Sramana: I assume that because you are a private company with a strong track record, you are a profitable company?
Sabrina Parsons: We have been profitable for quite some time. There were some building years when Tim first started the company but for the past 10 to 15 years we have strong track record of profitability. One of the things that I learned from Tim is fiscal responsibility. We bootstrap with our profits. If we can’t afford it, then we don’t do it.
Forecasting and budgeting can be a very powerful tool which lets you know how much you can invest, spend, and manage. You never have to wonder or hope for enormous growth to survive. I budget and then put managers in charge of those budgets. I tie as many line items as possible in my budget to sales. If we make more, then we can spend more. When I can tie in formulas that tie into sales, it gives us flexibility for growth while maintaining a private, cash flow positive company.
Sramana: This next question is for both of you. The story of Palo Alto Software has multiple members who have played key roles in the business. What are the dynamics of the relationships, and how have you established the equity stakes which allow this to work smoothly?
Tim Berry: We set up some estate planning in the very early days of Palo Alto Software. My wife and I have two LLCs that control the business. We have five children and a son-in-law involved in the business. Sabrina has to deal with me, one sister, and her husband as employees of Palo Alto Software. We stuck to meritocracy. When Sabrina became CEO she had two sisters, a cousin and her parents as salaried employees in a company with 45 other employees.
When I chose Sabrina and asked her to be CEO, none of the siblings even questioned the decision. She had earned it and was clearly doing a great job. In general, there is no denying that there are higher risks when it comes to family businesses. We worked with a consultant for years who wrote a code of conduct and we have done our best to make that work. Benefit is also related to high risk. To have people who are top notch is key. Sabrina and her husband are both Princeton graduates with Silicon Valley ties. You need smart, hardworking people whom you can trust.
Sramana: Every business structure has advantages and disadvantages. Having VCs involved who fire founders is also risky. There is no business that is free of risk.
Tim Berry: It was wonderful for me in 2007. I loved business planning and I loved writing. For the past five years I have been fortunate to do the part of business that I love. I was never that great at management. I was able to pass that on to the next generation while staying involved in the business. It was hard in the beginning of not making it a fake transition, but I think I did a pretty good job of not second-guessing Sabrina. I also had a safe harbor mentality and I did not want to retire. Retirement sounds like hell to me. I wanted to be involved without the daily management headaches. It worked out well for me.
Sabrina Parsons: There were several things that worked well for us. The transition that Tim made was very quick. It was also a real transition. He did step back and I was fiscally responsible for the company. Yes, my parents were the majority shareholders, so I did answer to them, but I put a clear black line down for the rest of the employees to understand. I think that if it had been a nine-month transition like some succession planners were recommending, it would have been a lot harder.
I think that there are some moments in time where my background truly has helped. If you look at my resume, you would not wonder why I am in this role. It was also nice to prove some key things to my parents and others. Hitting the recession as soon as it did was great because I was able to show everyone that we were being fiscally responsible. We managed to the numbers. That experience was really good for our family to go through. I think that was a turning point.