
How Fred Smith Saved Fedex at the Blackjack Table - vincentchan
http://warstory.co/how-fred-smith-saved-fedex-at-the-blackjack-table/
======
graycat
The way I heard the story, and I was at FedEx in Memphis at the time, Fred
went to Vegas to see Howard Hughes and pitch for an investment and won the $27
K while waiting to see Hughes.

That week the company asked employees to delay cashing their paychecks if they
could.

At the time, I was doing operations research working on fleet scheduling, etc.
Likely there was a lot of money to be saved with better scheduling of the
fleet.

I'd written the first software for scheduling the fleet, and one evening Roger
Frock (mentioned in the article) and I used my software to do a schedule for
all planned 33 airplanes and all planned 90 cities. Our two representatives
from Board Member General Dynamics checked the 'feasibility' of the schedule
and announced "It's a little tight in a few places but it's flyable". Some
members of the board had been concerned or even convinced that a schedule
would not be possible. So, the schedule Roger and I did alleviated the
concerns and, as I was told, enabled $55 million in funding, i.e., loans, on
the airplanes.

At a senior staff meeting, Fred's remark on the schedule was "An amazing
document. Solved the most important problem facing the start of Federal
Express.". Yup, it had been six weeks in my living room in Maryland connected
to a time sharing computer for 80 hours a week writing PL/I code while
finishing teaching two computer science courses at Georgetown U.

That FedEx was close to going under didn't bother me much, but the stock I'd
been promised "within two weeks" with my offer to join still was not there 18
months later and bothered me a lot.

If I couldn't get the promised stock when the company was close to folding,
then staying around and helping to save the company would get me what? With no
stock, I was going to graduate school to have a better career in operations
research.

Then Fred called me to his office and said: "You know, if you stay, then you
are in line for $500,000 in Federal Express stock." But he wasn't giving me
that statement on paper with a signature. My manager, Mike Basch, SVP
Planning, was there with me with Fred. My office was next to Fred's with
Mike's across the hall. No, given that the promised stock was already 18
months late, the company was close to going under, and Fred was not putting
his statement in writing, I didn't know I was in line for any stock at all.

Apparently none of Fred's talk about stock meant anything: With the original
copy of the offer letter, all the promises, all my records from then, when I
contacted Fred with all the information, he and his FedEx lawyer refused to
pay me anything, and a lawyer told me that legally FedEx owed me nothing.

The work I was doing would likely have saved FedEx a LOT of money soon. E.g.,
a good first shot would have been to modify the scheduling software to include
some accurate costing and then just use it to develop schedules with the least
cost by just intuitive methods. For a second cut, generate and cost out many
possible individual airplane trips from Memphis to the cities and back. Then
use that data for integer linear programming (ILP) set covering with one
column for each possible trip and one row for each city to be served, say, a
few dozen cities growing to the planned 90. Then use some column generation
(Gilmore and Gomory) and some branch and bound. Easily should have saved
millions a year in fuel and other operational costs quickly. I had world
expert in integer linear programming George Nemhauser lined up as a
consultant, and I was writing software in PL/I on an IBM CP67/CMS system.

Actually, well into the start of FedEx, Fred had planned to do the first
schedules himself. When he tried, for just a few cities, just by hand, from
his office, when FedEx was still in Little Rock, at the end of the afternoon
he came out of his office saying "We need a computer". A guy I had known in
college heard that and gave me a call.

Yes, ILP set covering is in NP-complete. So, no one has a guaranteed
polynomial algorithm for worst case examples. But that doesn't mean that can't
save a lot of money fairly easily in cases of interest. Sure, might have
trouble guaranteeing to save the last 10 cents, but if save $5 million a month
over the best solution otherwise, then just saved, let me see here, right, $5
million a month.

I didn't get the stock, and Fred didn't get the savings.

Fred has been very successful, but he didn't do it alone, and some promises
about stock were not kept.

One lesson is, from what my wife told me as I joined FedEx, "Get it in
writing". Well, my offer letter said I'd be in the stock plan, but apparently
that was meaningless legally. Better still, get a lawyer. Better still, start
and own your own company. Back to it.

~~~
cmccabe
Sorry to hear that you didn't get the stock. I've been in a similar scenario
where promises of stock were made and later not kept by a very small startup.
In my case, the company didn't end up going anywhere, so there was not much
regret on my part at the end. I also did get a salary during that time, which
helped.

Joining as a low-numbered employee is a really big act of trust, bigger in
some ways than being a founder. You ought to find out everything you can about
whom you'll be working with, and what they think of you, before you consider
it. It helps to have the ability to read people. Getting things in writing
definitely is a must-do, but it's not a silver bullet.

~~~
logicallee
regarding, >"Joining as a low-numbered employee is a really big act of trust,
bigger in some ways than being a founder.

The reason it's not a "bigger in some ways than being a founder" is precisely
because you CAN follow the suggestions you then list

>You ought to find out everything you can about whom you'll be working with,
and what they think of you, before you consider it. Getting things in writing
definitely is a must-do, but it's not a silver bullet.

