CompStudy report in Technology 21 Dec. 2009

2009

T E C H N O L O G Y

Compensation & Entrepreneurship Report

Special Access Code

A SERVICE FROMJ. ROBERT SCOTT

Visit www.compstudy.com and register to receive full access

Data in this report produced in collaboration with Professor Noam Wasserman of Harvard Business School

J. Robert Scott and Ernst & Young are pleased to bring you the 2009

CompStudy Report in Technology. We are excited to have the most

robust data to date for our tenth anniversary edition, and within this

brochure you will find a summary of the results the survey generated.

Also included are interviews with Aaron Ain, CEO of Kronos

Incorporated, and Todd Dagres, General Partner at Spark Capital.

Participants in this year’s survey are

provided free access to the detailed

position-by-position analysis, which for the

first time is available as part of our new,

interactive online platform. To gain

temporary access, use the special access

code on the front of this book to register at

www.compstudy.com. Once you complete

the survey, you will be granted permanent

access to the complete results.

Demographics 4

Summary 7

Interviews 14

Sponsors 26

Welcome to the 2009 edition of our annual Compensation and Entrepreneurship Report

in Technology. This report—our tenth annual and largest to date—includes summaries

and analysis of compensation data collected from executives at 489 private companies

from across the country in software, hardware, content, cleantech and other industries.

The survey data were collected between April and July of 2009.

This survey responds to our clients’ continuing need for better access to reliable,

comparable compensation data to assist them in the critical decisions involved in

attracting, motivating and retaining key executives at private companies. We are able to

present correlations between executive compensation and a number of variables,

including: financing stage, company size both in terms of product stage and headcount,

founder/non-founder status, industry segment and geography. We also provide a

number of analytics on Board of Directors compensation and make-up, company equity

plans, and a look at how organizations develop as they raise additional financing. For

the most in-depth data available, please visit www.compstudy.com.

Our survey has evolved over the years based on input received directly from the industry,

and our hope is to continually improve the data so that we can best serve the needs of

our clients in the Technology industry. We encourage readers of this publication to

submit comments and suggestions to help us most efficiently and accurately present the

compensation dynamics of the market. Suggestions and comments should be directed

to [email protected].

Lastly, we would like to express our gratitude to Professor NoamWasserman of the

Harvard Business School who, in addition to utilizing the data for his own research

(more at http://founderresearch.blogspot.com), continues to contribute greatly to

our publication.

Letter to the Industry TABLE OF CONTENTS

• 34% of the executive population this year were founders oftheir company, up slightly from 31% of the population in our2008 edition.

• CEOs and CTOs were the most frequent founders of theircompanies, at 62% and 59% respectively. Heads of HR andGeneral Counsels were the least likely to be founders, at 2%and 11% respectively.

www.compstudy.com | ey.com | j-robert-scott.com4

Demographics2009 Compensation & Entrepreneurship Report in Technology

Founder Status

Demographics of Respondent Population

• This survey of executive compensation in privately held technology companies was conducted

between April and July of 2009. The questionnaire resulted in 489 companies participating with

data from over 2,000 executives in a wide cross section of industry sectors, geographies and

stages of development. This represents a 54% increase in participation over 2008’s survey.

• The CompStudy website provides aggregated results of the data as well as a deeper

examination of the population by a number of perspectives, including: financing stage, founder

status, geography, headcount and company revenue.

CEO COO Head of Head of Head of Head of Sales Head of Head of Head of Human Head of General CounselFinance/CFO Technology/CTO Engineering Marketing Business Resources Professional

Development/CBO Services

Founder Non-Founder

% respondents in this range

61.8

38.2

49.650.4

13.3

86.7

15.8

84.2

12.5

87.5

10.5

89.5

29.7

70.3

2

98

11

89

59.4

40.6

21.7

78.3

• Companies with 20 or fewer FTEs make up approximatelyone-half of the population. This year’s survey saw a decreasein the number of mid-size companies in the 41-75 FTE range— 15.2% of the population, compared to 26.6% in the prioryear.

• California and New England dominate the population ofcompanies, closely mirroring venture capital funding trendsand similar to our previous editions.

• Software companies again were the most common segmentcomprising nearly half of the respondents. ComputerHardware, Semiconductor, Electronics companies were nextlargest with 13.7% of the responses. CleanTech companiescomprised 10.1% of the responding population, a significantincrease compared to the 6% figure in the prior year.

www.compstudy.com | ey.com | j-robert-scott.com 5


Software

Communications

Hardware/Semi

IT Services/Consulting

Content/Information

CleanTech

Other

49.1

6.2

13.8

12.8

10.1


3.7

4.3

California

New England

Mid-Atlantic

Midwest

West

South

Geography

Business Segment Headcount by Number of Full-Time Employees



33.3

23.7

13.5

6

9.6

13.9

California New England Mid-Atlantic Midwest West South

1-20 21-40 41-75 76+

19.4

50.8

15.514.4



Company Age (Years) Financing Rounds Information

• Companies are divided between those that have not receivedinstitutional financing, and those that have. Among thosecompanies that have received institutional financing, webreak them out into five groups—one, two, three, four, andfive or more rounds. Compared to prior years, there weremore companies in each group; however the most dramaticincrease was among respondent companies at the earlystages of development.

Financing Rounds

Company Age and Financing Information

• Two-thirds of the companies in this year’s study were six years old or younger, compared to justhalf the companies in 2008.

• In 2009, mid-stage companies, those with 2-4 rounds of financing, raised capital faster thandid companies in the prior year’s study. Gross proceeds for each round declined by an averageof 4%, with the exception of fourth round gross proceeds, which increased by 10%.

• There were more companies at every stage of revenue in thisyear’s survey; however respondents leaned slightly moretowards early stage revenue companies than in previousyears, with 72% generating less than $5 million, comparedto 65% in 2008.

Revenue

0-1 2-6 7-10 10+

48.9

18.0

24.0

9.1

Round 1 Round 2 Round 3 Round 4 Round 5+

4.3

Avg Time from Foundingto Round (Years)

7.3

2.6

9.1

4.1

9.1

7.0

10.2

5.1

1.3

Money Raised PerRound ($Million)

11.8

24.9

21.6

17.8

12.2 11.6

0 1 2 3 4 5 or more

30.7

41.3

12.7

7.4 8

Pre-Revenue Up to $5M $5-10M $10-20M $20M+

% respondents in this range% respondents in this range



Summary2009 Compensation & Entrepreneurship Report in Technology

Total Cash Compensation

Cash Compensation – 2008 and 2009

This data compares 2009 compensation data with compensation data for 2008 non-foundingexecutives. 2008 figures are represented with both actual bonus received and totalunachieved target bonus for the year. 2009 bonus figures indicate at-plan target amounts.

• Average base salary across all positions was up 0.8% in 2009,compared to a 4.7% increase in 2008. This represents thelowest year-to-year increase in the history of the CompStudy.

• Nearly all executives’ base salary was flat or slightly upcompared to the prior year. Heads of Business Developmentand Heads of Marketing saw a slight decrease in base salary,whereas every other position was flat or slightly up.

• Within prior year bonus figures, we have distinguishedbetween actual received and target amounts. Breaking thebonus apart in this way shows that on average, executivesearned approximately 58% of their target cash bonuscompensation in 2008, compared to 67% in 2007.

• Overall bonus targets as a percentage of base salary did notchange materially from 2008 to 2009.



