Brad Feld

Month: January 2006

The Nacchio File

Jan 02, 2006
Category Technology

If you are interested in the story of how things play with Joe Nacchio’s criminal insider trading indictment I recommend you subscribe to the New West Networks Boulder feed as Richard Martin is writing a series titled The Nacchio File.  Nacchio is at the top of the Qwest meltdown pyramid and – among the expected editorial chatter – the case will likely be covered heavily by the local (and national) news guys.

I was at Qwest headquarters a couple of times during the bubble for various meetings with senior Qwest execs (a few cases of potential M&A that never went anywhere, some executive recruiting, and a random hysterical meeting that will go down in history of one of the silliest experiences I’ve ever had at a corporate headquarters anywhere.) 

I never met with Nacchio, but I bumped into him twice.  One time he was hunkered over the Bloomberg that was prominently located in the center of the executive waiting area looking at the movements of the 100 or so stocks on the Qwest default screen.  The other time I literally ran into him as I turned a corner as he was saying something like “nice sale today” to Weisberg.  I was easily ignored as a long haired nerd wearing jeans – he likely thought I was up there fixing the executive network connectivity and – since I clearly had nothing to do with the Bloomberg machine (since it seemed to be working at the time) – wasn’t worthy of a greeting.


Jan 02, 2006

My sister-in-law Laura just introduced me to PalmArt.  Her friend Rob Davenport is one of the featured artists in their gallery.  Super cool stuff.

Book Review: The Protege

Jan 02, 2006
Category Books

I took a break from Carnegie (which is amazing, but it’s massive – really two books) to gobble down some mental floss yesterday.  Stephen Frey’s new book The Protege is out.  Frey is on my regular rotation of mental floss and The Protege is a sequel to The Chairman.

If you are a VC or private equity investor, Frey (and these two books) are mental floss at their best.  Christian Gillette, the 37 year old Chairman of Everest Capital, is every private equity investors heroic figure.  Gillette is young, fit, rich, busy as hell but able to manage it with grace, and firmly in command of a huge private equity empire (Fund 8 weighs in a $15 billion for a chapter – after which the Wallace Family and it’s gorgeous 30 year old matron Allison contribute another $5 billion (of their $22 billion fortune) as long as Allison is made a managing partner.)  Like all great mental floss, the book quickly devolves into a complex plot with lots of misdirection, suspense, confusion, suspicious characters, the mob, private planes, security, an NFL franchise, Las Vegas, a kinky sex murder, yacht “adventures”, the CIA, nanotechnology, mysterious scientist deaths, and the exploits of our fearless hero (including a bunch of deals done in rapid fire fashion) as he saves the world while struggling to decide between two beautiful women.

Ah.  I feel better.  Back to Andy Carnegie.

I Hate PowerPoint

Jan 02, 2006

As we start 2006, I thought it’d be fun to revisit my endless rant on PowerPoint as a hint and reminder to everyone that has to interact with me this year.

We start with The Torturous World of PowerPoint and Chris Wand’s list of questions to address if you are insisting on presenting a PowerPoint presentation pitching a company to me.  Seth Godin has a Special Bonus Tactic for Avoiding Really Bad PowerPoint in his book Free Prize InsideCliff Atkinson has a great blog on PowerPoint and a suggestion to simply Ban Bullets (or at least not read them to me if you insist on having them.)  Finally Ted Dolotta sent me a PowerPoint presentation that – if Lincoln had used – would have easily prolonged the Civil War by at least a decade.

Guy Kawasaki has a new blog and he starts with his own – very useful – rant on PowerPoint which he defines as the 10/20/30 Rule of PowerPoint.  Based on what Guy has done in the past, his blog will definitely be worth following if you are an entrepreneur.

It’s been a little over a month since Jason and I wrote posts for our Letter of Intent series. We took a time out for our 409A series and for actually selling two companies (Commerce5 to Digital River and another that hasn’t been disclosed yet) rather than writing about selling companies. This is the first time in four years where I personally haven’t been actively trying to close the sale of a company over the holidays, so I thought I’d put some time in and finish up this series.  2005 was an awesome year for M&A and all the pundits think 2006 will be equally good (or better), especially after all the M&A bankers get their year end bonuses in January and receive a new dose of forward motivation. 

After considering price and structure, it is time to discuss other major deal points generally found in an LOI. One item to note here: absence of these terms in your particular LOI may not be a good thing, as in our experience detailed term sheets are better than vague ones (although be careful not to overlawyer the detailed term sheet.) Specifically, this is the case because during the LOI discussions, most of the negotiating is between the business principals of the deal, not their lawyers, who will become the main deal drivers post signing of the term sheet. Our experience is that leaving material business points to the lawyers will slow down the process, increase deal costs and cause much unneeded pain and angst. Our suggestion would be to always have most of the key terms clearly spelled out in the LOI and agreed to by the business principals before the lawyers bring out their clubs, quivers and broadswords.