There is simply NO way to do that as a cofounder! The paperwork SIMPLY DOESNT
EXIST. As an early employee, you can view our patents, trademarks, etch stack,
talk with other employees, see our level of funding.

As a cofounder, you get to see an idea.

There is no guarantee whatsoever of ANYTHING as a cofounder, EVEN if you get
it in writing. The only thing you can be guaranteed is 50% of nothing.

So in some ways you could say that joining as a low-numbered employee is for
people who want to make it rich but don't have the balls not take any salary,
not to have any paperwork, anything in place whatsoever that they can do due
dilligence on except the person of the their cofounder and the ideas and work
that they personally bring to the table with their own two hands.

~~~
sjs382
The parent is talking about trust. You're talking about risk.

~~~
logicallee
I just don't see that. Where's the trust - as an early employee you have an
employment contract that will be enforced by law, you get cash coming in every
two weeks or monthly that is also enforced by law, and your employer owes you
a bunch of other rights.

as a cofounder, you're not owed shit. (except 50% of nothing).

the same thing applies to options contracts or anything else.

What I mean is as an early employee you can SEE all this in writing. As a
cofounder, you also get to have your equity agreement on paper. If it's 50% it
even means something. As a minority cofounder (e.g. if you're the 10% guy with
the other two having 45-45) that would mean considerably less.

I just don't see how you can anywhere NEAR approach the level of trust as an
early employee, that you need as a cofounder. It's not even within three
orders of magnitude of each other.

And that's part of why there are so many fewer cofounders than employees in
the world.

I mean think about it!! What can I say over IRC and Skype that would convince
you to be my cofounder without meeeting? What kind of paperwork can I produce?
What kind of documentation?

Now compare that with being a remote early employee.

The level of trust required is literally 3 orders of magnitude less. Not risk:
trust. But risk too.

~~~
cmccabe
Have you actually been an early employee, or are you just speculating? I can
tell you that in a lot of cases the paperwork you love so much often simply
doesn't exist. Even if it did, it might not be worth the paper it was written
on.

There are a lot of ways to lose out. If you're not a lawyer, there is almost
certainly something in the contract you overlooked. The contract might not
even be valid if two non-lawyers came up with it after a few beers. You could
be fired right before your options vest. (This happened to a lot of people at
Skype, for example.) Or you could be diluted down to nothing after a few
rounds of financing.

Sure, you can sue, but is that really going to help? If the company goes out
of business you're trying to get blood from a stone. If the company succeeds,
they'll have a legal budget 1000x yours.

Ultimately, the founders are going to set the direction of the company. You
have to trust them, and also trust that you will be useful to them over the
long term. Any other strategy is just a losing bet.

~~~
logicallee
Hi,

I'm specifically comparing to the trust required to be a cofounder. I've been
both an early employee and a cofounder. The level of trust I needed in my
cofounder to enter the business on the terms we did is simply 1000x bigger
than the level of trust I needed to start working as an early employee.

I mean think about it: you're talking about losing out on the upside as an
early-employee, but the salary still comes (or you just leave after 2 weeks)
and so does the experience.

As a cofounder, nothing "comes". There _IS_ no business.

Your assertion that a salary agreement isn't worth the paper it's written on
is ridiculous. Even paper isn't necessary: if an early employee didn't get
paid at all they would leave almost immediately.

it just doesn't require anywhere near the same amt of trust.

~~~
cmccabe
Well, first of all, your assertion that "if an early employee didn't get paid
at all they would leave almost immediately" is just false. I mean if you read
the post that started this thread, it's about a guy who went without any
salary for 18 months. Admittedly, he did have another source of income at the
time from the college, but that's still a long time to go. Personally, I have
known employees to go a few months without pay in the hope of seeing the
company through a rough time.

If you read the article itself, it talks about pilots using their own credit
cards to pay for landing fees in a pinch, and couriers selling their watches
to pay for fuel. So basically, I would urge you to read the article and the
posts you're replying to.

I admit that co-founders usually put more money into the business than early
employees. But time is also worth money, and early employees put a lot of that
in, for not much money up front.

I agree with you that the experienced gained as an early employee is valuable.
Some of that experience might be getting a better idea for whom to trust in
the future :) And with that, I think we've come full circle...

~~~
logicallee
well, you're not ''wrong''. I hope you will agree though that working for 18
months without pay at a startup very much stretches the definition of
"employee". (as opposed to "cofounder" or "unpaid intern").

most people who can claim the title of "early employee but not cofounder" here
at HN would not say they have gone 18 months without pay in that title or
would do so. so yes it's a data point but it's a pathological one.

On the other hand, 18 months without pay doesn't scratch the surface of what a
cofounder can expect: it's one of the best-case scenarios that anyone could
possibly expect!

A cofounder would jump at a chance to see liquidity within 18 months of
founding a new startup. More typical is more like 24 months absolute minimum,
36-72 months average, and often longer is the norm.