2008 BaseSalary

2008 BonusReceived

2008 UnachievedBonus

2009 BaseSalary

2009 TargetBonus

Figures in 1,000s of USD

61

230

24

151

28

153

14115

26

162

22

160

63

162

22

158

23

161

24

161

35

181

231

160154

117

159159165158162164

186

34 93

23 57

43 102

18 40 17 43 1842

3758

7 24

23 45 24 47

10 33



Bonus as a Percentage of Base Salary

Executives Eligible for Bonus



2008 Bonus Eligibility 2009 Bonus Eligibility

% eligible for a bonus

71.475.7

69.8

77.880.5

85.7

76.3

82.1 80.0

94.2

70.6

80

70.5

83.3

75.6

87

69.2

74.9

65.3

71.6

61.7

76.2

2008 Bonus Received 2009 Target Bonus

% of base salary

2008 Unachieved Bonus



14.2

25.4

38.3

12.2

18.8

29.9

25.8

38.6

60.9

11.4

14

24.4

11.1

18.4

27.710.8

14

24.3

22.9

15.8

36.6

6.3

12.2

20.7

13.7

14.5

25.914.8

13.8

26.9

6.4

13.6

19.9



Equity at Time of Hire

Equity Holdings

• Median equity holdings for CFOs, CTOs, Heads ofEngineering, Sales, Marketing, and Business Developmentare all approximately 1%, which is unchanged from 2008.

• CEOs’ median equity holdings increased slightly this year to5.9% from 5.1% in 2008.

• At the average, the non-founding CEO receives a 5.9% grantto join the company, as expected, the highest of thepositions surveyed.

• Incentive Stock Options continue to be the most commonform of equity granted in the companies surveyed,

accounting for 45% of the aggregate equity granted. 56% ofrespondent companies rely on stock options as the soleequity vehicle. This figure is approximately the same as theresult from our 2008 report, where 58% of companies usedonly options.



2009 Median 2009 Mean

% equity owned, fully diluted

5.96.1

1.5

2.9

1

1.8

1

1.9

0.5

1.6

0.3

0.90.9

2.1

0.1

1.3

0.8 0.9 1

2

11.5





5.1

5.9

2

3.3

1

1.7

11.2

0.50.7

0.4

0.90.9 1

0.1 0.4

1 1 1

1.61.1

1.4

Severance



Organizational Structure by Financing Round

Severance Packages

• 58% of non-founder CEOs have a severance package, down slightly from 64% in our previous survey. Betweenapproximately one-fifth and one-quarter of the remaining management team has a severance package.




Months of severance

6

6.8

6

6.6

3

4.1

3

3.9

3

3.6

3

4

3

4.3

3 2/83

4.5

3

4.1

3

4

Head of Sales Head ofMarketing

10%

46%

56%

1 orfewer

2-3 4 ormore

1 orfewer

2-3 4 ormore

1 orfewer

2-3 4 ormore

1 orfewer

2-3 4 ormore

1 orfewer

2-3 4 ormore

1 orfewer

2-3 4 ormore

1 orfewer

2-3 4 ormore

CEO

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

COO Head ofFinance/CFO

Head ofTechnology/CTO

Head ofEngineering

Founder Non-Founder

78%

53%

35%

14%

34%

45%

14% 11%22%

15%16%

8%

17%

52%

69%

6% 4% 3%7%

15%

22%32%

29%

38%

24%20%

48%

62%

2%7% 5%

19%

42% 48%

8%13%

7%9% 8%



Severance Eligibility

• 96% of companies surveyed from the earliest stage offinancing reported having a CEO, with 79% of thoseCEOs being founders of their companies. This is aslight increase from last year’s edition where 92% ofcompanies in the earliest stage of financing were ledby a CEO and two-thirds were founders.

• For just 33% of those companies in the latest financingstages, the founding CEO remains in control.

• The CFO is the most frequent addition as a companymoves from one or fewer rounds raised to two to threerounds. Just 30% of companies at the earliest stagehave a CFO, jumping to 66% at companies with 2-3rounds raised.

• The median CEO and COO severance package is 6 months. The rest of the non-founding positions surveyed have amedian severance package of 3 months.



2009 Severance Eligibility

% eligible for severance

% of companies reporting this position

58.7

30.9

24.8 24.3

19.6

17.620

10.2

24.6

17.9 19.1

Head ofBusiness

Development/CBO

Head of HumanResources

Head ofProfessionalServices

General Counsel

1 orfewer

2-3 4 ormore

1 orfewer

2-3 4 ormore

1 orfewer

2-3 4 ormore

1 orfewer

2-3 4 ormore

9%

21%

30%

8%5%1% 2%

6%3%

13%

2%8% 8%11%

16%17%

2% 1% 4% 4%



Equity Vehicles Used

Only Incentive Stock Options

Only Non-Qualified Stock Options

Only Restricted Stock

Only Common Stock

Both Options

Both Stock

None/Other

Stock and Options7.2

8.1

12.1

45.210.3

3.6

11.9

1.6

Only Incentive Stock Options

Only Non-Qualified Stock Options

Only Restricted Stock

Only Common Stock

Both Options

Both Stock

None/Other

Stock and Options8

7

13

477

3

14

1

20092008

Founder President/COO – Equity by Financing Round Founder CTO – Equity by Financing Round

Founder CEO – Equity by Financing RoundEquity by Financing Round

• In companies having raised one or fewer roundsthe average founding CEO holds 44% of thecompany’s fully diluted equity, which is up fromapproximately 33% in 2008, likely due to theincreased participation by pre-institutionalfinancing companies. Founding CEOs of companieswith two or more rounds of financing held anaverage of 17.2%, down slightly from 18% last year.

• Founding CTOs see a dramatic dilution of equity astheir companies receive additional financing. Theiraverage equity holdings drop from 20.7% forcompanies with one or fewer rounds of funding to7.9% for those with two or more rounds.

≤1

4+

2-3

13 21.5 32.8

27.5

6.8 10.5 19.6

13.6

3.7 4 7.1

5.7

≤1

4+

2-3

20 38 70

43.9

8.9 13 23.2

18.6

6 10.5 16

13.8

≤1

4+

2-3

10 18 30

20.7

2.9 6 11

8.9

2 3.9 8.4

5.3



Founder Equity

Founder Cash Compensation

Founder Equity Holdings

• Not surprisingly, founders hold considerably more equitythan non-founders at the same position, on the average,with founder CEOs holding an average of 13.2% more equitythan non-founder CEOs.

Founder Total Cash

• Average base salaries increased by just under 0.5% from2008 to 2009, a substantially smaller increase than yearspast. However, CFOs and Heads of Engineering saw 7% and5% increases in their base salaries, respectively.





17.8

28

11

15.7

6.5

10.6

6.2

10.9

5

8.2

6.3 6.3

4.5

7.4

N/A N/A

4

10.59

12.8

5

8.8



2008 BaseSalary

2008 BonusReceived

2008 UnachievedBonus

2009 BaseSalary

2009 TargetBonus

Figures in 1,000s of USD

43

172

250

40

155

90

27

158

39

149

40

15511149

24

14827

126

52

169172

225

162

90

157150153156152135

164

4574

4387

3561

1748 8

55

100

2847

25 25

31 53 22 4117

29

Aron J. AinChief Executive Officer, Kronos

Since he joined Kronos in 1979, Aron Ain has played a role innearly every functional department at the organization, helpingto build what is today a $715 million enterprise software power-house. Ain was the company’s first service person in 1979 andfirst sales person in 1980. He served as vice president of world-wide sales and service in the 1990s, and became chiefoperating officer in 2002. In October 2005, Ain was named chiefexecutive officer and a member of the Kronos Board ofDirectors.

