How relevant is executive management?
16 years ago
Friday, January 8, 2010
Equity in lieu of salary
Problem: Evaluate a job offer which is part salary and part equity.
Interesting. My friend is pursuing an opportunity with a start up and wanted to know how to calculate what equity being offered is worth? Now, I don't know what that equity is worth because that entirely depends on how the future cash flows are. Having delivered a presentation on business plan today (which some people did listen to in half sleep and were courteous enough to tell that it was good), I had some insights into the start up stages. The venture in question being in concept stage, it was difficult to predict what the future would tell.
Here is what I told him and I hope I did not mis-advice him.
Assume that you expect your salary to be INR 3 M ( 30 L) and the firm in question is offering 2M in salary. So, the salary deficit, d = 1M.
Assume:
1. You will stick with the firm for 5 years
2. Your salary inside/outside firm will grow at CAGR (say, g) = 15% (reasonable, considering the food inflation!!)
3. The discount rate is the rate at which you got your PGPEX loan (say, r) = 13%
= 4.58 Million
The same calculation was repeated for multiple scenarios including CAGR of 25%, salary hit of 1.2M etc. and the range for equity negotiation was identified as 4M to 6.5 M.
I recommended that he should negotiate for his share in equity (sweat equity) such that it is valued at about 5M as of today.
I hope I am right.
Interesting. My friend is pursuing an opportunity with a start up and wanted to know how to calculate what equity being offered is worth? Now, I don't know what that equity is worth because that entirely depends on how the future cash flows are. Having delivered a presentation on business plan today (which some people did listen to in half sleep and were courteous enough to tell that it was good), I had some insights into the start up stages. The venture in question being in concept stage, it was difficult to predict what the future would tell.
Here is what I told him and I hope I did not mis-advice him.
Assume that you expect your salary to be INR 3 M ( 30 L) and the firm in question is offering 2M in salary. So, the salary deficit, d = 1M.
Assume:
1. You will stick with the firm for 5 years
2. Your salary inside/outside firm will grow at CAGR (say, g) = 15% (reasonable, considering the food inflation!!)
3. The discount rate is the rate at which you got your PGPEX loan (say, r) = 13%
= 4.58 Million
The same calculation was repeated for multiple scenarios including CAGR of 25%, salary hit of 1.2M etc. and the range for equity negotiation was identified as 4M to 6.5 M.
I recommended that he should negotiate for his share in equity (sweat equity) such that it is valued at about 5M as of today.
I hope I am right.
Monday, December 21, 2009
The CEO of a very reputed content creation company in India made a presentation to PGPEX class. In the conversation he raised concern on of Indian classical music (ICM). One of the reasons identified was nepotism in music education.
My thesis is that it is that since very few individuals (stars) can make a decent living from performing arts others just live in oblivion. It is the star which sells not the music. Example: http://www.washingtonpost.com/wp-dyn/content/article/2007/04/04/AR2007040401721.html
However, we do have a problem, as highlighted, beyond the current generation we don't have a healthy pipeline of people who can take ICM forward.
I have started working on the issue and am trying to figure out an IPL type model so that a larger pool of artists can hope to become star and ICM can scale new heights.
Ideas welcome!
My thesis is that it is that since very few individuals (stars) can make a decent living from performing arts others just live in oblivion. It is the star which sells not the music. Example: http://www.washingtonpost.com/wp-dyn/content/article/2007/04/04/AR2007040401721.html
However, we do have a problem, as highlighted, beyond the current generation we don't have a healthy pipeline of people who can take ICM forward.
I have started working on the issue and am trying to figure out an IPL type model so that a larger pool of artists can hope to become star and ICM can scale new heights.
Ideas welcome!
Saturday, September 26, 2009
Reva and GM partner
Should we call ourselves visionaries??!!
In term 2, we did a project to understand Reva's marketing strategy. Our key finding was that Reva could not create the infrastructural changes required for an electric car to be successful in India. We claimed that best strategy for Reva would be to partner with some one like Ford or GM who has the scale and capabilities to change the landscape in automobile sector.
2 months later we see Reva going exactly the way we predicted.
No...we did not share our report with Reva!