And during that time you don't just hock a watch or pay for fuel: most
cofounders pay tens of thousands of dollars of their own money, often every
month and putting every source of liquidity they can into the business as it
ramps up.

and more often than not, as sad as all this is, most cofounders do lose 100%
of their investment and have nobody to blame, nobody to even ask for a break.
they have cliffs, and CANNOT jump ship. WHen a cofounder jumps ship they lose
100% of the entire equity they have in the company.

But at the same time, most startups simply don't go anywhere.

I would be hard-pressed to find a metric by which the average early employee
gets absolutely nothing for his time and has to pay for all the infrastructure
used to employ him.

it's just not the same planet.

of course there are pathological cases that are the worst of both worlds:
early employees who should be called cofounders, are paid nothing, and do not
get meaningful equity.

you don't need much trust to be an unpaid intern though.

------
kintamanimatt
This is the flip side to the Cooper Union story [1] that's gracing the front
page right now—a reckless strategy that is only lauded because it paid off in
this one high-profile instance.

I'm not sure where the line between reckless gamble and calculated risk is,
but this feels like it's over the line. Yes, the company would have likely
folded either way had the founder not gambled and won, but this strategy
together with the "never give up on a particular business" cockroach mentality
feels akin to winning a lottery and subsequently advising people that lottery
tickets are a viable way to prepare for retirement.

Also, I'm quite sure that the founder would have found himself in a lot of
personal trouble for gambling company funds on a blackjack table had he lost.

[1] <https://news.ycombinator.com/item?id=5599385>

~~~
moogleii
I agree it would have been over the line, if it hadn't been so desperate. It
sounds like it was do or die - in that sense, it shouldn't be interpreted as a
strategy, reckless or not. Everyone involved admits it was a gamble.

I get the feeling the Cooper Union situation was, although bad, not as bad as
what Fedex was in. Cooper Union made a gamble, failed, and was still able to
continue to run (2 years of debate, plus funds to run until the 2014 school
year when the fees actually kick in). That tells me it wasn't a do or die
situation; they still had rope left. Even now, I'm not convinced they
exhausted all available, smarter avenues. I'm also kinda surprised their books
aren't open if they've been debating for 2 years.

------
Bulkington
I'd always heard the blackjack story was cover for a new silent partner--the
kind you don't break your promises to. And those deals aren't in writing
either.

------
rrrrtttt
An entrepreneur's character is truly tested only when his company is failing.
You can take one of two options: 1) pay your employees and suppliers
everything you owe, return any money that's left to investors and close up
shop, or 2) take all the cash from the till and go to Vegas (or some other
equivalent of betting the farm).

If this story is true I wouldn't want to have anything to do with Mr. Smith.

------
leejoramo
I heard this store more than 20 years ago. I had always assumed "won the money
in Vegas at Blackjack" was a euphemism for getting a loan from the Mob.

------
zbruhnke
This is a story I've always loved and it's good to hear it with a little more
background. I had no idea they had raised so much money already. The smarter
thing to do would have probably been to go to one of his investors for a small
bridge loan knowing the new round was in the works.

I put myself in some pretty tight personal financial spots for the success of
my first company and just seeing my employees happy and at work was enough for
me to never regret it. After selling the company they all got an even more
stable foundation for their lives and I got the "reward" that comes to those
too dumb to give up.

Here's to guys like Fred for giving me the inspiration to do whatever it took
for my company!

~~~
arthurrr
This is a story that I've always hated because I think it is very very
unlikely to be true. If he actually did play blackjack, I'm curious to know
how many hands he played, how much he was betting per hand, what casino he was
playing at, etc. If he bet it all on one hand, what if he was dealt A-A and
didn't have the money to split?

I think somebody who is reckless enough to gamble the remaining funds of the
company, is not disciplined enough to walk away from the blackjack table after
having won just enough for the fuel payment.

If he actually did play blackjack, it would be more likely that he started out
winning, won enough to pay for the fuel, but then continued gambling and gave
it all back.

------
bryanlarsen
As presented, that sounds like an extremely good bet. Look at the stakes. If
he didn't gamble, they had a 100% chance of going bankrupt immediately. If he
did, they had a ~50% chance of going bankrupt immediately.

~~~
DennisP
It's a little more complicated but still an excellent bet. In poker terms, he
had good pot odds.

Say I'm an investor and get $10K if he goes bankrupt. If bets and wins, I
have, say, a 52% chance of getting nothing, and a 48% chance of getting a
million, for an expected value of $480K. The rational decision, in the best
interest of investors, is to make the bet.

Even more so if he was counting cards, improving his odds slightly over 50%.
Counting cards isn't all that difficult, the hard part is just doing it over
time without being detected, which in this situation wasn't necessary. It's
interesting that he chose blackjack, a game that punishes you badly if you're
not skilled, instead of roulette.

------
niggler
Discussion from a month ago (hit the front page):
<https://news.ycombinator.com/item?id=5405371>