Ain’s interactive and engaging leadership style is credited withcreating an energized corporate culture at Kronos. He believesthat employee retention inevitably leads to loyal and satisfiedcustomers. According to Ain, “Employees who feel valued staylonger and develop a deeper understanding of and strongerrelationship with our customers. It is their experience andknowledge that allows Kronos to deliver the best products andcustomer service.” Ain’s focus on customer service neverwaivers and is the reason that a customer-centric orientation isa core value intricately woven into the fabric of the company.

In 2007, Ain played the leading role in negotiating the sale ofKronos to private equity firm Hellman & Friedman for $1.8 bil-lion. A leading authority on the subject of managing a globalworkforce, Ain has been a driving force in expanding Kronosfootprint to meet the workforce management needs of its multi-national customers. Ain has travelled extensively to meet withcustomers, prospects, and industry influencers in countriessuch as Australia, Belgium, China, France, India, and the UK.

In addition to a bachelor’s degree in economics and governmentfrom Hamilton College, Ain has participated in a series of execu-tive education programs, including the AEA/Stanford ExecutiveInstitute at Stanford University.

Aaron LapatManaging Director, J. Robert Scott

Aaron has been with J. Robert Scott since 1993 and built thefirm’s high tech practice. He leads senior level search assign-ments across a range of industry segments, including Software,Communications, Solid State Electronics, Specialty Materialsand CleanTech. His practice emphasizes recruiting CEOs andfunctional leaders for private equity and venture-backed compa-nies.

Additionally, Aaron oversees the production of the annualCompensation and Entrepreneurship Report in InformationTechnology at www.compstudy.com.

Prior to joining J. Robert Scott, Aaron spent four years with aretainer-based executive search firm that serviced the hightechnology industry.

Aaron holds a B.A. in Anthropology as well as an M.B.A. fromBoston University. He serves on the Board of Advisors of Stax,Inc., a privately-held management consulting and marketresearch firm. Aaron and his wife Lauren have two children,Sophie and Sammy. In his spare time, Aaron plays tennis, runsand listens to music. On the off days, he can be found stokingthe embers of his VW-sized Texas BBQ, mixing up a homemadehot sauce, or trying to create the perfect play-list from his ever-expanding record (mp3) collection.


Interviews2009 Compensation & Entrepreneurship Report in Technology

INTERVIEWWITH ARON AIN

Aaron Lapat: Can you give an overview of your professional lifebefore Kronos?

Aron Ain: That’s easy. I basically had no professional life beforeKronos. I’m one of these strange guys who has had one jobsince I graduated from college. At 21 years old I joined Kronosright out of college and I haven’t worked anywhere else.

AL: How did that happen?

AA: One of my older brothers, Mark, and his two partners start-ed a company. He convinced me that this was a place where Ishould work for a little bit to help him get the company started,and then I could move on to explore other interests for myself. Icame here in 1979 while we were just getting things going. Ienjoyed working here and one thing led to another, and I’m stillhere 30 years later.

AL: Where did the idea for the company come from?

AA:Markwent to MIT and then got into business. He wasn’t apracticing engineer, but he used his skills in that area to help com-panies decide, throughmarket research, what products might beeffective to bring to market. Through that process he decided tostart his own company. He tells a story that he felt he was good athelping other people design products that were successful, so hewanted to do one for himself. So, he and his two partners, whowere also both engineers, decided to evaluate a group of differentideas. Mark actually had a list of criteria he had formed throughhis time as a consultant for what made a successful company orproduct. He focused on industries where there was a sleepinggiant or giants, where you could sell something acrossmultipleverticals, that could be differentiated and use technology to auto-mate something that was backwards or manual. Those weren’t theonly criteria, but they were some of the more important ones. Withthis framework, he found that the only part of payroll processingthat wasn’t automated was the time clock, and he concluded thatit was something that met his criteria. This led to deciding toinvent the first computerized time clock.

AL: Were all time clocks punch card based at the time?

AA: They were mechanical clocks. Even though payroll process-ing was automated through either in-house systems or servicebureaus, the actual front end of that payroll process, the collect-ing of the hours worked, was manual. It was time cards in a rackand time keepers would collect them and manually add up thehours. They would then calculate against all the various work

rules and prepare the hours for entry into a payroll system,which then would do the gross to net, calculate the taxes andvarious other deductions and come up with net pay.

AL: What were the main challenges in the early days of thecompany?

AA: The fundamental issues in the beginning were developing aproduct that really worked. It is one thing to have an idea, butthen you have to make the product work effectively. I rememberone of the early units we made when we were located inBrighton, Massachusetts. Our building was in a three-storywalk-up. We had manufacturing, if you could even call it that, onthe third floor, no elevator, and on the second floor we hadshipping. We would test the units on the third floor when wewould assemble them. If they worked, we would literally carrythem down to the second floor and test them one more timebefore we put them in a box. I remember doing this and oneunit would not work again after being brought downstairs. Oneof the engineers told me that I carried it the wrong way downthe steps. I asked him what we were going to do when weshipped it! So in the early days we had basic challenges, likemaking sure that when you carried the system down a flight ofstairs it would still work.

AL: Just small issues like that?

AA: Little things like that. So, we had technical issues to con-tend with, but we also had application related issues. Theproduct had to meet the needs of what our customers wanted.Our value proposition was the ability to fully automate the pay-roll process. If we did not automate it, and someone had to goback and recalculate what we were supposed to be calculatingthrough the programmatic aspects of the device, then we werenot really benefitting them. We got through that pretty quickly.We had smart engineers and we had good discussions withpotential customers. We understood what the business chal-lenges were from a programmatic aspect. The single hardestthing after that was bringing the product to market and buildinga distribution network. The mechanical time clock back thenwas a $300 or $400 unit and our product was $5,000 or $6,000dollars. Some people would tell us we had a $6,000 solution toa $2,000 problem. So we had to learn how to explain the valueproposition and what the advantages were. We had to build dis-tribution, as well as brand awareness and demand for what wehad. Those were the issues I worked really hard on for the fiveyears after we got the product to work. I was out in the marketgetting people to accept our product and distribute our product,whether those were direct salespeople or resellers.



AL: How was the business funded through the early years?

AA:We raised about $9 million dollars of venture funding, soreally very little capital compared to what is typical today.

AL: How did your role evolve over time?

AA: In the beginning, I did all the sales, marketing and service.In 1981, I moved to Chicago to become Kronos’ first RegionalManager. We didn’t have any regional managers, but we knewwe had to get out into the field. Specifically what happened withme was I took a look at my paycheck when I got my first raise,and while it was a very fair raise, it made me think. I thoughtabout what I had to do to make more money and decided that Ineeded to go out and be actively in front of customers sellingand serving and building distribution teams. So, I moved toChicago when I was 23 by myself and opened an operationthere. I did that for three years. I built a distribution organiza-tion, both direct and indirect in 12 states. I helped us getdozens and dozens of customers from none. In 1984, I movedback to Massachusetts and took over all of sales and distribu-tion.

AL: How big was the company at that point?

AA: In 1984 we probably were $15 million of revenue if I had toguess.

AL: And the IPO was what year?

AA: June of ’92, when we were about $60 million in revenue.

AL: By the time of the IPO, what was your role?

