which gives him great authority and many informative war stories to share.  His customer development model is highly valuable to any startup (though a bit better oriented to enterprise customers than mass consumers).

Steve’s blog has risen to another level in recent posts about how entrepreneurs can stop lying to themselves and deserve an epitaph that signify a family life well lived.  I haven’t seen any other startup blogger come closer to giving this topic the time and attention it deserves – managing the demands of a startup in balance with a rich family life is incredibly difficult.  Perhaps too few have succeeded in this to inspire many good blogs about it.

Finally, probably my favorite category of startup blog is from those who are blogging the process while they’re doing it.  Signal vs. Noise is a classic in this category, but I like to find new blogs from relatively unknown startups.  Two that I happened across recently are from the founders of Expensify and Alice.

What are your favorite startup blogs?  I’m particularly interested in finding ones from startup founders who are blogging it while they’re doing it.

We are in a time when the government’s hand in the U.S. economy is heavier than at any time since as least as far back the 1930’s.  Makes me wonder who, if anyone, lobbies in D.C. for the benefit of entrepreneurial activity?

The National Venture Capital Association has been in the news of late, as it tries to avoid Congressional and Treasury proposals to regulate “private pools of capital” – a generic term that includes hedge funds as well as venture capital funds.  Hedge fund activity in the credit markets may have contributed to the systemic failures in the financial system, but commentators indignantly proclaim that venture capital had nothing to do with the current mess.

The NVCA is the main lobbying organization of the venture capital industry, and in their stated mission and nearly all of their public policy positions, they say they have a broader mandate to “support entrepreneurial activity and innovation.”  The NVCA wants Washington to understand the VCs are not merely investors, but part of the lifeblood of the entrepreneurialism that fuels massive portions of the U.S. and world economy.

I suspect that at first the fine folks at the NVCA made this connection to entrepreneurialism because it sounds worthy and friendly to politicians, as compared to being cast as mere financial speculators.  But now this connection has become a key conceptual anchor of their argument that venture capital should be treated differently from hedge funds and other private equity funds.  Those other guys are pointy-headed number crunchers, see, who move massive amounts of money and credit with extreme disregard for our financial system.  VCs are closely involved with startup innovation, heck they are practically entrepreneurs themselves!

This conflation of VCs with entrepreneurs is even more critical in what has become the most important lobbying battle in the history of the NVCA, the fight over carried interest tax policy.  I think if more entrepreneurs understood this particular public policy issue, there might someday be better lobbying in DC for related issues that are closer to the hearts and wallets of entrepreneurs.

Briefly, VCs are typically compensated in two ways, with management fees and carried interest.  Management fees are a small percentage of the total capital commitment of the fund.  For example, a $100 million fund might have a 2% management fee, so the VCs receive $2 million per year for their operating expenses.  Carried interest is basically profit sharing on the investment.  So for example, if the $100 million fund operates for 10 years, and makes $500 million, a 20% carried interest might be applied on the profit – that would be $500 million less the $100 million of invested capital, less the $20 million of management fees (assuming 2% per year).  So 20% of $380 million is $76 million.  I’ve smoothed over a lot of variations and complexities, but this is basically how it works.

And how the U.S. tax system works – smoothing over a thousand times more variations and complexities – is that you either pay ordinary income tax of 35%, or long term capital gains tax of 15%.  Have you guessed what the carried interest tax policy battle is about?  That’s right:  carried interest has historically been taxed as capital gain, but many are now calling for it to be taxed as ordinary income.  In the example above (which would not be a particularly large or extraordinarily successful fund), the 20% difference in tax rates would mean $15.2 million less for the fund managers.  You can see why this is the Battle of the Century for the NVCA.

Now, let’s get back to this point about VCs being practically entreprenuers themselves.  In Congressional testimony, the NVCA says that venture capitalists rise above mere “financial engineers” (presumably the hedge funds and private equity guys), contributing sometimes daily management attention and real “sweat equity” into startup companies.  Some entrepreneurs may snicker at that testimony, and others may pluck their eyeballs out rather than read it.  I can freely admit that I’ve seen VCs who do make invaluable contributions to their portfolio companies, far above merely providing money.

