The Elves Leave Middle Earth – Sodas Are No Longer Free

Monday, December 21st, 2009

Steve Blank’s latest headline did its job and pulled me in — The Elves Leave Middle Earth – Sodas Are No Longer Free:

Last week as a favor to a friend, I sat in on a board meeting of a fairly successful 3½ year-old startup. Given all that could go wrong in this economy, they were doing well. Their business had just crossed cash flow breakeven, had grown past 50 employees, just raised a substantive follow-on round of financing and had recently hired a Chief Financial Officer. It was an impressive performance.

Then the new CFO got up to give her presentation — all kind of expected; Sarbanes Oxley compliance, a new accounting system, beef up IT and security, Section 409A (valuation) compliance, etc. Then she dropped the other shoe.

“Do you know how much our company is spending on free sodas and snacks?” And to answer her own question she presented the spreadsheet totaling it all up.

There were some experienced VC’s in the room and I was waiting for them to “educate” her about startup culture. But my jaw dropped when the board agreed that the “free stuff” had to go.

“We’re too big for that now” was the shared opinion. But we’ll sell them soda “cheap.”

I had lived through this same conversation four times in my career, and each time it ended as an example of unintended consequences. No one on the board or the executive staff was trying to be stupid. But to save $10,000 or so, they unintentionally launched an exodus of their best engineers.

This company had grown from the founders, who hired an early team of superstars, many now managing their own teams. All these engineers were still heads-down, working their tails off, just as they had been doing since the first few months of the company. Too busy working, most were oblivious to the changes that success and growth had brought to the company.

One day the engineering team was clustered in the snack room looking at the soda machine. The sign said, “Soda now 50 cents.” The uproar began. Engineers started complaining about the price of the soda. Someone noticed that instead of the informal reimbursement system for dinners when they were working late, there was now a formal expense report system. Some had already been irritated when “professional” managers had been hired over their teams with reportedly more stock than the early engineers had. Lots of email was exchanged about “how things were changing for the worse.” A few engineers went to the see the CEO.

But the damage had been done. The most talented and senior engineers looked up from their desks and noticed the company was no longer the one they loved. It had changed. And not in a way they were happy with.

The best engineers quietly put the word out that they were available, and in less than month the best and the brightest began to drift away.

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