AA: At that point I was Vice President of Worldwide FieldOperations and Marketing. That included services, as well assales and marketing. I had a peer who ran engineering and onewho was the CFO. I became the Chief Operating Officer of thecompany in the 2001-2002 timeframe, which meant I took overall aspects of the business. I became the Chief Executive Officerin 2005.

AL: What triggered your transition into the CEO role?

AA:My brother Mark decided after almost 30 years as CEO thatit was time for him to hand over the reigns to someone else totake the company to the next level. He was being very effectivein his role; however, he wanted to do other things in his life.

AL: It is highly unusual for an executive team to remain intactfor all those years, an executive team or an executive. Yourbrother remaining CEO for 30 years is uncommon, as is your

tenure. Typically companies go through evolutionary cycles andleadership changes in response to those growth cycles. Whatdo you attribute to your ability to transition as the companyhas evolved?

AA: That’s a really good question. I think it starts with a commit-ment to learn every day from your environment and keepingyour ego in check. For example, I am a big believer that we donot have a corner on the market of all the best ideas. It is con-ceivable to me that people out there who we may compete with,who we work with, or who we partner with can teach us ways todo what we do more effectively. If we allow our environment toteach us how to be better, then we will become a better compa-ny, and that is what having your ego in check really means. Ihave always believed deeply in listening and learning fromthose around me and then reacting accordingly. That is onething that has helped us evolve and continue to stay success-ful—we have changed as we’ve needed to change. We have notsaid the way we used to do it is the way we should do it goingforward. Also, we have gone through these waves, these evolu-tions as a business, and have been able to embrace changes intechnology. The result has been having systems and tools andproducts that are very modern and meaningful and make a dif-ference for our customers. We have always had an attitude thatsays if it is not broken, break it. We are always breaking thingsthat appear to be working. We don’t break them for the sake ofbreaking them; we break them because we think by doing so wemay find a better way to do it. We take chances, but I am not biginto keeping score. What I mean by that specifically is if wedecide to do something and it doesn’t work, then we stop doingit and we move on to the next thing. We don’t say, “Oh, Arondidn’t do that right so I’m not giving him another chance, andI’m going to put him in the penalty box.” If we all agreed it wasa good decision, and we tried it and it didn’t work, we stopspending money and resources on it and we move on to some-thing that we think will work. That philosophy has given us theability to adapt.

AL: Kronos has been highly acquisitive over its history. How doyou make those integrations work? I imagine, if not done right,they can be a huge drain on the culture and resources.

AA:We have developed a really good formula. It starts with hav-ing a strong corporate development team that evaluatesopportunities in the area of technology, distribution, marketshare, products, or geographies. Then you try to find targetcompanies that may have an interest in merging with Kronos.Once you evaluate those, if you are fortunate enough to be ableto strike a fair arrangement for both Kronos and the company



that you are acquiring, then you have to integrate it in. We haveteams of people and processes that allowed us to go in and veryquickly decide who we were going to keep and who we werenot. We map out how we are going to integrate them into thecompany and who will manage them. We also make sure fromday one that we treat the people who are going to join the com-pany very well, which means giving them the tools they needand the space they need to do their jobs.

AL: What does a company need to do to become an attractiveacquisition target for Kronos?

AA: First of all, they need to have exceptional products. Theyhave to have good people, and they have to have happy cus-tomers. Some combination of those three things would make anorganization attractive to us. I don’t think there’s any magic inthat. They don’t have to have all three of those, but the valuegets increased by those combinations. Sophisticated buyerslike Kronos are going to evaluate all of those components verycarefully, and we will base our value on how we measure andrate those areas.

AL: So to maximize value you need all three.

AA: I may not want to acquire a great product with unhappy cus-tomers. Then I inherit a mess. Or, maybe you don’t have greatpeople, which is okay, but it means we will have to create theteam. Also, we try to reward people based on what they’ve doneup to the point of the acquisition. I am less interested in reward-ing them based on what we are going to do as a result of thatacquisition. I see that as our reward for being able to integratetheir business effectively. Their reward is what they have doneup to that point. I scratch my head when people come in andsay, “Well, in the past five years we’ve gone from $1 million to$3 million to $6 million to $8 million and we are now ready tosell the company, and next year our projections are $18 milliondollars.” I look at that and say, if you are going to be $18 milliondollars next year, why are you selling your company to us now?Sophisticated buyers see right through that and base the nearfuture on the recent past. If the recent past says it’s been grow-ing at a certain pace on its own, then that’s what you can expectin the near future. Perhaps by being part of Kronos we can makeit grow faster, but that’s our reward for making it part of whatwe do.

AL: Does the current economic climate represent a buyingopportunity for Kronos?

AA: I think it does.

AL: Is there good value in the market?

AA: I think it matters what side of the fence you’re sitting on. Forus it looks like good value. For sellers it may look like bad value,because despite what I just said, 2009 was a difficult year formany, and it was not as good an indication of the future. Sowhat we might think is fair value may not jive with what thepotential sellers think is a fair value. This market can create mis-matches in value expectations. We are not a company thatfocuses on doing deals that are way below what things areworth. We try to be fair and reasonable and see that as a bigpart of how we have done 58 acquisitions.

AL: You have seen multiple economic cycles. How has thisdown market compared to previous down markets?

AA: I’ve lived through the challenges of ’81/’82, ’90/’91, and’00/’01, and this, by far, is the worst of those. Kronos had 115consecutive quarters of revenue growth, and that streak wasbroken during this period. That means revenue growth definedas year-on-year, quarter-on-quarter. We never had one periodwhen we didn’t grow revenue, and in this period it caught upwith us. That is an indication of how acute it’s been during thiscurrent downturn. The good news is I think that 2010/2011 willbe better. Not just for Kronos, but other companies too. We arealready starting to see things coming back, and I think there willsoon be an opportunity to start growing our company again.

AL: Did you have to do layoffs through this period?

AA:We did. We had a reduction of about 8% of our workforce inJanuary of 2009.

AL: Is this the first time you’ve had to do that as a company?

AA: It’s the first time we did it as formally as we did. In the past,we have had reductions because we have always felt it ourresponsibility to size ourselves to what the opportunity is. Sothat means there may have been parts of the company wherethings didn’t work out the way we expected them to, so we elim-inated groups or we eliminated projects. That might haveresulted in reductions in those areas, but this is the first timethat we did it across the company in such a broad way.

AL: I have to imagine that was not easy for you, for your man-agement team and certainly for employees, most importantlythe ones that got laid off?

AA: It was a horrible process.



AL: How do you manage through that?

AA: You try to be fair and kind and understanding to the peoplewho are impacted directly, but the fact is everyone in the com-pany is impacted. We tried to over-communicate about whathappened; we tried to be extra kind and understanding to thepeople who were impacted, which included making our sever-ance packages more than fair. That included making sure wetried to help the people who were impacted on the day theywere informed in a way that allowed them to transition in acomfortable way, then got everybody together for face-to-facegroup discussions and explained what we did and why we didit, and answered questions. I believed strongly that while thereduction was very difficult to do, we really felt like this down-turn was going to be for a prolonged period. It was not a one ortwo quarter phenomenon, so we had to right-size ourselves towhat the market was dictating. I also think we took a reasonableapproach in that we said that we were going to focus on allparts of the business and all types of positions. We felt it wouldnot be fair for this only to impact individual contributors. Ifteams are smaller, then I need fewer supervisors. If I have fewersupervisors, I need fewer managers, less managers means lessdirectors, fewer directors mean less VPs. So we focused on it inthat way both because it made sense for the business andbecause it was an issue of fairness.

