7

Few Options

My long daily commutes to and from Pixar were worse than I’d imagined. The section on Interstate 80 between the 580 turnoff to Point Richmond and the Bay Bridge, which runs past Berkeley toward the east, was one of the worst traffic corridors in the area, maybe even in the country. The traffic backed up for miles every day as commuters, visitors, and tourists all drove to and from the Bay Bridge. On a good day the drive one way took me an hour and a quarter. On a bad day, almost two hours.

I often sat in that traffic and thought to myself how this landscape must have looked before we covered it with concrete. Spectacular, was my conclusion. I imagined the first humans to set eyes on this terrain, surely among the most beautiful and fertile on the planet.

To the east of Interstate 80 were the wooded, grass-filled, low peaks of the Berkeley Hills, exquisite rolling hills that spread for miles and enjoyed an almost perfectly temperate climate. To the west, and the view from those Berkeley Hills, was the San Francisco Bay, that spectacular body of water formed by two peninsulas, one from the north, ending at Sausalito and the Golden Gate National Recreation Area, the other from the south, ending in San Francisco. Between those two peninsulas was a small channel that linked the San Francisco Bay and the Pacific Ocean. The only way across that body of rough and frigid water was a boat or, for the past sixty years, the Golden Gate Bridge.

I imagined what life in this vicinity must have been like long before the area became a bastion for higher learning and innovation. The Ohlone Tribe had lived in these regions for several thousand years. They had subsisted largely through hunting and gathering, building villages along the shores of the bay, traveling and fishing along the shallow waters in hand-crafted canoes, and moving inland in the spring to gather newly growing plants, nuts, and other edibles. The natural richness of the area must have been stunning to behold: tall grasses in tree-dotted meadows, herds of elk and antelope grazing, bald eagles overhead, abundant marshes and sea life near the shores of the bay. Ironically, like Pixar, story also mattered to the Ohlone. They lived by a rich mythology, full of spirit guides and shamanic rituals. Men spoke to the rising sun each morning; women sang in unison as they ground acorns and crafted exquisite baskets.³

 

I wondered whether, for all our modern conveniences, we really had it better than the Ohlone. We had done more to uproot the land in two hundred years than the Ohlone did in two thousand, decimating a way of life that seemed to have plenty going for it. Were we better off now, alone in our cars, waiting for the red brake lights of the car in front of us to turn off so we could edge a few feet forward?

Ever since modern man uprooted the Ohlone, we had been on an unrelenting march of technological progress, led in large measure by the start-ups that now occupied this terrain. The traditions that sustained a culture for two thousand years had been replaced by the relentless pace of innovation. Innovation had become our railroad into the future, ushering in sweeping changes to how and where we lived, what we did, and what we thought. Any company that could not keep up with the pace of change quickly became an artifact.

I had long been fascinated by why Silicon Valley existed at all. My work with new businesses left me mystified as to why giant companies with enormous resources and seasoned management teams allowed tiny start-ups to eat into their markets. Why hadn’t IBM, which led the computing world for decades, or Xerox, which invented the graphical user interface, not themselves become Microsoft and Apple? Years earlier, why hadn’t the railroads become airlines? More important to my present task, today, why wouldn’t Disney become Pixar? If Pixar succeeded at all, wouldn’t Disney, the king of the animation hill for more than two generations, want to claim computer animation for itself? The answer was that it definitely would. What would stop it?

The answer, I believed, had to do with one thing: culture.

Culture is the invisible force on which innovation depends. We like to pin the mantle of invention on individuals, not circumstances. We anoint heroes and tell their stories. Yet innovation is a collective undertaking. It is as much the product of circumstance as of genius. There is a spirit to it. Preserving that culture and spirit at Pixar was very, very important.

Indeed, I had been brought into Pixar as a change agent. My job was to shake up the company and usher it into an era of commercial success and viability that it had never experienced. How could I know that the changes I was sent to make wouldn’t end up destroying the culture on which Pixar depended to innovate?

