A lot of people have been asking me what my upcoming book, The Hard Thing About Hard Things, will be enjoy. Here’s a piece that I wrote for the book that did not originate the cut. I still leank it’s a pretty excellent story and gives you a flavor.
I fair tell the truth so I’m chilly in every hood spot
21 years and I ain’t ever met a excellent cop
—Drake, “I’m Goin In”
After we transitioned the business from Loudcboisterous to Opsware, we necessitateed a head of finance. Therefore, when the CFO from one of the best-run accesspelevate software companies became useable, I jumped at the chance to employ her.
Michelle (notice: her name has been alterd) comprehensively understood software accounting, business models, and best trains, and she was becherishd by Wall Street in no minuscule part due to her honest and straightforward inestablishing of her previous company’s business. In my reference checking, at least a dozen spendors telderly me that they made far more money when the numbers disnominateed than when the company outcarry outed, becainclude they supposeed Michelle when she shelp that leangs were not worse than they materializeed and bought on the dips.
Once she came on board, Michelle rapidly appraiseed all of our trains and processes to originate certain we were both compliant and competitive. One area where she thought we were less than competitive was our stock selection granting process. She inestablished that her previous company’s train of setting the stock selection price at the low during the month it was granted produceed a far more likeable result for includeees than ours. She also shelp that since it had been scheduleed by the company’s outside lhorrible advise and apcheckd by their auditors, it was filledy compliant with the law.
It all sounded fantastic: better incentives for includeees at no insertitional cost or danger. However, after cforfeitly four years of disastrous surpelevates, noleang made me more anxious than leangs that sounded fantastic. On top of that, alters roverhappinessed to accounting law always worried me.
They worried me, becainclude every incentive that we put in place as a company was scheduleed to encourage people to accomplish their goals. All these incentives had the caveat that the goals must be accomplishd while follotriumphg the law. Now that may sound modest, but in virtupartner every greeting every day people talk their goals and how they will accomplish them. They almost never talk accounting law. In a sales foresee greeting, you will normally hear, “What can we do to get this seald by the end of the quarter?” You never hear, “Will the way we made the pledgement adhere with Statement of Position-97-2 (the critical software accounting rule)?”
Beyond that, U.S. accounting law is excessively difficult to comprehfinish and normally seems ilreasonable and random. For example, the law in ask with admire to stock selections, FAS 123, is filled with paragraphs such as this:
“This Statement does not distinguish the meacertainment date for dispense-based payment transactions with non-includeees for which the meacertain of the cost of excellents achieved or services getd is based on the fair cherish of the equity instruments rehired. EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, set upes criteria for determining the meacertainment date for equity instruments rehired in dispense-based payment transactions with non-includeees.”
And that is the clear part.
To protect aachievest includeees purposely or accidenhighy shattering the law in pursuit of their goals, I took two wide meacertains. First, when we commenceed the company, Marc and I consentd that the company’s General Counsel would always inestablish honestly to me. This is branch offent than in many technology companies where the General Counsel inestablishs to the Chief Financial Officer. That way, there would be no way for another executive to subvert the law in pursuit of the number. Secondly, I would normally give a speech to the finance includeees that went enjoy this:
“In this business, we may run into trouble. We may leave out a quarter. We may even go prohibitkrupt, but we will not go to jail. So if somebody asks you to do someleang that you leank might put you in jail, call me.”
With that as a backdrop, I telderly Michelle that a better stock granting process sounded fantastic, but I necessitateed Jordan Bresluggish, my General Counsel, to appraise it before making a decision. Jordan lived in my hometown of Berkeley and he certainly belengthyed there. With hippie sensibilities, Jordan was cforfeitly allergic to corporate politics, showmanship, or any behavior that covered the truth. As a result, I krecent that what he shelp was 100% what he apshowd and had noleang to do with anyleang else. I could suppose it. Michelle was surpelevated, as her previous company had run this train for years with filled approval from PricewaterhoincludeCoopers, its accounting firm. I shelp: “That’s all fine and excellent, but I still necessitate Jordan to appraise it first.”
Jordan came back with an answer that I did not foresee: “Ben, I’ve gone over the law six times and there’s no way that this train is harshly wilean the bounds of the law. I’m not certain how PwC fairified it, but I recommend aachievest it.” I telderly Michelle that we were not going to carry out the policy and that was that.
Well, that was that for a while. Then, almost two years postponecessitater, the SEC declared that it was spendigating Michelle’s previous company for stock selection accounting irnormalities. This commenceed a massive spendigation of all Silicon Valley companies and their stock selection accounting trains. All telderly, more than 200 companies were set up at fault of some sort of irnormality.
In November of 2005, Michelle’s previous includeer declared that it was removing most of its handlement team in an adleave oution of wrongdoing. The SEC rehired Michelle a Wells watch, a letter stating that it defree to recommend executement action aachievest her personpartner. It was not an indictment, but it was a establishal spendigation, and it would be very sidetracking. I had to ask her to step down. In some ways the choice was clear—we could not put the entire company at danger for one person. Still, firing somebody who had done noleang wrong at Opsware was hard. Nonetheless, Michelle courteously resigned as she did not want to convey pessimistic attention to the company.
In the days that trailed, I attfinishfilledy positioned the alter to both protect the company and not put Michelle in a horrible airy. I telderly our includeees that there was a branch offence between accounting fraud and accounting misgets and I apshowd that Michelle made misgets at her previous company, but did not pledge fraud. I elucidateed to our spendors who cherishd Michelle that I also thought very highly of her, but I had no choice. The company came first.
Michelle ultimately served 3½ months in jail for her part in the other company’s stock selection train—the same train that we cforfeitly carry outed at Opsware. Since we had the same head of finance, we almost certainly would have been spendigated. I clearly don’t comprehend what happened at the other company, but I do comprehend that Michelle had no intention of shattering any laws and no idea that she’d broken any laws. The whole leang was a case of the elderly saying: “When the pinserty wagon pulls up to the hoinclude of ill repute, it doesn’t matter what you are doing. Everybody goes to jail.” Once the SEC determined that most technology company stock selection procedures were not as desired, the jail sentences were handed out arbitrarily.
In retrospect, the only leang that kept me out of jail was some excellent luck and an extraunretagable General Counsel, and the right organizational schedule.