AL: What inspired the decision to take the company private in2006?

AA: I felt really strongly in 2006 that the public markets weren’tfairly looking after the long term interests of our shareholders.This was a period when software companies in particular werebeing rewarded for revenue growth even if there was no prof-itability or cash flow. We were growing revenue, growingearnings faster than revenue, and we had exceptional cash flowfrom operations. We were not, however, doubling our revenueevery year. As a result, the money appeared to be chasing thoseother types of companies. We have a fiduciary responsibility toour shareholders, many of whom are our employees. As such,we started trying to understand the world of private equity.Once we realized how it worked, we thought it might be a wayto reward our shareholders, take care of our employees andalso have the company continue to march forward as it is, butnot as a public organization. That is what led us to go privateand, in fact, we were right. We were correct in terms of beingundervalued. We did get a meaningful multiple on what we wereas a public company by going private and just about every sin-gle person who wanted to stay with the company, when wewent from public to private, stayed with the company.

AL: What’s it like now being a private company, without thequarter-to-quarter public scrutiny? Has it changed the way youthink about growing the business?

AA: It’s much easier being a private company. First of all, look atthe world we are living in right now. Imagine being a publiccompany in this environment. Even notwithstanding that, beinga public company CEO stopped being fun in the 2000/2001timeframe with all the regulatory compliance requirements, andSOX rules that we had to follow. I understood why they existedand while Kronos has always been a company that follows therules, I did not see them adding value to what we were doing. Itwas not helping us produce better products or deliver betterservice for our customers, and so in some sense it was a dis-traction from our day-to-day operations. In addition, we got offthe treadmill of chasing quarter-to-quarter guidance and expec-tations and we understood that if something happens on April 2versus March 30 it is just as good. It made no sense to go per-form unnatural acts to accelerate activities to meet quarterlydeadlines. As a private company, we have been able to focusmore on the long term and move away from the short-termfocus. If there is a meaningful investment to make that wouldrequire a step back in order to lunge forward in future periods,the public markets may not reward us for that decision becauseof how it may affect earnings in the short term. In the privateworld, it is much easier to do that. Plus, we have a Board ofDirectors who does their job on a full-time basis. They haveother portfolio companies and they bring a valuable clearing-house of information to us on how we can run the businessmore effectively. That has been a great value as well.

AL: Let’s shift gears to compensation. How has your thinking oncompensation evolved over time, particularly vis-à-vis cash ver-sus equity?

AA: I’ve always felt we have to be competitive to attract, moti-vate, and retain the best talent. That includes from both anequity and cash compensation perspective. I feel we have donethat right from when we started as a small, private company, tobecoming a public company and today again as a private com-pany. I think people come to work at a company not just for thejoy of what they do, but because they want to be fairly rewardedand that reward system is important. I have never believed ingiving people less cash compensation and more equity. Ibelieve in giving them cash compensation that is more than fair,and giving them an equity position that is more than fair. To theextent that you do not have the cash to pay people at whatmight be deemed a reasonable cash compensation, then youhave to figure out how to bring the total compensation into



equilibrium by giving them more equity. But you know, evenequity has a limit. You can’t give 11 people 10% of the equityeach. No matter how much risk somebody wants to take, youhave issues of dilution, you have issues of fairness, and youhave to think about your investors. Finally, at the end of the day,there is only so much equity available to distribute to people.So you have to figure out how to properly distribute the equitythat’s available. That was a challenge for us when we weresmall, and it’s a challenge for us now as we’re larger. I sit onBoards of other companies, and it’s a challenge for them too.

AL: For some, more entrepreneurially-oriented people, equity isa particularly strong motivator, and for others, less so. Howdoes recruiting for this entrepreneurial mindset factor intoorganization-building issues and how do you address theseindividuals’ desire for larger equity packages?

AA: If you have a particular need within your organizationand/or if you meet a particular entrepreneurial thoroughbredwho you feel could really move the needle in a meaningful way,and that person is going to be particularly motivated by a strongequity position, then to the extent you have that equity avail-able to offer to that person, absolutely you do that. You have tobe flexible. You have to create an environment that gets thosepeople to join the company. However, you can’t do that foreverybody for all the obvious reasons.

AL: Have there been points in Kronos’ evolution where youroverall compensation philosophy skewed toward using moreequity than what might be typical because of the type of peo-ple you were looking to recruit to the organization?

AA: That’s a really good question. So the simple answer to yourquestion is yes, but it has also been a function of what wasavailable to us. Any company has so much of their total avail-able equity that they can give out in the form of, say, stockoptions. So when your company has 50 people, and you aredividing that available pool amongst your team, you can givemore to a particular person or group of people. When that samecompany grows to 500 people, your equity pool remains thesame. As such, your ability to give a large component of theequity to any one person or group of people is under tremen-dous pressure. That is the main reason why it changes overtime. We have never been greedy in terms of giving out equity.We have always given a healthy proportion of our total equity toemployees. Today, in many instances, companies are, in bestcases, giving out maybe 5% of total shares in a particular year.Public companies under pressure from shareholders may giveno more than 2%. If you’re giving 5% to 50 people, everyone

can get more. They’re giving the same 5% to 500 people, andthat’s when it becomes a challenge. It’s the law of the numbers.For me it is more of a function of the size of a company than it isthe type of people you’re trying to bring in. To the extent thatpeople want to roll the dice and want a lot of equity, they almosthave to find that at a smaller company. It’s not that manage-ment doesn’t understand the benefits of giving equity; it’s justthat you’re constrained. Sometimes we get into these discus-sions when we’re trying to recruit people, and they think they’revery sophisticated on this topic, but they often reveal them-selves not to be. They often don’t understand it in terms of howmany shares there are as a percent of the total shares outstand-ing. If a company only has 2 million total shares outstanding,20,000 shares is enormous. If the company has 200 millionshares outstanding, then 20,000 shares is nothing. We alwayshad a low share count because we didn’t do a lot of splits, sopeople would respond negatively to a low number of shareswithout understanding the real value.

AL: Do you think Kronos will ever go public again?

AA: I think there is a good chance we’ll be a public companyagain. We won’t keep our current ownership model indefinitely.That’s not the world of private equity. At some point we willhave to get a return. Just like when Kronos was a private compa-ny in the ’80s we needed to find a way to bring liquidity for ourshareholders. The way we did that was by going public. So inthe same way, we’re a private company now, and we will have tofind a way to bring liquidity to our shareholders. We will have tomake a decision on how we do that, and going public is certain-ly a very viable option.



Todd was named to the Forbes Midas List, which ranks top ven-ture capitalists who have created the most wealth for theirinvestors, three times. He was also named to the 2008Hollywood IT List by AlwaysOn, which features the top entertain-ment executives and dealmakers in information technology.

Todd was also a Senior Lecturer at the MIT Sloan School ofManagement for a number of years, where he taught a courseentitled “New Enterprise.” His entertainment and mediaendeavors include establishing two film and television produc-tion companies (Prospect Pictures and Ealing Studios) thattogether have produced over 10 films and TV shows since 2003.He has also been involved in the production of several films,including “Pretty Persuasion” (2005 Sundance Film Festival),which was released by Samuel Goldwyn and Sony PicturesEntertainment, and “TransSiberian” (2008 Sundance FilmFestival), which was released by First Look Studios.

