For the better, awareness is changing. CEOs are stepping up. They acknowledge the crisis and decry systemic racism and inequality. But thoughtful tweets and generous donations alone won’t get us through this.

It’s time for a national action plan on racism and inequality.

It’s a five part plan for a community:

1. Convene daily the local business, community, protest and police leaders to navigate the current situation together. Weekly press conferences should be held to share the results of the conversations and the plans. Every city needs a Task Force Against Racial Inequity
2. Commit to a joint police and protest leader dialog with two primary goals: A: isolate individuals responsible for instigating looting or property destruction. Expose instigators and turn them in to authorities. B: respect and dignify the protests, allow them to disrupt traffic and whatever normalcy we have. Protests should be not be overshadowed by destruction. The protests must be heard, seen, and respected without destruction of property and looting. Both can happen together, but only if the police and protest leaders work together.
3. End police militarization replace with a policy of deescalation. Police forces must reject the Israeli training handbook on forceful repression, tear gas, rubber bullets and crowd control designed to subdue protestors. Militarized policing disproportionally impacts communities of color and lower incomes. Police officers and protestors are members of our community. There is no military solution between them.
4. Publish metrics of racial inequality in their community. Reports and tracking of dashboard metrics related to racial inequality and treatment of people of color vs. whites should be published monthly. Blacks must feel safe in our communities and be protected by our legal and police system and not victimized. Only what we measure, can we improve. The data will help us celebrate progress or address regressions. But no longer can we ignore reality. We tracked Covid-19 with unprecedented detail. We can treat this crisis just as seriously.
5. Take aggressive action to reduce the racial economic inequality. After this economic depression, we must end up in a better place. Recovery is no longer enough. The richest (and often whitest) can’t end up with 90% of the recovery gains. The task force must focus on the working class so they have significant and, in some ways, disproportional gains in economic value including better paying jobs, dependable healthcare, and a voice in the future of the community. Nothing short of clear and absolute commitment to this goal will suffice.

Slavery is older than our nation itself. We are rooted in 246 years of slavery. Our founding fathers punted on addressing slavery while forming a free nation. Only a devastating civil war ended slavery in 1865 and provided the right for black men to vote, enshrined in the 15th Amendment of the Constitution.

Those in power resisted equality and passed local laws denying equal rights and equal access for blacks to voting, which continued for another one hundred years after the civil war.

Rosa Parks ignited 10 years of civil rights protests which drove the legalization of inter-racial marriage and spurred the 1965 Voting Rights Act banning racially motivated voting restrictions.

More recently, those in power resist equality and the Supreme Court, in 2013, allowed complex voting rules which dismantled a central component of the Voting Rights Act. States can, once again, make it more difficult for blacks to register to vote.

With 246 years of slavery and over 150 years of fighting for the right to vote, blacks have spent over 400 years seeking racial equality on voting.

Equal protection under the law and by the police, economic prosperity, voice and influence in the business, social and economic community are elusive. Blacks know it, yet nothing changes. The street protests must be heard.

This issue is deep. Monstrously deep.

Will it take another hundred years for meaningful racial equality?

We need dedication to seeing racial inequality, calling it out, and rejecting it. We can’t accept or ignore it any longer.

CEOs and leaders including Kevin Johnson of Starbucks, John Donahue of Nike, Tim Cook of Apple, Magic Johnson of Magic Johnson Enterprises are engaged with the local communities and bring a vision of modern CEO leadership. Unafraid to call out inequality and comfortable with committing resources and voice to societal challenges, they can partner with local communities to drive meaningful change.

This is our responsibility.

We’ll get through this difficult and painful period. We can’t repeat the past, by dodging the issue and deflecting the focus while deepening the problem.

It’s time to take measurable and real action.

Driven by vision of an equal society.

And build a better and healthier society.

We need to understand our history. Slavery is our pain. We must face it.

We need to hear and see the protests. They are legitimate.

It’s time for action that makes a difference. We are ready, capable and inspired.

Let’s start with these five steps to a national action plan.

John Carreyrou’s “Bad Blood” non-fiction thriller about Theranos quickly became a must read in the Bay Area. Many people knew former employees or investors and some had directly interacted with its CEO, Elizabeth Holmes. Peaking at a valuation of $9B, Theranos built elaborate new corporate and lab facilities and spellbound an industry while capturing the imagination of entrepreneurs everywhere.

