Thoughts on Operating Principles + Values

Nov 6

The following is a framework for operating a company, with an emphasis on company culture and values. These are subject to change as I learn more from first-hand experiences and other organizations.

Culture

Values

Values are a reflection of the organization. They should be the behaviors and skills that are valued in fellow employees. These values get surfaced, first and foremost, by people who get rewarded, promoted, or let go. They then permeate customers, partners, investors, and eventually the general public. They are the guiding principles for every decision that gets made – hiring, promotions, firing, etc.

After extensive reading, research, and first-hand experience, my belief is that the following characteristics are extremely important to a successful organization:

Adaptability

“My many years of advising companies and making value-driven equity bets has made it crystal clear to me that the ascent of great companies is not linear but more a step function. There are critical moments when decisions are made that inexorably shape the company’s future trajectory. To get these crux moves right, you must flexibly adapt your strategy to emerging circumstances.” (7 Powers)
“There are no permanent solutions in a dynamic system.” (The Almanack of Naval Ravikant)

Innovative + Courageous

“Courage. The foundation of risk-taking is courage, and in ever-changing, disrupted businesses, risk-taking is essential, innovation is vital, and true innovation occurs only when people have courage.” (Ride of a Lifetime)
“Mimicking the herd invites regression to the mean (merely average performance).” (Charlie Munger: The Complete Investor)

Humility

Trust goes up when people see that we are self‐aware about our own shortcomings and areas for improvement.
“There’s a strong correlation between knowledge and humility.” Humility is at the core of concepts like the circle of competence and always searching for evidence that disproves what you or others may assert.” (Charlie Munger: The Complete Investor
“Ego clouds and disrupts everything: the planning process, the ability to take good advice, and the ability to accept constructive criticism. It can even stifle someone’s sense of self-preservation. Often, the most difficult ego to deal with is your own.” (Extreme Ownership)

Curiosity

“Truthseeking, the desire to know the truth regardless of whether the truth aligns with the beliefs we currently hold, is not naturally supported by the way we process information. We might think of ourselves as open-minded and capable of updating our beliefs based on new information, but the research conclusively shows otherwise. Instead of altering our beliefs to fit new information, we do the opposite, altering our interpretation of that information to fit our beliefs.” (Thinking In Bets)

Ownership

When you have the right people in place, you need to give them the space to execute. They’re the owners of their domain.
“Things designed by people without skin in the game tend to grow in complication (before their final collapse).” (Skin in the Game)

Empowering

Customers, partners, and employees should feel empowered, even elevated. People need to feel like they have the power to push the boundaries of what’s possible regardless of role, title, income, or experience. The only way to achieve this is through a deep understanding of their needs, wants, and goals.
“The most valuable businesses of the coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.” (Zero to One)

Mission

None of this happens unless we’re a mission driven organization. The mission is:

we should massively exceed in scale and scope what any company has tried to do in the space

Clear

the more defined, the easier it will be for everyone to focus on it.
A clear and compelling sense of mission is a key to CONSISTENT success. A great mission helps prevent distractions that dilute everyone's focus. Distractions lead to stasis, often becoming a major source of self‐defeating behavior.

Not about the money

milestones are important (ie. revenue, etc.) but they’re not the thing that ensures sustained success.

The mission should be refined, but ideally not alter the purpose of our company.

“A change in purpose changes a system profoundly, even if every element and interconnection remains the same.” (Thinking In Systems)

People

Great companies are a product of their people. Talent density is paramount. Only when a company truly has the best talent can it blossom, therefore building a system for attracting and retaining the very best is critical to the short, medium, and long-term success of a company.

Hiring

Companies over-index on an interview, cases, and not enough on actual work. For this reason, the company should invest heavily in references. What did the person actually do and how were they as a colleague?

Overall, leaders should be spending 20%+ of their time recruiting. We want to avoid leveraging external recruiters as much as humanly possible. They’re expensive and their incentives aren’t aligned with the company.

Leaning into building a world-class internal recruiting organization is much more scalable over a longer time horizon.

“In picking people for long-term relationships, values are most important, abilities come next, and skills are the least important. Yet most people make the mistake of choosing skills and abilities first and overlooking values. We value people most who have what I call the three C’s: character, common sense, and creativity.” (Principles)

Compensation

Really great pay limits the stress that someone experiences, fostering more creativity within the workplace and creativity is a staple of any great company.

At Netflix, they believe, if you’re not paying top-of-market, you’re likely decreasing the talent density by encouraging the highest quality people to find a job elsewhere. In general I agree with this but I also recognize that an early stage startup doesn’t have as much flexibility with cash and therefore needs to rely on equity.

This puts a ton of pressure on constructing a mission that people are excited about AND developing a world class hiring process to ensure only the highest performers are receiving equity in the company.

Ideally, compensation (cash + equity) is top of market or very close to it. This only works with a leaner, 10x team which means there is no space for underperformers. Keep in mind at a startup equity value > cash.

“Money’s not about money. Compensating people well demonstrates love and respect and ties them strongly to the goals of the company.” (Trillion Dollar Coach)

Performance

As Andy Grove stated in High Output Management, “A team will perform well only if peak performance is elicited from the individuals in it.” The reality is, B-players will be a drag on A-players. Those A-players will grow frustrated and eventually seek employment elsewhere.