In 2004, he established the Face of an Angel Foundation. Face ofan Angel is a nonprofit, charitable foundation dedicated to edu-cation, research and treatment in the area of vascular malformaand tumors that cause severe birthmarks and disfigurement in0.2 percent of newborns. He has served on the Board of Fellowsat Trinity College and on the Board of Trustees at Governor’sAcademy.

Prior to Battery Ventures, Todd was Principal and SeniorTechnology Analyst at Montgomery Securities; SeniorTechnology Analyst and Vice President at Smith Barney/RobinsonHumphrey; Vice President of Communications at the YankeeGroup; and Business Development Manager for Networks andCommunications at Digital Equipment Corporation.

Todd Dagres holds an MBA from Boston University and a BS inpsychology from Trinity College, Hartford, CT.



Todd DagresGeneral Partner, Spark Capital

Todd Dagres is a founder and General Partner of Spark Capital.He leads the drive to find the home runs, to uncover the 100xopportunities. He has said that his work to bring Akamai fromidea to publicly traded company was his doctoral thesis in ven-ture capital. It is that bedrock of knowledge and the experiencesbuilt upon it that he brings to Spark and our partner companies.Todd has led Spark’s investments in Veoh Networks, MenaraNetworks, Verivue, Covestor, Kateeva, and Intune Networks.

Todd was previously a General Partner and Executive CommitteeMember at Battery Ventures. There he led the CommunicationsInvestment practice while focusing on the media, entertainmentand communications industries. Some of his investments atBattery include Akamai Technologies (NASDAQ:AKAM), Qtera(acquired by Nortel Networks), XCOM (acquired by Level 3Communications), Redstone (acquired by Siemens), River DeltaNetworks (acquired by Motorola), Broadbus Technologies(acquired by Motorola), Arbor Networks and Cedar PointCommunications.

INTERVIEWWITH TODD DAGRES

Aaron Lapat: How long have you been in venture?

Todd Dagres: I’m entering my fifteenth year. I’ve been withSpark four years and at Battery almost 10 years. At Battery I wasprincipally involved in telecommunications, communications,and Internet investments. When I joined Battery I had comefrom a Wall Street background. I had been a technology analystat a couple of investment banks, Montgomery Securities andSmith Barney specifically, and I covered the communicationsand Internet waterfront. While doing that, Battery Venturesapproached me about becoming a venture capitalist and Iagreed. That was 15 years ago.

AL: What is Spark’s origin?

TD:We started Spark four years ago in July of 2005, so it’salmost exactly four years old. I formed the firm with Santo Politi,with whom I had made some investments while he was atCharles River Ventures and I was at Battery Ventures. He and Ihad similar thinking about what was going on in the world rela-tive to media, entertainment and technology. We felt that therewas a massive movement afoot and that technology would dis-rupt the media and entertainment markets and new businesseswould emerge out of the wreckage. We came together five yearsago and we actually closed our first fund four years ago. Sincethen, we’ve invested in companies that are at the intersection ofmedia, entertainment and technology. One example is Twitter.Twitter is a short form blogging/social networking platform. It isgrowing rapidly and represents a new way for people to commu-nicate and share information. That’s one example of the typesof companies we invest in.

AL: How long ago did you get involved with Twitter?

TD: About a year ago. Twitter’s in our second fund. We closedthe first fund four years ago and our second fund a little lessthan two years ago. The first fund was $260 million and the sec-ond was $360 million. We invested in 19 companies in the firstfund and I believe we’re up to 11 investments in the secondfund. We’re about 40% of the way through, including reserves.

AL: In starting a venture firm, how do you instill a culture andan investment philosophy that will endure?

TD:We leverage our experience. I had almost 10 years of experi-ence in venture. Santo Politi, my co-founder, had six years ofventure experience, and our CFO, Paul Conway, had 12 years ofventure capital experience. With this we have a sense for best

practices. We have seen venture firms start out small, get big,get too big, get smaller, and then try to reinvent themselves.I’ve seen all different kinds of investment behavior and I’ve metlots of people. This experience forms a collective sense of theright way to do venture.

AL: Which is what? How do you differentiate yourselves?

TD:Well, we have a bit of a formula. It’s not scientific, but it startswith the team. We built a team of people who are knowledgeableabout the space that we are investing in, who complement eachother, get along and are able to provide value to the process. Amajor differentiator is related to due diligence. You have to prop-erly do your due diligence on your companies so that you knowwhat you’re getting into. I think we are very disciplined aboutdoing our homework on a company. We need to understand themarket, we need to understand the founders, we need to under-stand the technology, the products, the customers. We work as ateam when we do our due diligence. Each deal has a primary per-son and at least one other person who’s actively involved in thedue diligence, and then our whole team weighs in on the decisionto ensure we’re not missing something. We are not in a volumebusiness here at Spark. One thing I learned is that you don’t wantto be on too many boards. Another part of our philosophy is to bevery active investors. We spend a lot of time with our companies.We insist on knowing what’s going on. We don’t just show up atBoard meetings. Because of that, it means that each partner isonly on five to seven boards. We try to keep it to a manageablenumber of investments so that we can spend the time we need toon those companies. It is not the most leveraged model. We dowork as a team, but we are not here to leverage ourselves. Whatwe’re here to do is to make the best possible decisions becausethe investment decision is the most important thing. We also takea team approach to helping our companies once an investment ismade. I may be the lead on a deal, but if one of my partners has arelationship that would help my company, we make sure that thatpartner helps and brings that relationship to the company. Wehave a collaborative, team-oriented approach. Everybody at Sparkis here in Boston even though we invest across disparate regions.We think it’s critical that everybody understands what everybodyelse is doing and that we communicate well. To best achieve that,we’re all here buzzing in the hive and we think that is very impor-tant to our success. Focus is important too. One of the keys tobuilding a reputation and building awareness and a brand is totry to limit your focus so that you can go into an area and have animpact in that area, which is why Spark is focused on digitalmedia technology. We call it “the conflux,” which is wheremedia/entertainment/technology come together. We have man-



aged to build some awareness and a brand in that area. Peopledon’t think of us when they think of enterprise software. Theydon’t think of us when they think of semiconductors or telecom.Yet when it comes to digital media, social networking and themerging of media and technology we are seen as one of the play-ers in that space.

AL: So how do all of these elements—your culture, yourprocess, your philosophy of running the firm—translate to theentrepreneur?

TD: I think the entrepreneurs view Spark as a real partner. Whena lot of companies think of their venture firm, they think of theirpartner, the partner that’s on their Board, and that’s their pri-mary interface into that firm. Unless they go to an annualmeeting or they have to go in and present for a follow on invest-ment, they pretty much only know their partner and perhaps anassociate. Here, it’s likely that as an entrepreneur you’re goingto spend time with multiple Spark partners. Partners will showup with one another at Board meetings and that other partnerwill often times hear something that gives them a sense thatthey can help the company, maybe with an introduction to acustomer or a strategic partner. We’ve all built our networks andeven though we complement each other and there’s some over-lap, we all have our own relationships. Also, we all come fromdifferent backgrounds and perspectives, which helps when welook at something. We look at it from different angles, and whenwe look collectively that adds value. So when Spark invests in acompany, the entrepreneur is going to get the full team and isgoing to get the access to the full network and is going to havean active investor. We don’t take on an operating role. We don’ttry to make operations decisions for our companies. We just tryto make sure the company has what it needs in order to reachthe goals that caused us to want to invest.

AL: What is your sense of the current state of the VC market?