Theranos came to a crashing halt with Carreyrou’s investigative piece in the Wall Street Journal questioning claims and legitimacy of Holmes and her company.

Since then, many have speculated on the what, why and how of this certain-to-be case study. It’s a must do for Stanford because of their close relationship and access for a fascinating insider perspective on the people, motivations, emotions, and facts of Theranos.

As an entrepreneur of a connected home hardware startup and former venture capitalist, I felt a great deal of pain while reading Bad Blood. I know the difficulty of leading a team creating ground-breaking technology and could understand Holmes’ need to convince a team to believe in doing something that seemed impossible. The personal willpower required to push through every obstacle is immense.

But, my empathy ended there. Holmes created and curated a culture that destined Theranos the failure. She hired very talented and capable people, using them for show and credibility. Then proceeded to crush their souls.

Behaving as if she was the smartest, most insightful and most charismatic person in the room, she made six critical mistakes. Anyone of them is deadly, but all of them? Theranos didn’t have a chance.

Mistake #1: She couldn’t handle the truth. (shoutout to those who know the reference) A first principle job of a CEO to find the truth by asking hard but basic questions. They must know what’s really going on with their team, their product, and their customers. Basic questions such as “Does this product work?” or “How can we prove to ourselves that we can get it to work?” need to be asked and answered directly. A good CEO senses bullshit happy to talk or downplay of a serious issue. They sniff out the prize of truth like a champion truffle-hunting dog. She avoided the truth entirely.

Mistake #2: Believing that a difficult product review session is just people whining or that they don’t believe in themselves. As a CEO of a disruptive company, you constantly hear people saying that they can’t get it done or that they need more resources or that you are pushing too hard. You can start to believe that talking people off the ledge is all it takes. Get the complainer feeling good about himself and they will get it done. Or fire him. Slowly, the CEO gets isolates into a fantasy cocoon of her own making. If you product team is telling you something, listen. Maybe you have the wrong people but you just might have the wrong culture or have picked the wrong problem.

Mistake #3: Not surrounding herself with people who revel in problem-solving. With problem solvers. The right team wants to find the truth themselves, based on data and facts and proof. In healthy teams, bad news travels fast. Not to blame others, but to prioritize troubleshooting. At my company, anyone could “call hand grenade”. I picked people that wouldn’t look the other way if a “hand grenade” (something that might be a serious issue) appeared. We couldn’t take the chance it fell into a responsibility crack. If anyone, at any level, called “hand grenade” — the right people would assemble to quickly assess, understand, prioritize and solve the problem. Turns out, if, given the power to pull the fire alarm or stop the assembly line, it is rarely done. But when it does happen, it’s a powerful moment. Holmes did the opposite by firing those who raised their voice. She cherished employees happy with their own progress while remaining dutifully ignorant of their context.

Mistake #4: Holmes lacked the skills to lead a team tackling an ambitious technical challenge. Many technical breakthroughs were needed for the Theranos blood testing device to work. She did not understand the number of risks they faced to be successful. If there are 10 key risks and you can achieve 90% success on each one, the risk compounds to virtually assure that the product will never work. Even if you get to 99% right, it is still a 10% chance of not working. By attempting to take on too many technical challenges at once, she created endless loops of instability. The team could have kept working for a decade without success. By deferring some challenges to future versions, you ship a less than envisioned product. But you ship, learn and enhance. Repeat. At Microsoft, we were criticized that a product didn’t become great until version 3.0 and there was some truth to that. But to do it, we had to go through version 1.0 and version 2.0. The first released iPhone was compromised in many ways before later releases made it great. There are limits to the level of technical risk achievable in ambitious version 1.0 product. Holmes lacked a basic recognition of the technical risks and engineering leadership.

Mistake #5: Never believe the demo. Don’t falsify or believe the demo is something it isn’t. Know what you are demoing and describe the purpose and limitations of a demo. Demos are false data points — unreliable and untrustworthy as they rarely solve any of the hard technical challenges. I was in a BOD meeting for a startup, their first BOD meets to post a major investment, and the CEO couldn’t prove that his demo (of a software agent system) was real, as claimed prior to investment. We immediately discussed unwinding the deal. Be the demo skeptic.

Mistake #6: Holmes cultivated a deep culture of secrecy. While working on a disruptive product, some CEOs implement strict external secrecy rules to keep the competitors unaware and maintain an element of market surprise. That’s reasonable. However implementing rigid internal secrecy to keep leaders from knowing about related product development work in other parts of the company is a warning sign. Compartmentalizing information in a startup is disastrous.