But if the NVCA really wants entrepreneurs to view their efforts to “support entrepreneurial activity” favorably, they ought to extend their views on tax policy to the issues that really and directly affect entrepreneurs.  See, although startup founders can readily enjoy capital gains treatment on the value of their equity, some bizarre tax policies in this country often have the practical effect of forcing ordinary income treatment on the equity stakes of many private company employees.  The NVCA is fighting tooth and nail so that VCs (who are almost like entrepreneurs, after all) can get capital gains tax treatment, while saying not a single word about the policies that cause millions of startup employees to have their equity gains treated as ordinary income.

There are many ways that the NVCA could advocate tax policy for the benefit of entrepreneurs, but I’ll note the two most obvious ones, one a layup and the other a long ball in difficulty of change:

The layup is the Section 83(b) issue.  This is just an utterly bizarre policy that is harmless to entrepreneurs if you file all your paperwork correctly, but it is ruinous to entrepreneurs (and often their companies and lawyers) when there is a mistake in filing.  Briefly, founders and very early employees of startups usually receive stock (not options, but the stock itself) that is subject to vesting.  The tax code says that ordinary income tax is due as the stock vests, on the spread between the price paid for the stock and the value on the date of vesting.

That’s a real problem, because even as the stock vests, it has no liquid market – meaning that the stock can’t be sold easily.  So an entrepreneur who holds this stock in a successful company would get huge tax bills that he or she cannot pay.  Fortunately, the IRS allows the stockholder to make a “Section 83(b) election” – this is an election to pay the tax at the time of the initial stock purchase.  Since typically the price paid for the stock is the fair market value of the stock at the time of purchase, there is no spread and therefore no tax is due.

So that would be harmless, except that if you don’t file the election in the right way at the right time (30 days after purchase), you have to pay taxes the default way.  And that kind of mistake does happen, and it can cost millions – not just for the taxpayer, because ruinous tax issues for company founders and early employees can easily sink the company itself, and also typically results in malpractice suits against the company lawyers.

Why should the default position in the tax law be to pay a ruinous tax that no rational person would ever voluntarily elect to pay?  Why not just have a law that says if I don’t do a cartwheel on my lawn every 30 days, then I have to give my house to the IRS?  This is just utterly inane, so inane that it should be an easy win for the NVCA if they were to take it up as a lobbying cause.

The long ball would be for the NVCA to go after AMT/ISO reform.  This is a very complicated issue, but bear with me, because this problem does routinely affect startup company employees.  In a vast, vast oversimplication:  the problem is that the Alternative Minimum Tax requires Incentive Stock Option holders to pay a tax on exercise of their options, even though the company is private and there is no liquid market for their shares.

In a successful company, this can mean a tax vastly exceeding the assets of the employee, with no means of paying it.  A typical solution for many is to sell their shares at the mercy of the less liquid secondary markets (at severe discounts), in order to be able to pay the taxes.  And of course, a sale in that situation is typically taxed at ordinary income rates rather than capital gains rates, because of ISO tax rules.  So AMT and ISO rules conspire to mean that startup employees often are forced to sell their stock at discount values, and to add insult to injury the gain is taxed as ordinary income rather than capital gain.

So, NVCA:  you need to go after those two issues before any knowledgable person should regard you as an advocate for entrepreneurs and innovation.  Not only would you get the cosmic satisfaction of your actions actually conforming with your words, but you would also likely get grateful contributions from entrepreneurs and their lawyers.