TD: I would say the VC market right now is fairly messy. Thereare still too many VC firms. There are too many portfolio compa-nies that have venture money in them. That is starting to correctitself. The overhang of the fundraising that occurred over thelast 12 years or so is really starting to diminish. We are going tosee fewer VC firms and fewer VCs. There will be less moneybeing put out by VC firms because less money is going in. Thereare firms out there that have raised money in the last sixmonths or so that ultimately raised, in some cases, half of whatthey intended to raise. That means they have to empty the boata little bit. You can’t feed everybody on a fund that’s half thesize of the fund you had last time, so there are going to be

some people leaving the VC industry. It’s already happening.This is not a prediction, it is fact. My prediction is that it willcontinue for a while. I think we are in an environment right nowthat is going to remain messy. There will not be a strong IPO orM&A market for a few years. We are not going to have a V-shaped correction. The current administration has attempted tominimize the depth of the recession. In doing so, they haveelongated it. My working assumption is that we are going tohave three or four more messy years. The venture capital indus-try is very highly correlated with the financial markets,particularly the NASDAQ and the S&P. So, if the S&P and theNASDAQ continue to make progress as they are now, I think thatthe venture industry will experience more liquidity and that’swhat drives this business. The funny thing is at the time that theliquidity is happening; it’s usually during a time when there is abull market, which is often the worst time to invest. The besttime to invest is several years ahead of a bull market, which iswhy I think right now is a great time to invest. While we don’t tryto time the market, we are mindful that there are correlationsyou have to be sensitive to. I think the thing I’m most confidentabout is that there will be a gradual recovery. There will be arecovery and there will once again be an IPO market for venturebacked companies and there will be liquidity options that aresignificantly better than they are now. I firmly believe that willhappen in the next five years. I don’t know if it’s going to be intwo years or five, but it will happen. My best guess is you willwant to have inventory on the shelves in 2013 going into 2014.That is when I think the cycle really picks up and we head into astrong market situation. In the meantime, you’re running thesausage factory. You’re making sausages and are grinding it outtrying to help your companies make progress every day. Youneed to stay capital efficient, try to survive, try to find the nichein the market, and try to get their organizations working well.Right now, growing is less important than surviving. Over thenext few years, companies will need to show growth. Becausegrowth is where often times the value is.

AL: Are there any key take-aways you learned from the lastboom and bust cycle that serve you well now?

TD: One thing we learned from the last bust is that there will beanother boom and you need to invest through the down marketto reap the rewards of the boom. The other thing we learned isat the time of a boom you don’t want to be too aggressive,because a boom usually leads to a bust. You have to get inearly, make sure you get liquidity and then make sure that youdon’t invest in companies that have faulty business models thatare not going to be able to sustain themselves through a tough



time. The cycles have emphasized the need to invest in capitalefficient companies that are solid businesses so that they cansurvive difficult markets.

AL: Let’s shift to organizational issues. What are your key con-siderations when assessing the existing leadership team andthinking about team build out?

TD:Well, the team is crucial. We want to make sure that theteam we’re investing in is going to be able to weather the storm,as you need to assume that there is usually going to be a stormat some point for every company. You want to make sure thatyou have a strong nucleus of a team in the company. That does-n’t mean you have to have the CEO who can take it public, but itmeans you have a solid entrepreneurial team that is going to beable to pursue the market opportunity. You want to make surethat the team you have is capable of hiring the very best people.We have a saying which is, “A’s attract A’s, B’s attract C’s.” So,you want to start with an A team because people want to workwith people who are truly talented. We try to make sure whenwe make an investment that we are investing in talented peoplewho are going to be able to build an organization around them.You never have everybody at the beginning. You might be miss-ing a VP of Sales or a VP of Engineering, etc. Oftentimes you aremissing some major components to the team. Sometimes youjust have a technical founder with another founder who’s astrong business development or product management personand that’s actually a very solid kernel. I like to see two founderswho can work well together because I found that two foundersoften times do better than just one founder.

AL: Why is that?

TD: I just think the partnership that forms with two founders isvery valuable. It’s easier for them to make the right decisions ifthere is somebody else whom they trust, whom they canbounce things off of. Most of our companies have a couple offounders. If you look at the most successful companies, fromGoogle to Yahoo to Cisco Systems and even to some extentMicrosoft and Apple, they all have this element. Most of thebest companies that have been created in the last 20 years werecreated by two people. Sometimes more than two, but usuallythere are two people. One might be dominant, the other onesomewhat subordinate, but they form a partnership and thosepeople often times have different skills that compliment eachother. I’ve also found in companies with a single founder thereis a tendency for that founder to run the business as a dictator-ship with only supporting characters under the founder. Thatcan be a risky situation because you’re relying on one person

and that one person may not have a sounding board inside thecompany to bounce things off who can serve as a checks andbalances mechanism. A single founder can work—Ken Olsenfounded Digital Equipment Corporation. He brought in somegood people who helped take it all the way to a multibillion dol-lar company, but, I think that’s an exception.

AL: My experience is that there are few founders who have theability to take a company through multiple phases of growth.As such, how do you plan for those necessary organizationalchanges as the company expands?

TD: Of course the best way to know if you have a guy who cantake it from start up to successful exit is if you have somebodywho’s already done that in the past. For instance, I am investingin a company called Verivue. One of the founders’ names is JimDolce. I know Jim is capable of running a billion dollar companyas he’s already proven that he can do that. So we feel a guy likethat can scale. A different example would be Akamai. When Iinvested in them, the team consisted of a professor from MIT,his PhD student and another guy from the Sloan School.Combined they had two or three years of business experience.So in this instance everybody around the table knew two things:first was that this was a very gifted core team, and second wasthat the CEO was not part of the group. In fact, the current CEOof Akamai, Paul Sagan, I put into the company the same day Iinvested to ensure that we had somebody who had significantbusiness experience and commercial seasoning to help guidethe team. The team didn’t need somebody to tell them what todo, but they did need guidance to avoid mistakes and pitfallsbecause they were going 100 miles an hour at a target, and Paulhad to make sure that they didn’t get whacked along the way. Ithink more often than not, you are going to have to augmentyour core team with leadership after it gets through what Iwould call the entrepreneurial phase. The entrepreneurial phaseis defined by starting the company, establishing the key goals,building a core team, securing initial funding, and building theproduct. As soon as you start offering the product to customersyou go from developing the company to having to manage thecompany and scale the business, and things become more com-plicated. Nothing complicates a business like a customer. That’soften times when you have to bring in somebody who haspresided over the successful scaling of an organization. Youneed somebody with operational sensibilities and experience toallow you to build. I mean, the DNA of an entrepreneur is differ-ent than the DNA of a manager. Most of the time, the guy whocomes up with the idea, passionately pursues that idea, startsthe company, raises the money and builds the core team is not



the person to provide the operational discipline necessary toexpand an operation. So you have to bring that person in.

AL: How do you ensure that the baton passes smoothly?