The warning signs were evident. Holmes tripped a number of deadly signals that a BOD with product making experience would have seen. The only such board member, Avi Tevanian, left shortly after searching for the truth. He found it and realized that no one else was interested.

Riveting, sad, and infuriating, the Theranos story isn’t of an innovative team achieving something great only to be too early to market or fallen by a tragic event. This wasn’t General Magic or Go or WebVan, all business failures but very important companies to the fabric of Silicon Valley.

It was dark side of Silicon Valley. This was Theranos, a fraudulent company with an incapable leader that simply survived many deadly mistakes far longer than normal.

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Six Deadly Product Mistakes to learn from Theranos was originally published in The Startup on Medium, where people are continuing the conversation by highlighting and responding to this story.

This is a 10 minute read providing background and context for why options are broken and why something new, a version of RSUs that I call SRSUs (Startup RSUs) should be created to make equity compensation useful.

I am a major fan of the uniqueness and power of alignment that stock options brought to employees, management and shareholders. Over time, however, that alignment and benefit degraded to the point where stock options have become a lottery ticket rather than compelling & predictable wealth creation. Recognizing this, most large tech companies have replaced stock option programs, yet they remain the primary model for small to mid-sized tech startups. So, what’s the disconnect?

Stock Options Worked Very Well.

Way back, stock options were provided to executive leadership, and over time, to nearly all full-time employees of tech companies. The basic structure involves the company issuing the right for employees to buy stock in the future at today’s price, set to a vesting schedule. If the value of the stock rises over the next several years, the employee buys vested stock from the company at the initial price and sells it at the current, higher, price. The difference is a financial gain and is taxed at ordinary income. You may hear someone brag about holding options worth $1M, but, typically, the amount they can put in a saving account would be significantly less. For example, if the cost of the option was 20% of current value, 80% would be a gain and as much as 40% paid in taxes, leaving 40% — $400,000 as the true value of the option.

I joined Microsoft shortly after they began to popularize stock options for all full-time employees as public company in 1986. Over the next dozen years, Microsoft’s stock price soared creating tremendous wealth for employees, often far in excess of their salary. Microsoft received very large tax deductions while also getting cash from employees who acquired the highly discounted stock. Additionally, employees were motivated to help the company perform financially well, knowing that it would further fuel a run up in the value of the stock. Since Microsoft’s IPO, a share of its stock has risen a stunning 147,000%. Options, issued at any point, would eventually be very valuable.

The financial velvet handcuffs were meaningful and voluntary employee turnover was likely lower than what was considered normal for the tech industry. Other technology companies expanded stock option programs to the broad employee base and, as long stock prices rose, the option program appeared to a beautiful model for everyone.

Then They Broke.

So, what happened? There’s an adage that employees do what you pay them to do. That is, behavior will heavily be influenced by the compensation model. Pay large bonuses for large contracts and you’ll get large contracts, regardless of profitability. Pay for profitable sales and the sales reps will only focus on profitable sales but growth may suffer. Stock options provided employee alignment with shareholders as they were both focused on increasing the same metric: stock price. All good, right?

Over time, four realities transpired and changed the game.

Number One: Stock options are an incentive only when they have value, and that only happens when the stock price continues to increase. Underwater options are just demoralizing. Great in bull runs, worthless in bear markets and arguably more correlated to the overall market conditions than specific company performance. There are difficult periods where the stock value doesn’t nicely reflect the progress of the employees. It can be confusing to employee incomes to have dramatic and uncontrollable swings in value.

Number Two: Stock options are compensation expense, not a tax deduction. In 2005, accounting rules changed to recognize this expense, however, most companies treated this expense separately and do not include in their “adjusted EBITDA” performance numbers. Either way, options are now a drag on earnings instead of an enhancement.

Number Three: There are two scenarios where employees could write checks and end up losing their own cash. One is when they want to get capital gains taxation, do a 83(b) election, and buy the stock from the company at grant. The other is when they leave the company, acquire vested stock, pay taxes on the gain, and hope to sell at a future liquidity. For example, if they bought $100k of stock and paid $50K in taxes on the gain, they now have $150K of their own money at risk. Most people walk away from vested stock simply because they don’t have, or can’t put, their own cash at risk.

