I had the following conversation recently.
Entrepreneur: “Brad, I just got an offer for my company for $15 million from Company X.”
Brad: “Awesome. Who’s Company X – I’ve never heard of them.”
Entrepreneur: “It’s a private company funded by Venture Firm Y.”
Brad: “Cool – $15 million – is it a cash deal?”
Entrepreneur: “No, it’s all stock.”
Brad: “Hmmm – are you getting preferred or common stock?”
Entrepreneur: “Common stock – why?”
Brad: “How much money has the company raised?”
Entrepreneur: “$110 million”
Brad: “What’s the liquidation preference? Is it a participating preferred? What’s the valuation of the company?”
Entrepreneur: “Oh – I’m not worried about that stuff – the valuation is $300m and they say they are going public soon.”
If you’ve read our term sheet series, you know where this one is going. The entrepreneur just received an offer for his company for 5% of the acquirer (actually 4.76% on a post-transaction basis) in an illiquid stock in a private company that is sitting under $110 million of liquidation preferences that are probably participating. If my friend calls his friendly neighborhood financial appraiser to do a valuation analysis, he’ll find out the “$15 million” is actually valued at a lot less (probably good for tax purposes, not so good for buying beer, sports cars, and second houses.)
The form of consideration matters. Cash is – well – king. Everything else is something less. And it can be a lot less – did you here the one where the acquirer offered “free software products” up to a certain amount in exchange for the company’s assets? Gee, … er, “thanks.”
Obviously cash is easy to understand and to value. Stock can be more complicated. If it’s stock in a private company, understanding the existing capital structure is a critical first step to understand what you are getting. If it’s stock in a public company, you’ll want to ask a variety of questions, including whether the stock is freely tradeable, registered, or subject to a lockup agreement. If it’s freely tradeable, will you be considered an insider after the transaction and have any selling restrictions? If it’s not freely tradeable, what kind of registration rights will you have? It can get messy quickly, especially if you try to optimize for tax (there’s that tax thing again.)
Bottom line – make sure you recognize that the “value of your company” and the “price you are getting paid” may not be the same. Don’t let yourself get locked in early in the negotiation to a “price” until you understand the form of consideration your are receiving.
Wired Magazine has a great article this month on Tim O’Reilly. The first time I heard Tim’s name was in 1994 at NetGenesis when GNN appeared on the scene. I remember when it was acquired by AOL for $11 million and I thought to myself “holy shit – there could be real dollars in this Internet stuff.” I’ve never spent any time with Tim, but the article reflects the way I think of him and the business he’s created.
Wired also had a short fetish review of the super-bitchin Optimus Keyboard. I’m ready for about five of these when it finally ships.
FeedBurner just completed its second hackathon. Eight hours of focused hacking generated the following features:
Eight hours, eight new features into production. Nice job guys.
I periodically get questions from readers of this blog about business plans. I was pondering the best way to work through a “business plan series” (similar to the Term Sheet series and Letter of Intent series) when Dave Jilk – my partner in Feld Technologies (my first company) – dropped a few documents on my desk, including the original Feld Technologies business plan. A scanner, Adobe Acrobat PDF maker, and a little OCR later, I had the document in electronic format.
While I don’t read business plans anymore (executive summaries are enough for me), I believe the business plan is a critical document for an entrepreneur to organize his thoughts around his new business. In today’s world of excessive PowerPoint presentations, the art of sitting thoughtfully and writing out the plan has – in many cases – been lost. The best way to explain what should be in a business plan is to show one and, as I read through the original Feld Technologies plan, I was pleasantly surprised by the content. In many ways it is simplistic and reflects the relatively naive thinking of a 22 year old working on his first business. However, when I think about how Feld Technologies evolved, the document framed the business very effectively.
If you are looking for sex, violence, insider trading, hackers, and rock and roll, stick with Tom Evslin’s blook hackoff.com. If you want to see a late 1980’s business plan and some of my commentary along the way, enjoy. I’m going to go linearly through the plan – the actual plan text will be in purple so it’s easy to separate the plan text from my comments.
FELD TECHNOLOGIES
BUSINESS PLAN
351 Massachusetts Avenue
Cambridge, MA 02139
(617) 492-4642
April 28, 1987
This business plan has been submitted on a confidential basis solely for the benefit of selected, highly qualified individuals. It is not for use by any other person, nor may it be reproduced. By accepting delivery of this plan, the recipient agrees to return this copy to Feld Technologies at the address listed above when so requested by Feld Technologies. If a conflict of interest is perceived at any point, please return this plan immediately.