Underperformers should be dealt with immediately. First through a very candid feedback session and if they continue to miss the mark, they should be relieved of their duties. This sets the tone for the organization. Prioritize building an environment that A-players want to work within.

“concentrating on the stars is a high-leverage activity: if they get better, the impact on group output is very great indeed.” (High Output Management)

KPIs + MBOs – In general, I’m not an advocate of longer term KPIs because things change very rapidly within an organization. If necessary, managers should use them as a tool to measure progress but I’m not sure they should exceed a quarterly timeline.

“If you need MBO to get people to do their job, you may have the wrong people, the wrong managers, or both.” (Amp It Up)

Severance

Companies take entirely too long to fire people. It’s not comfortable but it's an important muscle to build if you want to cultivate a high performing environment. If someone isn’t performing, they need to be removed as quickly as possible. Should that person align deeply with the company values, demonstrate high character, AND show signs of upside, coaching should be provided for a period of time. If they continue to falter, they should be removed and provided a generous severance.

Severance should give a former employee ample time to find new employment, ideally 4-8 weeks depending on their tenure and experience. These individuals are a reflection of the organization when they leave and should be treated with respect.

“If an individual on the team is not performing at the level required for the team to succeed, the leader must train and mentor that underperformer. But if the underperformer continually fails to meet standards, then a leader who exercises Extreme Ownership must be loyal to the team and the mission above any individual. If underperformers cannot improve, the leader must make the tough call to terminate them and hire others who can get the job done. It is all on the leader.” (Extreme Ownership)

Bonuses

Bonuses should be avoided in companies where adaptability is mission-critical. Bonuses are based largely on the premise that you can reliably predict the future, and that you can set an objective at any given moment that will continue to be important down the road. This limits our ability to adapt and innovate based on the feedback we’re receiving from our employees, customers, and the broader market.

Founder Level

Board of Directors

“A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.” (Zero to One)

Founder Equity Distribution

More equity equals more motivation for the founding team who should expect to be building a company for 7-10 years. Depending on the founding relationship, effort, personal investment, etc. I think founders should aim for as close to equal distribution of equity as possible.

In general, I agree with YC’s view on equity splits:

“equal equity splits among co-founders. [1] These are the people you are going to war with. You will spend more time with these people than you will with most family members. These are the people who will help you decide the most important questions in your company. Finally, these are the people you will celebrate with when you succeed.”

Business Resiliency

We need to build resilience into the product and company on day 1. Cash is always king and should be managed appropriately. We need to really understand the dials – CAC, payback, etc. – and how much we can adjust them up or down to get to the desired outcome. With smaller, high performing teams, great things are possible.

“Systems need to be managed not only for productivity or stability, they also need to be managed for resilience—the ability to recover from perturbation, the ability to restore or repair themselves.” (Thinking In Systems)

Decision Making

The best ideas win regardless of who they come from. We should lean into solving the biggest problems first. Bring it front and center and attack. Indecisiveness kills companies. You can still succeed if you make the wrong decision as long as you know you’re wrong quickly. Create shorter feedback loops wherever possible.

Some view from others that do a better job of summarizing my thoughts:

“most companies don’t die because they are wrong; most die because they don’t commit themselves.” (Only the Paranoid Survive)
“What makes a decision great is not that it has a great outcome. A great decision is the result of a good process, and that process must include an attempt to accurately represent our own state of knowledge. That state of knowledge, in turn, is some variation of “I’m not sure.” (Thinking In Bets)
“slow down and critically examine situations and problems before settling on an explanation, never mind a solution.” (Amp It Up)
“a decision about an uncertain future. The implications of treating decisions as bets made it possible for me to find learning opportunities in uncertain environments. Treating decisions as bets, I discovered, helped me avoid common decision traps, learn from results in a more rational way, and keep emotions out of the process as much as possible.” (Thinking In Bets)
“Every really good, really experienced CEO I know shares one important characteristic: They tend to opt for the hard answer to organizational issues.” (Hard Thing About Hard Things)

Employee Equity

The goal of equity is to:

Help you hire top talent
Hang on to your top performers
Develop an ownership mentality
Keep money in the bank

We should be re-upping the very best performers whenever we can. This is sustainable with a leaner team so hiring the very best and firing underperformers quickly is important.

Transparency

Companies with high levels of trust create transparency wherever they can. You cannot be selective about transparency at a ‘transparent’ company. It starts at the top and it threads everything from retrospectives, to candid (but respectful) debates, and reporting. Progress starts with the truth and the most efficient way to arrive at the truth is by providing everyone with all of the information they need to execute. Companies should make any and all information about the business available – P&L, funding, employee dismissals, retrospectives, etc.

“You can only make progress when you’re starting with the truth.” (The Almanack of Naval Ravikant)

“Trust goes up when people see that we are self‐aware about our own shortcomings and areas for improvement.” (Amp It Up)

Philanthropy + Politics

In a deeply divided political world, it’s really important to keep politics out of the workplace. If it’s not aligned with the company mission, it’s not relevant within the context and space of work. I do believe that we can be a safe space for people who want to focus on their work without worrying about everything going on in the world, if only for a portion of their day. Brian Armstrong from Coinbase had a great memo on this topic. If a candidate isn’t onboard with this, they’re not a fit for the company.