Number Four: Employee retention is directly influenced by the value and timing of the stock options. The standard four year vesting cycle with a one year cliff influences behavior. Also, in a successful company with a rapidly rising valuation, it’s almost certain that future grants will be priced high and be far less generous ownership and, therefore, much less valuable. So, especially in the upside case, there’s little financial reason to stay longer than the initial grant vesting.

Well, do they work? They can provide wealth, but only for a small number of people who hit the stock option lottery — essentially, the early employees with respectable grant ownership of rapidly appreciating companies. That’s rare but makes all the news.

The vast majority of stock option grants issued will be worthless or worth very little. I interviewed an engineer who was leaving FitBit, a massively successful startup tale. Its market cap peaked over a $10B valuation but quickly settled down prior to employee liquidity and now trades around $1.3B. Even then, a great success. The employee’s post-tax shares, however, were nothing better than a nice bonus.

Simply put, if you compensate with lottery tickets, your employees will leave when they think the number may not pay off. Worse, they may start to think of your company in the same way you compensate them — a long shot random opportunity.

I’ll provoke by saying that many startup CEOs don’t even believe in their own stock option programs. A number of high profile CEOs often sell some of their stock to investors as part of an investment round. If they really believed, they’d be buyers not sellers. I know there can be compelling reasons for this, but when a CEO sells and his own employees can not participate, it’s a major disconnect between them.

Large Companies Ended Options, But Startups Couldn’t Do The New Plan.

For these and other reasons, in 2003, Microsoft ended the stock option program and replaced it with restricted stock units (RSUs). Shortly afterwards, Microsoft co-founder, Bill Gates was quoted as saying he wished they had never issued options citing the highly volatile lottery like program, essentially saying “either you can buy 10 homes or none at all”. Now, nearly all large technology companies, public and private, now offer restricted stock units rather than stock options. One notable exception is Netflix, which has one of the most innovative stock option offerings and is quite thoughtful about aligning the interests of shareholders, management and employee.

Do they retain good talent? I’d argue that it’s not clear and it’s possible that it has a negative impact— the 4 year vesting schedule has become the retention guide and beliefs about staying at the company focus on a vest schedule rather than company fundamentals or overall career satisfaction. Employees now seek a portfolio of lottery tickets, getting initial grants at four to eight companies in their career. I joke about it as “VAR” for “Vest and Repeat” or, less nicely, “Vest and Run”. In the success case, once an employee begins to understand that future grants are not likely to generate anywhere near the income of the initial grant, they focus on maximizing value of the initial grant and then seeking out the next grant at a new company. It’s no surprise that the likelihood of employment after the third year is only 50%.

After decades of involvement and BOD roles with startups and after founding and leading my own startup, I believe the stock option model doesn’t work for startups. Compensation reward should be tied to contributions & time with the company, not the luck of being employed at the right time in the company history. Essentially, long term contributions to an enduring company should deliver long term wealth and be more attractive to top talent than the roulette wheel of stock option program.

Before going public, United Parcel Service (UPS) created meaningful wealth for many employees, from drivers on up. As a profitable and private company, they assigned a book value for their stock and allowed over 300,000 employees to capture a share of value creation during their employment. When the employee left, they were paid out in cash as their equity was repurchased by the company. It was a strong and clear message to employees that they, not former employees, created shareholder value. This excellent model worked because UPS was profitable, unlike most tech startups, and had the cash to repurchase ownership.

If the goal was to provide meaningful and fairly consistent rewards based on company performance, RSUs got the job done. Stock options, on the other hand, provided fantastic value to a small lucky group of employees and nearly no value to the vast majority.

Startups and VCs are starting to recognize that stock options are losing their effectiveness in recruitment and retention of the best talent. RSUs, used at large companies, doesn’t work at most startups since they can’t use their cash to buy back RSUs. Additionally, RSUs cause force a sale of stock at vest, in order to pay taxes. Essentially, you are forced to sell regularly even if you believe in the potential in the stock, a significant disadvantage to stock options.

So, what to do?

A new equity model should be created — one that provides benefits to long-term employees, shareholders and company management and that provides powerful recruitment and retention.

To execute my suggestions, a team of lawyers, accountants, tax experts, VCs and entrepreneurs would need to translate this framework into a binding and effective program. At my startup, we implemented an equity model that would have yielded much greater value to employees. Basically, our equity plan, while not perfect, allowed employees to have no strike price, pay capital gains tax rate and never have a situation where an employee would have cash at risk. It required, however, that we operated a LLC, not a C-Corp, and that proved different enough and complex enough for many to comprehend. Reid Hoffman & Josh Elman, partners at Greylock, were terrific in allowing me to try it out at Otto and learn a number of important lessons that are central to this new model.