Faith and reason, properly understood, are intertwined sources of truth. The encyclical Fides et Ratio states this more elegantly:

Faith and reason are like two wings on which the human spirit rises to the contemplation of truth

In this light, I contemplated Fred Wilson’s note about investing on faith. The implication for some may be that this is investing without reason. However, Wilson’s leap of faith is no less legitimate than “pure” reason. Unlike religion, truth for startups has an ultimate arbiter in this plane of existence: return on investment. There are legions of startups that had all the reasons in the world to succeed – great idea, huge market, killer team – and yet they failed nonetheless. I’d bet that experienced startup investors have succeeded as many times on what Wilson calls faith as they have by stacking up reasons.

Coincidentally, the next day, Steve Blank posted on the startup transition from faith to facts. It might seem hard to argue with his view that startups begin on faith and must quickly move to facts to succeed. Again, I wouldn’t draw the divide that sharply. I’d say faith is a requirement throughout the journey, and so are facts. From day one, you must believe in what you’re doing, have faith informed by reason. And also from day one, you must engage with the facts; endlessly and relentlessly collect, examine and act on available facts with all your reason supported by your faith.

I would say that ideally startup hiring managers should try to get folks who’ve been through at least two of the four private company stages, including at least one that the hiring company has not yet been through.

Well, I would say that, except I find that these “stages” are not particularly well defined by anyone.  Or at least not anyone I could find in 28 seconds of Googling.  So like any moron with a digital pen and printing press, I can just make up my own definitions.

Some of the typical “stage” terms are seed, early, expansion, and late - these are often used by investors, are vaguely defined, and don’t always track to a company’s internal status and expectations.  I’ll try to align the four stages of private company progress with some more-fun-if-equally-irrelevant quadrilateral perspectives, from psychology and Buddhism.

Stage I:  pre-product

psych: unconscious incompetence – the individual neither understands or knows how to do something, nor recognizes the deficit or has a desire to address it

Buddhist: the path to stream-entry; the fruition of stream-entry

This stage is everything before you have a product launched to anyone outside your “friendlies” (relatives, friends, close contacts) – from the idea on the napkin to your Hello World! launch to the general public.

What others call ’seed stage’ is often short of this – just the idea through a prototype, with ‘early stage’ then following from pre-launch to revenue traction.  But although that division may be natural for funding demarcation, from a product perspective you just don’t know what you have until it’s in the hands of the buying public, so I regard all of this period of not knowing as a single period of sustained ignorance.  It is all the pre-product path before the fruition of entering the great stream of commerce.

Stage II:  maximum iteration

psych: conscious incompetence – though the individual does not understand or know how to do something, he or she does recognize the deficit, without yet addressing it

Buddhist: the path to once-returning ; the fruition of once-returning

This is the period where the company has both the maximum flexibility and the most urgent need to rapidly iterate development.  Not just product development – everything about what the company makes, does and is.  The flexibility is there because the product has been launched, which not only lifts the inchoate burden of launch, but begins the collection of data (customer feedback, product metrics, use data etc) which can now be mined for insights about how to shape and reshape the product.  The need is there because if you don’t iterate, you will not grow and then you will not exist.

And again, it’s not just product iteration but an opportunity to examine and tune everything you do as a company:  recruiting and review systems, management team and tools, compensation, cultural principles, office design, everything.  The things you do to shape the company during this period will have an enduring effect on everyone who works there for years to come.  Too bad you don’t really know what you’re doing just yet.  But now is the time to get on the path to once-returning, to reincarnation and rebirth into the next stage.

Stage III:  revenue optimization

psych: conscious competence – the individual understands or knows how to do something; however, demonstrating the skill or knowledge requires a great deal of consciousness or concentration

Buddhist: the path to non-returning ; the fruition of non-returning

Unless you were oh-so-clever enough to launch without a revenue model, the company began to enjoy early revenues during the maximum iteration stage.  Iteration remains critical, but now your flexibility is naturally limited by the existence of paying customers, who often have a limited tolerance for change.  You have to optimize existing lines of revenue while making careful tradeoffs in launching new lines of revenue.  You may for the first time begin pursuing meaningful acquisitions or divestments that could change the face of the company.