Pixar was innovating on not just one but two fronts: storytelling and computer animation. The culture on which this work depended was very delicate. The storytelling part of that culture seemed especially fickle. In contrast, with engineering projects, you could set a goal and you were likely to see some result, a prototype, a beta, an early version that you could look at and iterate. That didn’t make engineering easy, but at least a good engineering manager could find the road map. Storytelling was different. There was no road map. I was learning how it involved much more groping in the dark. The culture had to allow for that exploration. As we laid out a plan for Pixar to grow, we couldn’t include in it a line that said, “Make three great stories a year.” We had to preserve whatever it was about Pixar that enabled great stories to happen.

Corporations are a lot like living creatures. They have personalities, emotions, and habits. The person at the top might seem to be calling all the shots but is often imprisoned in a culture he or she can do little to change. As corporations succeed, they generally become more conservative. The flames of creativity on which a company is built can easily cool as pressures to perform mount. Success brings something to defend, something to lose. Fear can easily trump courage.

In my days as a lawyer representing start-ups doing deals with large corporations, I had observed how the giant East Coast technology companies like IBM and Digital Equipment Corporation that once ruled the high-tech world had evolved into hierarchical, formal cultures. Orders came from the top. Lines of communication were rigid. Coloring outside the lines was shunned. Their organizations became politicized. The most progressive, innovative contributors did not necessarily rise to the top. Excessive hierarchy and bureaucracy were like a death blow to innovation. I knew that at Pixar, we had to avoid this.

Now I was being exposed for the first time to Hollywood culture. In our efforts to understand the entertainment industry, I had visited executives at Disney, Universal Studios, and other film companies; talked to Hollywood agents, lawyers, and accountants; and read as much as I could on the field. What I found surprised me. I had expected to see the creative, trend-setting, glamorous veneer that defined the image of Hollywood. Instead, I found that Hollywood could be even more defensive and fearful over changing the status quo than the huge tech companies with which I was familiar. Fear and power politics seemed to have a strong grip on Hollywood. The studios wanted to own things: artists, movies, TV, music, whatever it may be. Their instinct was to tie them up, to control them. I had seen this firsthand as I came to understand the terms of Pixar’s 1991 deal with Disney.

What this indicated, surprisingly to me, was that the hotbed of creativity that was the supposed hallmark of Hollywood was not all it was cracked up to be. It was much harder than I thought for the studios to take big risks and to innovate. They seemed to trade more on certainty and copycatting than risk. This meant that if Pixar were to raise its flag as an entertainment company, it would have to avoid the Hollywood habits that stifled innovation. If Pixar traded its familial and informal culture for one based on control and celebrity, it could lose the freshness and spirit on which it depended. Maybe my grumbling about Pixar’s lonely outpost in Point Richmond, California, was misplaced. Perhaps it was a good thing, making it easier for Pixar to forge its own way.

I could see many challenges to preserving Pixar’s culture. But there was one challenge that was rearing its head above all the others. It struck at the heart of Silicon Valley’s innovation culture, and it was a festering wound at Pixar that was in danger of becoming life-threatening. As I pulled into Pixar’s parking lot after that long commute through the Bay Area and Berkeley, this problem was rarely far from my mind. It involved a little device that had become the glue that held Silicon Valley together: the stock option.

Start-ups were bound together by the opportunity for their founders and employees to share the spoils of success. This was one of the main incentives for joining a high-risk venture versus a more established company. The vehicle for participating in a start-up’s success was the stock option, a paper promise that had become the currency of Silicon Valley. Stock options turned Silicon Valley into the modern-day equivalent of the gold rush.

A stock option gives an employee the option to purchase stock in the company in the future. Its value derives from the fact that even though the employee doesn’t have to pay for the stock until later, the price the employee pays at that time is set at the value of the stock when the employee receives the option, usually when he or she joins the company. If the company is wildly successful after the employee joins, the value of that stock could grow astronomically, but the employee only pays the price set when he or she received the option. All the rest is profit. For example, if a company’s stock is worth $1 per share when a new employee joins, and if that employee receives an option to buy a thousand shares of stock, five years later if the stock is worth $100 per share, the employee still pays only $1. He or she makes $99 profit on each of those thousand shares, or $99,000 of profit. This is how Silicon Valley gives birth to new generations of millionaires and billionaires.