Enter SRSUs- a better plan.

This new model, I’ll call “SRSUs” — for Startup RSUs. It works as follows:

Startup C-Corp (note, this is a traditional C-Corp, not a LLC) issues SRSUs to employees, which vest on two triggers: 1- one year monthly schedule; 2- at liquidity event.

Grants are issued annually, as a percentage of salary, not tied to individual performance. Employees can substitute grants for cash income (by reducing their salary), effectively purchasing grants with pre-tax dollars.

For exceptional executive hires or key talent, an additional DRSU grant could be offered with a multi-year vesting schedule — anywhere from 2 to 10 years. It’s also possible to provide traditional stock option grant as an additional lottery ticket to key employees simply to provide access to greater upside.

Once a year, existing investors (VCs) are invited to acquire time vested employee SRSUs to a max percentage (~25%) of an employee holdings at a price set by the buyers. It’s a simple and fast Dutch auction where employees, on equal terms with the CEO, can get liquidity on their holdings. That auction would be considered a valid liquidity event providing full vesting of eligible shares.

The offering price is set by the auction. Since it is a free market, it’s possible investors may offer a lower price for shares than the prior year, or they may not offer any price at all. The clarity of a real market price set by sophisticated and skilled insiders may eliminate the need for annual 401A valuation reports. It also provides direct investor & important feedback to the team on their performance.

When an employee leaves the company, they get to keep their time-vested SRSUs but can no longer participate in the annual investor purchase program and must wait for a major liquidity event — either IPO or company sale. Within 3 months of termination, however, investors have the option, but not obligation, to purchase the departing employee’s entire stake at the last auction price. The ex-employee is not guaranteed liquidity when they leave and they may have have to wait until an overall liquidity event.

Automatic annual grants provide a reasonably predictable stream of SRSUs to employees. Performance bonuses could also be converted to SRSUs by the employee.

If an employee wanted, at the annual auction, rather than selling eligible shares, they could simply acquire the shares. Ordinary income tax would be due, but by holding for at least one year, future gains would be taxed at capital gains rate. A powerful investment opportunity for a bullish employee.

Key benefits:

• Risk free & valuable grants to employee (RSU-like)
• Not subject to standard option strike price volatility
• More fair & sustainable for growth companies
• Less dilutive than standard option programs
• Annual liquidity program for all vested employees
• Taxable only at liquidity, not time vesting
• Ownership focused on current employees & investors
• Standard C-Corp structure with modified RSU program

These changes would provide new opportunities for employees at venture funded startups to participate in annual liquidity events, share in valuation growth of the company and align interests among shareholders, employees and management. Additionally, it should provide better economic incentive for employees to stay with a startup rather than pursue a new company every two to three years.

These changes won’t solve all the problems associated with stock options but addresses many of its weaknesses and underlying ineffectiveness. Stock options have all but disappeared in the tech industry but they’ve clung to life within the startup world. They are no longer effective and SRSUs, or another innovative model, is needed to replace them.

If you are a CEO, attorney, or venture capitalist and want to give this a try, reach out to me. While this was a lengthy description, there’s a great deal of nuance and learnings along the way and I focused on the core items. I’d be happy to help out in a way and help you advance the industry in this way.

I wrote the “So Close” post to honor the team, entrepreneurship and the courage of startup teams to go for it. Creating a category defining product requires risk taking — often at very uncomfortable levels. I love that spirit.

I anticipated readers would bring a wide variety of perspectives. I didn’t write the post to deflect blame, fall on my sword, or even as an epitaph. As CEO, I know my role and the responsibility for the company rests with me. I own that. I made decisions every day, some solo, and many with the support of a very talented and empowered team.

I’ve spent time reflecting on those decisions. Hindsight would guide different decisions, but I have a strong opinion that it is the wrong framework to reflect and learn. If we operated such that we couldn’t trust anyone, or any business deal, we’d never get shit done. Several of our most important business partnerships were based on trust relationships. The “One Percent Doctrine”, which states that even a 1% chance of occurrence must be treated as a certainty, would be a terrible way to run a company. Risk assessment is far more practical. As a hardware company, we had more than our fair share of risk. Did we misestimate the risks we faced? Did we manage risk in a reasonable way? Our reflections focus on our risk awareness and risk mitigation.

