Month: December 2005
I’m sure I have to pay someone to put this up on my blog legally.
Thanks njschock – nice use of the for:bfeld del.icio.us tag.
I love the Beatles. I love Brian Ibbott’s Coverville podcast. I love running. I set out to do 60 minutes in Atherton early this morning and started listening to Coverville 149: The 2nd Annual Beatles Thanksgiving Double Shot on my iPod Shuffle. 90 minutes later I had one of my best runs of the year. I was late to my first meeting (sorry Greg) but it was worth it. If you are a Beatles fan, don’t miss this one.
Since FeedBurner and Technorati started off their announcements this week with cooking metaphors, I thought I’d continue the trend. Three of my four RSS-related investments made announcements this week about products and/or customers.
FeedBurner announced a new service called FeedFlare. Jennifer Aniston didn’t wear enough Flair in Office Space, but she would have been fine if she had used FeedFlare. At the bottom of my feed, you’ll now see options to email this post to a friend, email me, see the Technorati links to the post, tag the post with del.icio.us, and see any del.icio.us tags that have already associated with the post. This was trivial to set up – a couple of clicks within my FeedBurner setup page and I automagically had Flare. FeedFlare is based on an open-API so expect lots of new Flare to quickly appear. Fred Wilson nails it with his description.
FeedBurner also announced that Reuters has chosen it to manage its RSS feeds. Major publisher, major market validation.
Technorati announced the Technorati Kitchen. Niall Kennedy explains why this is “The Kitchen” instead of “Beta” (Beta feels so “day old bread”, doesn’t it?). First up – Explore. Think of it as a newspaper front page for any subject – find out what bloggers are saying right now on any topic, organized by how many links their posts are getting.
NewsGator announced that the NewsGator Hosted Solution has been chosen by Newsweek and MacWorld. Brent Simmons – the creator of NetNewsWire – talks about why he’s excited about the MacWorld deal.
All in all, a tasty day.
IRS Regulation 409A really sucks. While I’m probably now on some audit watch list as a result of speaking my mind, there really isn’t any other way to state it. Jason Mendelson and I were bitching about this today as we pondered how to deal with it and decided that we might as well try to constructively air our thoughts (and help educate our entrepreneurial and venture brethern on some of the issues) via a 409A Series (similar to our Term Sheet and Letter of Intent series). Remember – we aren’t lawyers (ok – Jason is…) and this isn’t legal advice – just the thoughts and opinions of two guys dealing with this stuff everyday.
In case you missed it, proposed IRS Regulation 409A, dealing with deferred compensation, is making everyone in the startup community run around like chickens with their heads cut off. It’s a broad regulation, but in a nutshell, for private companies it redefines the way companies determine fair market value in granting stock options. In the “old days” (before I was 40 years old) the board would spend time and make a good faith determination what the fair market value was and grant options. Now, companies must formally value their common stock options (by one of two prescribed methods that we’ll get to later) or risk the penalties should they be wrong with their option pricing. Please note that this regulation also affects public companies, venture capitalists, severance contracts, any sort of deferred compensation, etc., but we’re only going to focus on the private company option pricing nightmare.
Because everyone likes the punch line, the simple answer to “what are the penalties?” is this: The penalty for undervaluing options is that the option holder gets taxed at normal income rates on the “spread” (difference between the grant strike price and what the IRS deems the “correct” value) as if it was income given to him by the company PLUS an additional 20% tax on top of this in further penalties. Furthermore, the company gets penalized on withholdings it should have made on this additional “income” it provided to the employee.
But wait, it gets better. Did we mention that these are only proposed regs, but the IRS says everyone must comply with them immediately as if they will be adopted and oh yeah…. they’re retroactive also and any stock option that still has vesting left as of January 1, 2005 is subject to the regs. Yes, if you granted or received an option in mid-2001 with typical 4 year vesting, congratulations, you are subject to 409A.
Basically, everyone involved gets fucked.
Interested? Scared? Reconsidering a new career as a 409A valuation expert? In this series we’ll take your through some detail on the joys of 409A. If you are a masochist and want some good reading, Cooley Godward has a good overview online as does O’Melveny & Myers.
In the mean time, sleep well. While we wish we could spray some Formula 409 on this and make it go away, we know the value of facing reality and will provide some addition information in our next post.
For my 40th birthday, I got a couple of cool t-shirts with photos of me substituted for Jack Bauer on 24. The only thing disconcerting was the image of me holding a handgun. I was pondering how ripped I looked (on Jack’s torso) when two questions on term sheets came in from someone at Ernst & Young. Being the excellent delegator that I am (much better than Jack, if you know what I mean), I forwarded the questions on to Jason who promptly answered them. They are as follows:
1. What would you deem the most hotly contested points of the term sheet? The most hotly negotiated term (after price) is the liquidation preference. In a Series A deal, it is between the company and the investor. While it’s often an intense negotiation, it’s straightforward because there are only two interests to consider (the founders and the Series A investors). In later stage, the negotiations become even more interesting. Take a situation where you have a Series D deal with each Series (A, B, and C) having different prices. By definition each of the different Series investors will have different payouts on their previously purchased stock and the Series D investors will be negotiating with several sets of interested parties (the founders, the Series A investors, the Series B investors that are not in the Series A, and the Series C investors that are not in the Series A / B). Of course, the notion of participating preferred plays into this negotiation also.
2. In your view, how has the role of legal counsel changed over time during the deal process (in the past 10 years or so)? Legal counsel is relied on more heavily these days to be a business arbiter, rather than a “take no prisoner negotiator” who must win every last deal point. These deals aren’t rocket science and any good lawyer knows that. As a result, legal counsel (at least good legal counsel) is now much more of a deal maker than hard ass negotiator.
Here’s some candid straight talk about access to VC capital in Colorado. Brad Feld, Managing Director of Mobius Venture Capital didn’t have much good news to talk about when w3w3.com interviewed him two and three years ago. Brad gives some specific examples and offers some interesting advice for the coming year. For some, it is going to be a very good year and others will struggle. Brad points out that mid-stage and later-stage activity is very healthy.