TD: Sometimes when you make an investment, the founderbelieves that they can run the company into the future withoutany timeframe in mind. If that person doesn’t have a successfultrack record of running a company, then you’re taking a chance. Itry to get an agreement up front that at the appropriate time thatwe will bring somebody in to take the company to the next stage.If the founder pushes back hard on that, then we need to have adiscussion as to whether or not we’re going to invest. We have tohave an agreement that doing what’s best for the company isparamount and that there will be a management transition atsome point, whether that transition is around a specific timeframe or a phase of the company or it may be tied to the devel-opment cycle of the product. I do not want to go into aninvestment where that is a nebulous issue. Often times you go inand you agree with the team that one of your roles as the ven-ture capital investor is that you’ve got a network and you havehad experience hiring people, so you’re going to be activelyinvolved in bringing in the CEO at the right time. The wrong timeto bring in a CEO is after your founding team fails. You bring inthe CEO to ensure that the founding team succeeds. I’ve hadfounders askme, “How do you know I can’t do it?” They assertthat they want to prove that they are capable of scaling as CEO. Iexplain to those individuals that I don’t want to be in a situationwhere they have proven that they can’t take the company to thenext level and damage has been done. So we have to have anagreement on the transition. I’ve made investments in compa-nies where the founding CEO stayed on through the liquidityevent—usually an M&A transaction not an IPO. It’s rare that thesame guy that started the company can take it through an IPO.It’s fairly common that the same guy that started the companycan take it through a liquidity event like an M&A transaction,because that doesn’t necessarily require building a large com-plex company. So some of this depends on what your goals are.

AL: Even well intentioned founders can struggle embracing anew CEO from the outside. How do you make that transitionwork in practice? Particularly when the team is accustomed togoing to the founder for direction, vision, guidance, etc.?

TD: The key is that that founding CEO be a part of the process oftransitioning to the new CEO. If the founder is an engineeringperson, hopefully they still perform the engineering job and nolonger have to worry about keeping the paperclips stocked. Ifthere are a couple of founders, they can still do what they did

functionally and pass the baton to somebody who now managesthe organization as it gets bigger. It’s not easy. I’ve seen manycompanies ruined by bringing in the wrong CEO. If you bring inthe right guy, it can help you get the company to the next leveland it can be very positive. If you bring in the wrong person itcan be devastating because that wrong person can chewthrough cash and cause turnover in the company. I’ve had expe-riences bringing in the right person, as well as the wrong person.Sometimes you can bring in the right person for a certain situa-tion. For example, if you’re building your company in its growthphase, you need a particular type of CEO. Sometimes you hire aperson you expect to scale and grow the company, but all of asudden you have an economic downturn, like we are experienc-ing now, and that same CEO who was the right guy to grow thecompany is not the right guy to right-size the company, cutexpenses and focus the business on a narrower set of objectives.

AL: I frequently hear from Boards and investors that they waittoo long to act on organizational changes.

TD: I agree. One of the problems I see is that Boards tend towork toward compromised solutions. I think the problem withcompromise is that it means you may not be pursuing the mosteffective path. You may not be making the most effective deci-sion. Instead, you tend to make decisions that have beenwatered down in order to get people to agree. Internally here atSpark we believe that if we’re having a debate about something,the worst thing we can do is compromise to get the decisionmade. Because in all likelihood, one of the people in the roomhas the right idea. One of the people knows the right decisionto make. The key for the group is to find that person and makethat right decision, not to regress to the mean and compromiseto a decision that is half right and half wrong.

AL: How do you do that?

TD: It’s difficult because there’s a dynamic that has to happen.You have to have a group of people who can argue with eachother, but not take it personally. You have to have a group of peo-ple who have egos but will subordinate their ego for the team.The ego is focused on making the best decision, not on your deci-sion being the best decision. You have to make sure the processtakes you to that optimal path rather than just a compromise.

AL: What are the hardest executive positions to recruit for?

TD: Right now, somebody who is strong in what I would call con-sumer demand building. We can find people who are good atbuilding consumer demand in traditional media and traditionalcompanies, whether it’s consumer electronics companies or



consumer products companies, but finding somebody whoknows how to build consumer demand for a digital company ismuch more difficult. It’s also hard to find them in New Englandas this tends to be an area that is much more enterprisefocused. It dates back to the days of Digital, Prime, and Wang,which still causes us to have a bit of an enterprise perspectiveand mentality here. Plus, you have the Yankee attitudes thattend to be more risk averse. In the enterprise area, you can gotalk to 20 enterprise customers, find out what they want, buildthat product and some of them will buy it. In the consumerspace, determining whether a critical mass of consumers willbuy something is much harder. So, I would say the biggest chal-lenge is someone who understands how to build a brand andhow to generate consumer demand. I would say the CEO posi-tion is the most challenging role to fill. The CEO is challenging,because simply stated, there are just not that many people whoare talented at being CEO. The key is to find people who arestrong leaders, who can get the most out of people and are nim-ble and flexible because you never know what you are going toexperience. I would say that it is not important that the personnecessarily have a deep knowledge of the domain that they’rein, but rather the aptitude to get deep in that domain. You alsoneed somebody who understands that they need to go out andtalk to customers. They need to get out into the field andimmerse themselves in the market.

AL: What about Boards? What is the right timing for bringing inoutsiders?

TD: I think you bring an outsider in when you need advice andcounsel from somebody beyond the management team and theventure investors. I think that sometimes the outside Boardmember is brought in to work with and coach the CEO, especial-ly a first time CEO. With first time CEOs, I like to find a Boardmember who is a successful CEO. It doesn’t even have to besomeone from the market segment that you are going after. Ialso like to bring an outside Board member in before the com-pany really starts to scale. At this point, I like to bring in a Boardmember who has had some success in that market segment inthe past and understands the supply chain, the customers, andthe competitors. Hopefully there are people on your manage-ment team already who understand all that, but bringing in aBoard member to look at it from a higher level can be very help-ful. They can open doors; they can help you avoid mistakes thatthey may have learned in that market.

AL: Can we wrap with a few questions on what you’re seeing inthe market around compensation?

TD: Comp has gone down. It hasn’t plummeted, but it has defi-nitely gone down. What has gone down even more is thenumber of people that you hire. You still hire the very best peo-ple and you pay them fairly, but you try to hire fewer peoplethese days. So, for example, I have companies now that arepaying very competitive salaries for engineers and for opera-tional people. They did not make these people take big paycuts, but hired fewer people and are asking the people that arethere to do a little more. In some cases they’re off shoring someof the less vigorous development activity. So, rather than having100 people in Massachusetts, you might have 60 people inMassachusetts and 40 people in China or India. I would say thatif you look at the average salaries today for technical or opera-tional people versus a year ago, I’d say things are down10-20%. I don’t know how long this is going to continue. Thereare some segments where things haven’t changed. For example,software developers that understand digital media salarieshaven’t come down very much. Also, CEOs and executives incompanies in the social and digital media world have not seencompensation come down much. As you get into other seg-ments, like enterprise software or communications equipmentor storage, compensation is softer.

AL: With liquidity being more challenging, have you seen achange in executives’ valuation of equity in the compensationmix?

TD: It still needs to be about the equity. A CEO should take a jobfor the equity. First of all, it’s a tax advantage, and second of all,you can make a lot more in equity than you can in salary if yourcompany’s successful. I want CEOs who are focused on theequity and not the salary and CEOs who set their salary low sothey can set everybody else’s low so they can be capital effi-cient. That way the company does not have to raise loads ofmoney to be successful. I think people do still value the equity.They don’t value the equity like they did in 1999 and 2000, butthey still value it. They still want to get paid though. You know, itis one thing to go home to your spouse and say, “Hi honey, Ijust took a job where I own 5% of the company.” It’s anotherthing to go home and say, “Hey, I just took a 25% pay cut sowe’re going to have to tighten our belt, but I’ve got thisMonopoly money that someday might be worth something.”Entrepreneurial activity is about building a company that can beworth enough that your stock is going to be worth a lot, so theCEO and the leadership team need to be thinking first and fore-most about the value of their equity.



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