I’ve received dozens of supportive calls and notes from CEOs and founders expressing their understanding and sharing their stories. Product leaders of hardware companies recognized the uniqueness of the Otto lock. Founders, who completed successful acquisitions, shared stories about running close to the edge and operating without a safety net. They privately shared how easily their outcome could have been very different. None of it erases the disappointment but the conversations were incredibly helpful and provided important context to the risks and challenges of a startup.

I shared my experience to honor my team and because I felt it might be useful to others. Especially because it was painful and imperfect and real. I hope other entrepreneurs understand this stuff is really hard, bad shit happens all the time and that others are watching, but you can’t play scared or freeze up. It may not work out as planned, but the outcome isn’t final unless you let it be.

But entrepreneurs get it. They really get it. They reached out to help, share, support, and problem solve. We learn and grow together. We pay forward. And for this, I am truly humbled and appreciative.

On a warm summer evening, I’m at a dinner with a small group invited to meet David Candaux, a top Swiss watch maker. Normally, I wouldn’t find much interest in discussing the engineering and design effort behind creating the finest of watches, but my engineering team at Otto had been hard at work innovating a gear mechanism for our digital lock and I was learning a thing or two about the elegance of an intelligent and well designed gearing system.

David Candaux is a mastermind of elite Swiss watch making and I wanted his immense engineering talent with intertwined gears and minuscule drivetrains to vet the design of the innovative transmission system at the heart of the hardware that became the Otto digital home lock. The next morning, David, looking properly science fiction with his watchmaking magnifier glasses, is surrounded by our team of mechanical engineering guru’s in Otto’s hardware lab. We’re deep in stealth mode and this is the first time that we’ve exposed our gearing system to an outsider.

Time ceases to exist. Laughter erupts as his first reaction is “Wow, it’s so big”. He rocked our perspective that this is the smallest sophisticated motorized gearing system we’ve seen in a lock. The lab goes quiet as the only sound is the turning of the Otto drivetrain in David’s precise hands. Turn, turn, turn and stop. Repeat. Stillness, thinking, calculating reviewing…this continues with slight turns and then quiet. Ten minutes feels like hours as the turning stops and David peers up from his speciality glasses. There’s a collective pause in breath, waiting for his verdict. David Candaux’s words are as meticulous as his manner, “May I use this design?”

That was one of our many “Oh shit, we are on to something” moments at Otto. To deliver the consumer experience we envisioned, we had to invent a sophisticated and precise yet durable gearing system. Imagine if a Swiss watch and a Volvo had a ‘love’ child. Creating a new user experience meant we had to innovate at every level, including display, power, materials, bolt, battery, gearing and UX. We knew we could deliver the most secure lock on the market with the best user experience. Creating a new, exciting and addictive user experience guided our actions and decision making. It cost us time and money, but we understood that we couldn’t cut corners on reliability, durability or safety. We faced barriers that seemed unsurmountable and yet were able to stare them down .We plowed ahead, believing in our creativity and the perseverance of our team to find a way. And we always did. And I was so impressed by it. Every. Single. Time.

But there was a final barrier that did stop us. It is with great sorrow to say we have suspended operations at Otto. I have never experienced greater professional pain than I have in the past two weeks. Especially since this post was intended to tell the exact opposite story. I will explain what happened, but to be clear, the main point is to reflect on the story of Otto and honor the very ambitious team that set out to create an entirely new experience of accessing and sharing your home.

The team’s commitment to this was profound. Many individuals spent multiple weeks, multiple times, living in China working with our suppliers. They were creating precision parts and designing a manufacturing line that would assemble, test, and package Otto units at scale. After a long day at the office, a dozen or so people would get on a nightly call to support the team in Asia. They then worked to provide fixes, updates or additional support so their colleagues would not be slowed. During our builds, standard work weeks became 6 days a week with often scheduled company-wide calls nightly and over holidays, vacations and weekends.

Building Otto has been a triumph of engineering deeply interwoven with design. We created a culture of innovation and challenged ourselves to do the right thing. No company, large or small, had transformed the standard deadbolt lock into a fully intelligent, secure and reliable device and service for the home. It demanded breakthrough engineering work — from the initial design to working with our suppliers to create very precise components that could be built at scale and ultimately creating and managing a supply chain with dozens of suppliers.