If Pixar had failed in any one area, it was that its employees did not have stock options. Steve had long promised that he would fix this, but it had not happened. This shortcoming was the single biggest source of resentment and bitterness with employees at Pixar. In my early weeks at Pixar, barely a conversation started with me that didn’t quickly lead to the question “What about the stock options?” This wasn’t a gentle inquiry as much as the bubbling over of a seething cauldron of anger and frustration.

Pixar’s employees, especially those who had been there the longest, felt trapped. They felt let down and misled by Steve for not giving them a right to share in Pixar’s success. But they had little choice other than to wait and see what happened because they had invested so much time in the company. It would make little sense to leave now, especially when Toy Story’s release was imminent.

Making matters worse, Steve had made promises to a handful of Pixar’s senior team, giving them a share of Pixar’s film profits that might be converted into stock options. I was the most recent of those, having received a promise of stock options when I joined the company. Besides the top executives, everyone else was excluded. This was a disaster in the making. All it would take was one domino to fall, and an exodus of Pixar’s talent could happen overnight; if not now, later. That would spell the end of Pixar’s capacity to innovate.

On this issue I was caught squarely in the middle. On the one side, Pixar’s longtime employees were angry and bitter. There were constant gripes as I made my rounds at Pixar:

“Will Steve take care of us?”

“We’ve waited a long time for this.”

“I hope you make it right.”

“I’ll believe it when I see it.”

On the other side was Steve, who had all the power to decide how many stock options to give Pixar’s employees. A stock option plan requires a company to set aside a percentage of its stock for the benefit of its employees. In start-ups that percentage varies, from as low as perhaps 15 percent to as high as 40 percent. Because Steve owned 100 percent of Pixar, every option that went into the stock option plan would reduce his personal stake in the company as those options were exercised by Pixar’s employees.

Steve wanted to reduce his share as little as possible. He had in mind the kind of percentage that a new start-up might use, as low as 15 or 20 percent. That might work for a company just starting out, one that might expect to hire 50 or so employees in its first couple of years. But Pixar was far bigger than this. It already had approaching 150 employees, and many of those were seasoned veterans who, by Silicon Valley standards, were entitled to significant stock option amounts.

The problem was exacerbated by the possibility that we might try to take Pixar public soon; Steve was aiming for the end of the year. The price of a stock option is set at the value of the stock at the time the option is granted. Early in a company’s history that price will likely be very low because the company doesn’t have much value. It might be well under $1 per share. But as the company grows, its value goes up, and so does the option price, maybe to a few dollars per share. Obviously, it is much better for an employee to pay a lower price for stock in a company. As a company approaches its initial public offering, or IPO, its value is presumably growing and growing—which is the momentum that makes the IPO possible—with a corresponding increase in the option price.

Because Pixar was ostensibly close to its IPO, the option price would have to be set much higher than if Pixar was a brand-new start-up. This meant that Pixar’s employees who had been there since the early days would be paying a much higher price for their stock options now than they would have had they received them years earlier, when theoretically they should have received those options. There was nothing we could do about that now, but this was going to be a very bitter pill to swallow. It put even more pressure on granting options generously.

Steve did not want to take these factors into account. His position was that “the option price doesn’t matter because we’ll make the value of the stock so high.”

He was also adamant about taking no risk that he would lose control of the company in the future, as Pixar’s stock options were exercised by employees, and as Pixar sold stock to other investors. I didn’t need to ask him why. He wanted to avoid any risk of being in a position like he had been in at Apple where the board had effectively ousted him from the company against his will.

I understood that Steve wanted to retain control of Pixar, but I felt there was more to it than that. He could have authorized more options in the pool and still retained control. He just didn’t want to give up his own shares. When it came down to his own pocket or the pockets of Pixar’s employees, Steve wanted the stock in his pocket. On the one side, I couldn’t blame him. He was the owner of the company. He had taken all the financial risk.