This stage may be the most difficult among the four; your hard-earned knowledge seems to have the perverse effect of increasing the challenge.  When you were young and ignorant, it served you well to underestimate the difficulty in changing the world.  Now that some corner of the world has bent to your dream, you find that the dream is a shared hallucination of many rather than your own private trip – and your role isn’t to enjoy the ride but to supply the vehicle.

Nonetheless you are on a path of no return:  in returning there is only defeat and regression to a lower form of living; you can only move forward for true enlightenment.

Stage IV:  maturity and liquidity

psych: unconscious competence – the individual has had so much practice with a skill that it becomes “second nature” and can be performed easily (often without concentrating too deeply)

Buddhist: the path to enlightenment; the fruition of enlightenment.

The mature company does not have to be moribund, there is a vitality and pleasing grace to the well-oiled machine.  You know what you’re doing and you’re at the height of your powers, freed from the mixed blessings of youth.

And no matter your personal attitude towards money, getting the company to liquidity is the last barrier to enlightenment.  (Here I’m putting aside the case of those who want to build a big, sustainable private company without calling it a “lifestyle business” – the more typical startup dream involves shareholders and employees who want to be able to freely trade their stakes in the business on the open market.)

With your first big liquidity event, you find out if the other side of that barrier really is nirvana.  You find out whether the money has changed you, or whether it exposed who you really are.

That is the startup path as self-actualization, the startup path to enlightenment.  When you’re hiring for a startup, you need to pay careful attention to which of these stages your candidates have progressed through, and uncover their self-knowledge about their enjoyment in what has been learned and their eagerness to learn what hasn’t.

btw, if you are on that path or would like to be, and have skills in javascript, php and/or other web programming-fu: send me your résumé! (just a link to your LinkedIn or other relevant online bio would also be fine.)  use the intarwebs to find how to contact me.

A lot of people might reflexively answer ‘Google’ on the belief that it’s still the most interesting and profitable company in technology.  While this isn’t as bad as saying ‘IBM’ or ‘Microsoft’ it’s still an undue faith in the benedictory power of large companies.

Not that there’s anything wrong with folks from IBM or Microsoft, mind you – I’ve worked with many and hired some, and don’t regret any incidences from either.  However, as a statistical matter, you’re not likely to find the kind of employee that really thrives in a small startup if they’ve spent a ton of time working in longstanding behemoths.

Doesn’t mean that big companies can’t innovate – in fact these days some say that only big companies can innovate big.  Of course, it may be that the people saying that tend to reap consulting dollars from big companies for advising on innovation . . .

Anyway, Google is a slightly different case than IBM and MSFT, in that it hasn’t been around as long and is not quite so large in terms of revenue and employee base.  However, because of the neck-crimping trajectory of Google as a company, I think it might be hard to get startup-ready employees out of Google:  the good ones that are still there are engaged on the big premium projects, many of the not-so-good more recent vintage are as big-company-minded as anyone, and the truly great early employees who departed are retired or VCs – too rich to be enticed into a little startup unless they start it themselves, which they rarely do as it distracts from counting the money.  Even if you follow startup news, you don’t hear so much about Google guys leading startups, with the notable exception of Paul Buchheit at FriendFeed.

So, if not Google, what company should be the most desirable to see on a résumé, all other things being equal?  I think I’d pick the one company that spawned founders and early investors and employees at YouTube, LinkedIn, Facebook, Yelp, Slide, Zinga and Yammer:  PayPal.

See, the ideal company – at least in terms of educating talent for the next venture – doesn’t have a Googlerian or Microsoftesque trajectory.  From founding to acquisition by eBay for $1.5 billion, PayPal lasted about four years and grew to a profitable company with over 600 employees, having been through a lot of growth, innovation, regulatory challenges and corporate evolution.  People in key positions through the bulk of that time saw the whole arc of company development, but never got so fat and happy that they didn’t want to do another startup.  Yep, if you’re hiring for a startup, the name you’d most like to see on that résumé is PayPal, pre-acquisition by eBay, natch.