Behind the hardware was the most secure, reliable and scalable service platform ever created for home access — and likely for any access system. Not to be outdone, the software team challenged themselves to complete the full user experience so that our customers would fall in love with the way they engaged the product and actually experience joy as they used it. The software team’s dedication to fast and guaranteed reliability at every level — firmware, app, cloud, connectivity and data provided the foundation for a magical experience in which Otto recognizes you as you approach. We were committed to doing a few things really well which we viewed as more valuable than having a lock experience work most of the time. It was a moment of celebration to see Press To Unlock, a signature experience, come to life as all the pieces executed to perfection.

The most thrilling part of the team experience was that we needed our team to be as integrated as our product. Job titles were irrelevant as people filled gaps as needed. Marketing, engineering, operations and software worked as one team to debug, solve problems and harden the product so it would be reliable and work as it should every time. Nearly every person told me how they grew, learned and experienced interdisciplinary teamwork at the highest level.

When we introduced Otto to the world, we struck a happy chord with the marketplace. Concerns about the $699 price point melted away as homeowners valued the security, design and performance of a new generation of home access that Otto represented. Our beta users raved as the product spoke for itself, and it was rapidly maturing. More importantly, it stood for what was possible and what we could deliver in the future. We could see people falling in love with our product and that couldn’t motivate us more.

Ok, so what happened? This past summer, we began fundraising for our next financing round. In early September, we were approached by a public company who understood the product we built, the engineering behind it, and the opportunity it represented. Initially they proposed investing, but quickly shifted the conversation to an acquisition. It wasn’t our desire to be acquired so early, but they helped convince us that the best path forward was to marry our innovation with their scale and distribution. We would focus our energy on accelerating product development as a global opportunity. This would be as transformational to them as it would be to us.

Our signed agreement restricted our ability to solicit other bids or fundraise and targeted a close on December 11th, 2017. The interim period was consumed with meetings, trips, lawyers, planning and intensive due diligence. While a tedious process, we built a close working relationship and shared their enthusiasm about our future together.

On December 11th, they called me and stated they would not complete the acquisition nor revisit the investment proposal. I was stunned. The reason is still not understood. We had extended our cash to get to the closing date, and now were left without alternatives. Rather than telling our dedicated team that we were accelerating our growth plans and their equity ownership might provide them some financial stability, I had to tell them we could not continue operations.

I define startups as companies that don’t have control of their own destiny because they rely on investor cash infusions to operate. When asked, “How’s business?”, I always replied “I don’t have a business yet, we’re still a startup.” Startups are vulnerable to market financing conditions and events such as what we experienced. This year, 2017, was a particularly harsh year for hardware startups. Additionally each day carried the potential of a new existential threat, from product to supplier to market to financing to people to regulatory to competitive. We learned to breathe through each one, stare it down and tackle it head-on. But even if we dodged a hundred bullets along the way, it only takes one to end it. I know these risks. They can be exhilarating. But in this moment, they are crushing. That phone call, and its timing, was the bullet we couldn’t deflect.

Otto assembled a stunning team of expert and talented individuals. We were proud of our diversity and our belief in each other. Each person had an important impact on our product, yet they could not have done it without their commitment to teamwork and mutual support. They faced every obstacle with resilience, grit and mental toughness. We had moments of joy and overwhelming challenges and we accomplished something that no one else had done, with a team that rose together on every occasion. Our culture was grounded with a great deal of personal responsibility and empowerment allowing each team member to shine. Team Otto was supported by investors that backed our audacious and ambitious plans. For their belief in us, we are forever grateful.

To our beta users, pre-order customers, suppliers and partners, I’m so very saddened that we can’t deliver Otto, which was planned for first revenue in just four weeks. Seeing Otto light up as it welcomes me home and unlocks with a simple press, is a moment of joy that is now coupled with deep sadness. Otto will not ship next month and it may never ship. We will evaluate our options in the coming weeks and see what is open to us.

Team Otto created a product that is exciting, innovative and category defining. It wasn’t an easy or predictable journey, but it was incredibly rewarding. The teamwork, the friendships, the highs and lows, the sense of accomplishment that came from the opportunity to work with dedicated and determined team-players is something that I will carry forward. I hope the entire team feels this as well. The only comfort I can find at this moment is to believe that Team Otto and the technology and product we created, will serve as seeds to grow and change industries in new and exciting directions. And in that way, products that bring joy can see the light of day.