In term 2, we did a project to understand Reva's marketing strategy. Our key finding was that Reva could not create the infrastructural changes required for an electric car to be successful in India. We claimed that best strategy for Reva would be to partner with some one like Ford or GM who has the scale and capabilities to change the landscape in automobile sector.
2 months later we see Reva going exactly the way we predicted.
No...we did not share our report with Reva!
Tuesday, June 2, 2009
Organizations are driven by profit, mission and vision are only marketing devices
Yesterday in a session on designing effective organization, this statement brought me out of my long lost sleep. It was further added that firms are in business for making profits and vision and mission statements are just lofty ideals.
What if this statement were true?
My acquaintance with vision and mission goes back to 1995 when I joined Crompton Greaves, and the learnings are relevant even today. The vision provided the overall objective of where the company wanted to be, the mission provided the framework and broad guideline while quality policy dictated how the vision and mission will be followed by the organization. These three became the guiding principles on which the whole quality system (including business processes) was designed.
An article by Glassman explains the significance of vision/mission statement and also captures where firms can go wrong.
The vision and mission statements help a firm articulate its sense of purpose, its direction and to an extent keep the firm from wandering into non-core areas.
The experts for ages have been advising that firms need to identify their core and align their business to that core. Diversification is good but not without a core. A Reliance can be successful in Petrochemicals and in retail too, but the two groups are separate organizations with their individual cores. Mixing petrochemical business with retail may not be so successful (of course there are synergies for example, Reliance could combine the fuel stations and its retail store in the same premises - but that is different).
While the top level statements help provide a framework, in the moment of truth, it is laid down procedures, policies and culture which define employee's behavior. In the example from Glassman's article, John was guided by mission, alright. To me he appeared to be violating a defined policy. The policy probably was not in sync with the mission statement and that caused the heart burn.
Another point of the article which I would like to analyse is - mission statement may restrict firm's growth opportunities. I agree a very narrowly defined purpose would lead firm to not pursue opportunities outside its core business area. But then, Bajaj auto could define itself to be a scooter company and die, or, it could change its vision to be a two wheeler company (which in fact it did in the face of competition) and still face loss of market share, or it could define its business to manufacture low cost personal transport equipment. In post mid 90's, it would appear that finance should not be Bajaj's business, but prior to that, offering loans for two wheelers was an excellent strategy to stimulate demand for its automobile products.
Now coming to the point of profit centricity of firm, I think that at least for "For Profit" organizations that is their Raison d' etre and is therefore not required to be captured in vision and mission statements. Also, it is important to understand that while no loss making business would survive, profit is not what motivated Ratan Tata to develop Indica and Nano. He wanted to make profits by selling Indica and Nano not the other way round. There were significant challenges when Indica was developed and even more when Nano was. And the challenges were not just Singur!
To conclude, the vision and mission statements are not just marketing devices. They are important tools for:
What if this statement were true?
My acquaintance with vision and mission goes back to 1995 when I joined Crompton Greaves, and the learnings are relevant even today. The vision provided the overall objective of where the company wanted to be, the mission provided the framework and broad guideline while quality policy dictated how the vision and mission will be followed by the organization. These three became the guiding principles on which the whole quality system (including business processes) was designed.
An article by Glassman explains the significance of vision/mission statement and also captures where firms can go wrong.
The vision and mission statements help a firm articulate its sense of purpose, its direction and to an extent keep the firm from wandering into non-core areas.
The experts for ages have been advising that firms need to identify their core and align their business to that core. Diversification is good but not without a core. A Reliance can be successful in Petrochemicals and in retail too, but the two groups are separate organizations with their individual cores. Mixing petrochemical business with retail may not be so successful (of course there are synergies for example, Reliance could combine the fuel stations and its retail store in the same premises - but that is different).
While the top level statements help provide a framework, in the moment of truth, it is laid down procedures, policies and culture which define employee's behavior. In the example from Glassman's article, John was guided by mission, alright. To me he appeared to be violating a defined policy. The policy probably was not in sync with the mission statement and that caused the heart burn.
