Making Trapdoor Decisions

Posted on: March 19, 2019
Posted in Strategy

A “trapdoor” function in cryptography is one that is easy to perform one way, but is difficult to apply in reverse efficiently.

The analogy to a “trapdoor” is something like this: It’s easy to fall through a trapdoor, but it’s very hard to climb back out and get to where you started unless you have a ladder.

Trapdoor Decisions 1 are a useful framework to denote important decisions at startups which, when made idly, can cause a lot of harm and are difficult to back out of. These include:
• Changing pricing for your product
• Hiring an executive
• Technical decision to use a certain infrastructure or language
• How you brand and publicly define your company
• Adding your second or third product

You will indeed be making these trapdoor decisions throughout the life of your company. But it’s a fool’s paradise to make them without deeply thinking about their implications and how reversible they are.

With power comes great responsibility. One truism in the Valley around capital raising is that – no matter the round size – you will find a way to spend it. In addition to the general pressure there is to grow, many people go absolutely insane when given money.

A lot of founders push the need to move fast into the wrong quadrant of this matrix after a financing event. You don’t need to avoid making decisions that appear in the trapdoor quadrant—in fact they are perhaps the best decisions you can have the luxury of being able to make. But you need to have strong confidence and accurately measure downside cost and risk.

Many of these trapdoors are larger than they appear due to hidden costs—e.g. say you hire a VP of Sales as a young company. Nakedly this decision is around $300K+ in salary/comp, but there are a litany of other hidden costs. E.g. many startups hire search firms ($100K to place a VP), and surely a VP wants to immediately hire 2 or so people to fill out the team. What seems like simply the addition of an exec can turn into almost $1M in additional cost over the next year. Imagine a series A backed company which raised $6M spending over 15% of that capital on one decision. Even if reversed (bad fit, too early, etc) after 6 months, a lot of brain damage can occur.

A lot of these trapdoor decisions feel somehow empowering in the moment – it’s fun to hire, open an office, or launch pricing. Be cautious if others are encouraging you to make these decisions – investors and outsiders encourage brazen behavior, and risk-taking is celebrated in the Valley. But outsiders don’t have to live with these decisions (at least acutely). You do.

I talk to a lot of smart, organized, well-connected founders who seem sloppy when it comes to these important high risk decisions. I ultimately realized there’s a certain pacification that comes with making a decision, a feeling that intoxicates people from consequences before it’s proven wrong or right.

If your board is pushing you to do better at marketing, and you decide to hire a VP of Marketing, then that job is “done” for the moment. You will feel emboldened by the encouragement of outsiders to make decisions, and even possibly feel meek when you’re apprehensive or decide to wait.

Tech as an industry tends to associate “moving fast” with positive progress. Try to de-associate that for decisions that are both high-impact and not easily reversible. Each decision at a startup comes with untold costs which become known later. One of the lifelines of startups is runway between financing events. If you run out of money because of these decisions you can’t get it back.

In general you should be looking at worst case modeling scenarios around growth to ensure that your financing that was supposed to last for 18 months allows you to go 50% longer if things don’t go as planned. One or two bad trapdoor decisions can actually make it impossible to do that.

Of course, costs are really a proxy for time for a typical growth investment (a startup). Some trapdoors aren’t ordinarily associated with spending money, but incur a cost measured in wasted time. These can also really hurt the company if they lead you in the wrong direction, since under growth conditions time – not capital – is your most precious commodity.

1. I am not entirely sure who coined the term Trapdoor Decisions but to the best of my knowledge Stripe COO Claire Hughes Johnson deserves attribution and has shared this framework publicly in conference talks

Tweet or Like this post.