Confidential Plan Number: 01
Version Control Number: 1.029
Delivered to: Mr. David J. Jilk
Don’t forget the cover page. I know it sounds silly, but I can’t tell you the number of times I’ve received a plan or an executive summary without contact info, printed it out, and then been at a loss how to contact the person that sent it to me. My cover page was conspicuously missing my name (at least it had Feld on it) and my email address (I didn’t have one in 1987!) I called (617) 492–4642 to see who would answer – I got a modem. Finally, note that 351 Massachusetts Avenue was the address for ADP, my fraternity at MIT.
So Brad was pretty bored by my first two reviews so I figured I’d tackle something a bit more complex this time around, the Roku PhotoBridge HD. In short the PhotoBridge HD allows you to stream audio, video, and pictures from PC’s connected to your network to your television/home theater – all in high definition, or at least that’s the idea.
I got my PhotoBridge back in June while I was recovering from surgery. I was excited to get it as I’d been following this class of product for quite a while. I specifically wanted the PhotoBridge as it was the first (and only at the time) device that would stream video in HD – something that was key to me to use with my new plasma TV.
However, I was painfully disappointed.
I had one primary goal for the PhotoBridge – to allow me to stream DVD’s in their native resolution from my PC to my home theater – allowing me to build a mini-jukebox of DVD’s that I could watch at any time (like my TiVo). It failed, miserably. There are several reasons why, the biggest being that the PhotoBridge is not ready for prime time. As I suggested on their forums (which are thankfully very active) it should be called a “reference platform” since the one key thing they did right is run embedded Linux on it. As a result of this and the fact that they have released an API (albeit a very limited one) there are several third party software applications that almost get it there.
Almost. The main reason I gave up was that in the end it wouldn’t support subtitles, DTS sound, DVD menus, true fast forward/rewind (it only had 30 second jumps), and was extremely buggy. The interface is terrible, the remote is lousy, the software is limited, it locks up constantly, and you have to jump through hoops to get basic things to work. One positive – photos look amazing on an HD set – really awesome. However, while I love to play with toys when it comes to my home theater I just want things to work. After 40 hours with the PhotoBridge (upgrading, reinstalling, reading, posting, reading, installing, tweaking) I punted and sold it on eBay. Up next, the Buffalo Linktheater Hi-def Mediaplayer (should be here this week).
As for the PhotoBridge I give it a strong pass, that is unless you feel like playing with something that in the end will never live up to the marketing hype. Very disappointed. … Ross
An MIT study delves into the reality of Aluminum Foil Deflector Beanies. Is it a great innovation? Is it a government plot? Is the FCC involved in some way? Or – is mind control in our future?
Dave Jilk passed on this article by Dominic Humphries explaining why Linux is Not Windows. The analogy that starts off the article is perfect:
Linux <=> Windows is like Motorbikes <=> Cars: Both are vehicles that get you from A to B via the roads. But they’re different shapes, different sizes, have different controls, and they work in fundamentally different ways. They are not freely interchangeable. They have different uses and different strengths & weaknesses, and you should pick whichever is appropriate, not pick one and expect it to do everything that the other can do.
This is not a screed on why Windows sucks, or why Linux is great. Rather, it’s a very thoughtful article on the differences between the two.
Dick Costolo – the CEO of FeedBurner – sent me a link to this great photo last night. FeedBurner exhibited at the Portable Media Expo & Podcasting Conference 2005 this weekend in Los Angeles and invited publishers using FeedBurner to sign the banner in the booth. This is what it looked like after the first day.
I love it. These are just a few of the 139,039 feeds (including 24,669 podcasts) from 92,068 publishers that FeedBurner manages as of mid-week last week (11/09/05).
As a kid, my parents used to have a monthly gourmet group with a group of friends (they are still doing it monthly 35 years later) where they got together, cooked a fancy meal, and sat around late into the night talking. We joined up with about 15 friends several years ago and started a similar tradition in Boulder – we get together about six times a year for a fantastic evening we call Chez Gourmet.
Last night was Spanish Tapas Night at Chris Wand’s house. The food was magnificent (I cheated – $200 at Wild Oats buys a lot of tapas) but the conversation was even better. Rajat Bhargava and I were holed up in the corner of the couch talking about the incredible Kalamazoo Promise (Raj is from Kalamazoo – it was announced this week that any Kalamazoo Public School graduate has the opportunity to attend any public State of Michigan University or Community College for free due to the incredible generosity and vision of several anonymous donors). Our conversation rambled around and we ended up talking about a competitor of StillSecure’s (Raj’s company) that had been consistently lying to prospects and customers about their products’ capabilities (which StillSecure was benefiting from as the truth eventually came out.)
We quickly moved on to politics and as we bantered around how absurd it is that people lie, Raj said something that really stuck with me – “Truth Is The Absolute Defense” – which he attributed to Alan Shimel, who has worked with me and Raj for a number of years. I woke up thinking about how simple, yet profound, this is.