Another point of the article which I would like to analyse is - mission statement may restrict firm's growth opportunities. I agree a very narrowly defined purpose would lead firm to not pursue opportunities outside its core business area. But then, Bajaj auto could define itself to be a scooter company and die, or, it could change its vision to be a two wheeler company (which in fact it did in the face of competition) and still face loss of market share, or it could define its business to manufacture low cost personal transport equipment. In post mid 90's, it would appear that finance should not be Bajaj's business, but prior to that, offering loans for two wheelers was an excellent strategy to stimulate demand for its automobile products.
Now coming to the point of profit centricity of firm, I think that at least for "For Profit" organizations that is their Raison d' etre and is therefore not required to be captured in vision and mission statements. Also, it is important to understand that while no loss making business would survive, profit is not what motivated Ratan Tata to develop Indica and Nano. He wanted to make profits by selling Indica and Nano not the other way round. There were significant challenges when Indica was developed and even more when Nano was. And the challenges were not just Singur!
To conclude, the vision and mission statements are not just marketing devices. They are important tools for:
- defining and communicating a firm's business objectives.
- formulating policies
- managing culture change to align the firm with ever changing business environment
Sunday, May 24, 2009
What Would Happen if Marijuana Were Decriminalized? A Freakonomics Quorum
Read the blog here:
http://freakonomics.blogs.nytimes.com/2009/05/22/pot-quorum/
The question is not relevant to Indian society but the fundamentals are same.
We have been fighting battles to win over deceases such as TB and cancers (oral and lung). I fail to understand the economics behind harvesting tobacco. Today I saw a notice in ToI about warnings on packs of tobacco products. It is pretty graphic for smoking products but appeared pretty benign for chewable products.
Will they deter our youngsters to not indulge in - remains to be seen. I think the negative externality of its social impact is not reflected in price of tobacco products. It should be internalized and passed on at the grass root (farmer) level. Giving subsidies to farmers (free electricity, water, even fertilizer) will not allow the externality to be internalized even with tax on final product. Also, while cigarette appears to heavily taxed, other products such as chewable tobacco are not.
http://freakonomics.blogs.nytimes.com/2009/05/22/pot-quorum/
The question is not relevant to Indian society but the fundamentals are same.
We have been fighting battles to win over deceases such as TB and cancers (oral and lung). I fail to understand the economics behind harvesting tobacco. Today I saw a notice in ToI about warnings on packs of tobacco products. It is pretty graphic for smoking products but appeared pretty benign for chewable products.
Will they deter our youngsters to not indulge in - remains to be seen. I think the negative externality of its social impact is not reflected in price of tobacco products. It should be internalized and passed on at the grass root (farmer) level. Giving subsidies to farmers (free electricity, water, even fertilizer) will not allow the externality to be internalized even with tax on final product. Also, while cigarette appears to heavily taxed, other products such as chewable tobacco are not.
IPL-MC
While watching the IPL final a few hours back, I decided to choose IPL as my topic for Managerial Communication submission. Here is why:
"Mukesh Ambani is not throwing money into cricket because he loves the game; it is hardcore business for him." Sources say that Reliance applied its normal business filters on the IPL franchise too. As a policy, the group does not get into any new business unless it has the potential to generate a return on capital employed of over 35% in the medium term. Sources say that Reliance is convinced that its Mumbai franchise can exceed this target.
Read the related stories.
http://www.blonnet.com/catalyst/2008/02/21/stories/2008022150020100.htm
http://business.outlookindia.com/inner.aspx?articleid=1036&subcatgid=501&editionid=31&catgid=9
Not that there is anything new in what I read, even the articles are more than a year old, what attracted my attention was the way Modi handled the challenge of elections. First the IPL itself and then holding it in SA!
"Mukesh Ambani is not throwing money into cricket because he loves the game; it is hardcore business for him." Sources say that Reliance applied its normal business filters on the IPL franchise too. As a policy, the group does not get into any new business unless it has the potential to generate a return on capital employed of over 35% in the medium term. Sources say that Reliance is convinced that its Mumbai franchise can exceed this target.
Read the related stories.
http://www.blonnet.com/catalyst/2008/02/21/stories/2008022150020100.htm
http://business.outlookindia.com/inner.aspx?articleid=1036&subcatgid=501&editionid=31&catgid=9
Not that there is anything new in what I read, even the articles are more than a year old, what attracted my attention was the way Modi handled the challenge of elections. First the IPL itself and then holding it in SA!
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