But on the other side, I grew frustrated with Steve over this. I felt we had a chance to fix an injustice in a way that would allow everyone to win. Giving up a little more stock would make little difference in the wealth Steve would enjoy if Pixar succeeded. In any other start-up, Pixar’s key employees would have had stock options years earlier, at very low exercise prices. It was virtually unheard of to put in place a stock option plan so close to a potential public offering. This did not have to be such a battle.

The more I waded into this issue, the more I felt like a punching bag for everyone: Pixar’s employees thought I was protecting Steve. Steve thought I was asking for too much for Pixar’s employees. It didn’t matter that, inwardly, I sided with Pixar’s employees. My job was not to take sides but to broker a solution that would work for Steve and the rest of the company. It was the first time I felt myself pitted against Steve, though. He began to get irritated when I brought up the subject of stock options.

“We’ve already discussed it,” he would add curtly. “Just show me the proposed plan.”

But I couldn’t make a plan without enough stock to put in it.

“When Steve digs in his heels, it’s very hard to move him,” I complained to Hillary one night. “Most of the time we’re on the same page, but we’re not on this one and there’s little I can do.”

“Look, if you’ve tried everything,” Hillary said, “what else can you do? It’s his company. It’s not your fault.”

But I felt I needed to fix it. I could feel the tension building on this issue. Everyone was itching for a stock option plan, but when they saw how much stock was in it, the bitterness would just grow. I had to wrestle more stock from Steve than he wanted to give.

And so, on my long drives between the Berkeley Hills and the San Francisco Bay, I worried. I worried about how seriously we would be taken as an entertainment company. I worried about Disney claiming the space that Pixar was creating. I worried about the pressures a new strategic agenda would put on Pixar’s culture. And I worried about Hal Vogel’s observation that taking a film company public was a “long, torturous, and expensive obstacle course.”

But it was the stock options that bothered me the most. Many of Pixar’s employees had staked their entire careers on Pixar, had given it the best years of their professional lives. What kept them there? What kept them from jumping ship for more lucrative opportunities? I reasoned that it could only be because they were passionate about Pixar. Despite all the years of commercial failure, they believed in the potential of their own work, and they wanted to see it through. We could not rely on that for much longer, though. They now needed to be rewarded for it.

Somewhere on those drives, in the quiet of my own car, I realized that no amount of deliberation was going to resolve my worries. Sometimes there comes a point when you jump not because you feel ready or are sure that you’ll make it across the chasm, but because the conditions are forcing you off the edge. That’s when you find out if you can fly. I felt this was the time to jump. We had to start moving, and resolving the options problem was the place to begin.

As mundane an issue as it might seem, I believed that Pixar’s fate hung partially in the balance over how much stock we put in the stock option pool. Too little, and Pixar’s key employees might be forever disgruntled, ruining the culture on which Pixar was built. I wasn’t sure I had anything further I could squeeze out of Steve, but I needed to take one more final swing at it, even if it meant incurring Steve’s legendary wrath. I picked up the phone one night and called him.

“We have to add more stock options,” I said flatly. “We can’t make it on the amount we have allocated right now. It’s not enough. A few percent more, and we can give it a shot and still have a good chance you’ll maintain control of the company even after we go public.”

“I said I didn’t want to revisit this,” Steve griped. He was on the verge of dismissing it. I suggested a number. It was as far as I thought he might go.

“Will this be it?” Steve asked, totally exasperated. “Will this be enough options to last for a long while?”

I didn’t think it would be. It would barely get us by now.

“Yes,” I declared with unfounded confidence. “We’ll make it work.”

“Then I don’t want to hear about it again.” And with that, Steve ended the conversation.

I breathed a deep sigh of relief. It could have gone much worse. I would still get a lot of grief over not having enough options to go around, but I had gained enough to now make a case that if Pixar became a big enough success, that would make up for it.

I at last had my first real toehold. The option plan was pivotal to moving Pixar forward. But now the stakes were higher than ever. Those stock options needed to be worth a lot one day. A small win wouldn’t cut it for anyone. Pixar was aiming for the big time.