AFTERWORD (Jan 13, 2018)

I wrote the “So Close” post to honor the team, entrepreneurship and the courage of startup teams to go for it. Creating a category defining product requires risk taking — often at very uncomfortable levels. I love that spirit.

I anticipated readers would bring a wide variety of perspectives. I didn’t write the post to deflect blame, fall on my sword, or even as an epitaph. As CEO, I know my role and the responsibility for the company rests with me. I own that. I made decisions every day, some solo, and many with the support of a very talented and empowered team.

I’ve spent time reflecting on those decisions. Hindsight would guide different decisions, but I have a strong opinion that it is the wrong framework to reflect and learn. If we operated such that we couldn’t trust anyone, or any business deal, we’d never get shit done. Several of our most important business partnerships were based on trust relationships. The “One Percent Doctrine”, which states that even a 1% chance of occurrence must be treated as a certainty, would be a terrible way to run a company. Risk assessment is far more practical. As a hardware company, we had more than our fair share of risk. Did we misestimate the risks we faced? Did we manage risk in a reasonable way? Our reflections focus on our risk awareness and risk mitigation.

I’ve received dozens of supportive calls and notes from CEOs and founders expressing their understanding and sharing their stories. Product leaders of hardware companies recognized the uniqueness of the Otto lock. Founders, who completed successful acquisitions, shared stories about running close to the edge and operating without a safety net. They privately shared how easily their outcome could have been very different. None of it erases the disappointment but the conversations were incredibly helpful and provided important context to the risks and challenges of a startup.

I shared my experience to honor my team and because I felt it might be useful to others. Especially because it was painful and imperfect and real. I hope other entrepreneurs understand this stuff is really hard, bad shit happens all the time and that others are watching, but you can’t play scared or freeze up. It may not work out as planned, but the outcome isn’t final unless you let it be.

But entrepreneurs get it. They really get it. They reached out to help, share, support, and problem solve. We learn and grow together. We pay forward. And for this, I am truly humbled and appreciative.

So Close. was originally published in HackerNoon.com on Medium, where people are continuing the conversation by highlighting and responding to this story.

This further validates Otto’s position in regards to digital home access. The intersection of the smart, connected home and e-commerce opens up the potential for companies to interact with and delight customers in a whole new way. But it raises a lot of concerns as well.

Amazon’s announcement came with the backlash you would expect from a service that gives strangers access to your home. Customers were predictably concerned with its security implications and potential users had a field day making jokes at Amazon’s expense on Twitter.

While many people had an adverse reaction to this announcement, it meant something very different for me. When I launched Otto, I wanted to help pave the way for this type of scenario and I was excited to see that a pioneer like Amazon was initiating the same conversation. How can we make access to our homes easier and more convenient while simultaneously making it more secure?

It seems like a paradox. Increasing access means compromising security, right?

I don’t believe these two things are mutually exclusive. When we look at our daily lives, we are constantly providing access, often without taking stringent measures to ensure our security. We open our doors for delivery drivers, enter strangers’ cars for Uber rides and even stay overnight in strangers’ homes. The level of access Amazon Key is requesting is something we are starting to practice more regularly. The tension between security and convenience is tied to the older paradigm of mechanical world. Products that simply automate don’t change this paradigm. This tension creates the uneasiness that underlies the concern.

For the past four years, I have worked with my team at Otto to develop a product that unlocks the future of digital home access, innovating with e-commerce and the sharing economy platforms in mind. This is why our engineers have built Otto based on security and consumer trust, empowering the homeowner by giving them the ability to not only share but securely share their space. Foundational to our approach was achieving the highest level of security with the best consumer experience. To start an environment of trust, we removed the key completely.

With Otto, we eliminate anonymous access — locksmiths or even Otto employees cannot unlock your door. Only known and authorized people, controlled by you, will be granted access. Among Otto’s security features are an activity log with real-time notifications so you always know who entered your home and when.

Our ambitious vision of digital home access came to fruition under the helm of a team of digital cybersecurity, physical security, design, and family-minded engineers who designed a product that would put control in the hands of the homeowner. The Otto team listened and responded to our community’s concerns about security and digital home access and created the most secure digital lock on the market. We arm homeowners with the technology to share their space with anyone and do so with confidence and security.

We’re excited about this advancement and to be part of ushering in a new way to share your space safely. Amazon’s latest service opens the door for innovation and a new form of customer convenience. Moreover, it marks the first of many changes to emerge from the crossroads of e-commerce and the smart home.