First, exactly how and why did this make it into the news? I’m not questioning whether it’s newsworthy (it is), I’m wondering about the exact path that this took from fact to front page. Was this program broadly announced at Google, and a random employee alerted the media? That would be one typical path. Was it an unannounced program, and someone in the HR department leaked it to the press? Or perhaps the HR folks proactively fed this to the press. If one of the latter two, what’s the motivation? Does it make Google look smart as a company? Does it comfort employees to know that Big Brother is watching and cares whether or not you leave? I don’t think any answer to any of these questions is necessarily a bad thing, I’m just wondering what the answers are.

Second – and more answerish this time than questioney – it’s really interesting to consider the reported inputs to the algorithm. According to the WSJ, “data from employee reviews and promotion and pay histories” comprise the formula. At first glance, this might seem logical: you would hope that reviews and compensation have some correlation to job performance and satisfaction.

Ah but then – you’ve been hoping that all your life, haven’t you? And haven’t you found that the content of employee reviews is often radically disconnected from actual performance, that the “wrong” person often gets promoted, that compensation has at best a tenuous connection to performance and satisfaction?

So the data set might not be as logical as it first seems; fortunately the magic of the sample size means that this isn’t a logic problem, but simply a correlation exercise. There is certainly some correlation between the content of that data and the incidences of employee departure, or Google wouldn’t be trying this.

But I’d bet that the correlation is much weaker than you’d think, and much weaker than Google would like. Any manager knows that reviews and compensation are blunt tools, and these are likely to be trailing indicators rather than the leading indicators of dissatisfaction that you want for real predictive power.

I worked at a company that somewhat famously had a “Love Machine” – a simple tool for employees to express appreciation for each other. Basically, as an employee, if a colleague did something that you appreciated, you could send them a point of Love, along with a one-line comment as reason for the gift. It was just a neat little way to say Thank You, and people really appreciated both giving and getting Love. And as very minor benefit, periodically the accrued Love points would be paid out to employees as a cash bonus.  (Distribute that on a Friday and watch people really spread the love around.)

When this was reported externally, some people misunderstood the corporate purpose of the Love Machine. Which is to say, some people thought it had no purpose at all, except as some gross hippy dippy vibe. Those people not only misunderstood the effect on morale, but also vastly underappreciated the value of the data from the Love Machine.

Think about it: as a manager, is it valuable to know which of your employees is appreciated, and which is not? The Love Machine is certainly not the sole source of information on this, but the data gives at least some general information on both specific and aggregate cases. You can see not only who is appreciated, but who gives appreciation. You can see which departments are praised and which toil without recognition. You can see who works across departmental boundaries and who only interacts upwards or downwards in their own reporting silos.

All this is phenomenally powerful data that gives factual indication of matters that you might otherwise pay significant amounts to guess about through expensive organizational consultants. I was convinced back then and I still am today that if HR departments and managers understood the power of this data, every company would have a Love Machine. Most would call it something else, but that part is just internal marketing.

Back to Google: as far as I know, they don’t have a Love Machine. But that doesn’t mean that they are feeding the best data they have into their Who’s Leaving? algorithm. Nearly every company has somewhat similar data in their email traffic, and certainly in a big data set, email traffic would work quite well. Now, I’m not saying that the email content should be analyzed – even though many companies actually do that, I find it unacceptably creepy. I just mean the fact of communication. Every manager knows that communication is a powerful indicator (and motivator) of job satisfaction.

Who’s talking to who? Who’s on how many email lists? What is the response rate and timing and length? Is communication cross-functional, up and down and across reporting levels, inside and outside the company?  All of that information is available in company email – I guess you could call it the email graph.

I would bet almost anything that this kind of data from email traffic provides a more powerful indicator of who’s leaving the company than the data from reviews and compensation. In fact, I’d bet that the email graph has better correlation to actual job performance than performance reviews!

Of course, the combination of those data sets could be even more powerful, and it’s entirely possible that Google is already doing this, though that wasn’t reported in the Journal piece.