Today we are going to discuss the treatment of the Stock Option Plan. The way stock options are handled (regardless of how you address the 409A issues) can vary greatly in the LOI.  The first issue to consider is whether or not the plan is being assumed by the buyer and if so, is the assumption of the option plan being “netted” against the purchase price. In some cases, the buyer will simply assume the option pool in addition to the base consideration being received; however, it’s typically the case that if the buyer agrees to assume the option plan then the aggregate price will be adjusted accordingly as very few things are actually free in this world.

Let’s presume the option pool is not going to be assumed by buyer. The seller now has several things to consider. Some option plans – especially those that are poorly constructed – don’t have any provisions that deal with an M&A context when the plan is not assumed. If the plan is silent, it’s conceivable that when the deal closes and the options are not assumed, they will simply disappear. Obviously – this sucks and is not in the spirit of the original option plan.

Most contemporary option plans have provisions whereby all granted options fully vest immediately prior to a merger should the plan and / or options underneath the plan not be assumed by the buyer. While this clearly benefits the option holders and helps incentivize the employees of the seller who hold options, it does have an impact on the seller and the buyer. In the case of the seller, it will effectively allocate a portion of the purchase price to the option holders. In the case of the buyer, it will create a situation where there is no “forward incentive” for the employees (since their option value is fully vested and paid at the time of the acquisition), resulting in the buyer having to come up with additional incentive packages to retain employees on a going forward basis.

Many lawyers will advise in favor of a fully vesting option plan because it “forces” the buyer to assume the option plan, because if it did not, then the option holders would immediately become shareholders of the combined entities. Under the idea that “less” shareholders are better than “more,” this acceleration provision would motivate buyers to assume option plans. Of course, this theory only holds true if there are a large number of option holders.

In the past few years we’ve seen cases whereby the buyer has used this provision against the seller and its preferred shareholders. In these cases the buyer has explicitly denied assuming the options, wanting the current option holders to become target shareholders immediately prior to the consummation of the merger and thus receive direct consideration in the merger. The result is that merger consideration is shifted away from prior shareholders and allocated to employees whose prior position was that of an unvested option holder. This “transfer of wealth” shifts away from the prior shareholders – generally preferred stockholders, company management and former founders – into the pockets of other employees. The buyer “acquires” a happy employee base upon closing of the merger. Note, that this is only an option for the buyer if the employee base of the target is relatively small. Also note that the buyer can “re-option” the management and employees that it wants to keep going forward, so that in the end the only stakeholders worse off are the preferred holders and former employees / founders of the company.

Bottom line, the assumptions of stock options can be a more complex term than most people give it credit, as evidenced by this post.

Fooled By Randomness was unquestionably the best non-fiction book I read in 2005.  The author – Nassim Nicholas Taleb – is a magnificent writer, deeply intellectual, and delightfully blunt.  While one could interpret his style as arrogant, I chose to view it differently, especially given his endless self-deprecating remarks.  I don’t know Taleb, but I’m going to assume that he’s simply an enlightened guy that feels compelled to say exactly what is on his mind in the clearest way possible.

This book is subtitled “The Hidden Role of Chance in Life and in the Markets” and – in my opinion – is a must read for anyone that ever thinks about probability or statistics (or has ever said a phrase like “sunk cost.”)  In college, I struggled with 6.041 – Probabilistic Systems Analysis & Applied Probability (it was the only C I got as an undergrad) and felt like I was a week behind the entire class (e.g. I eventually got it, just a week after the problem set was due, or the test occurred.)  As a grad student I breezed through 15.071 – Decision Methodologies for Managers not necessarily because I was smarter, but because MIT Course 15 classes are much easier than MIT Course 6 classes. 

When I grabbed Taleb’s book, I had some flashbacks to 6.041.  Fortunately, Taleb’s book was extraordinarily easy to understand, even though some of the subject matter was congruent to 6.041.  Fooled By Randomness tackles classic probability theory (or – in Taleb-speak “the philosophy of randomness”) in a way that anyone with a college degree can understand using the financial markets as the backdrop for discussion.  Taleb loves dramatic examples which is a great way to understand this stuff as you end up with an extremely memorable heuristic for understanding something that could easily devolve into complex theory.

Oh – and he’s funny as hell.  I rarely laugh out loud when reading a non-fiction book – Taleb got a few deep belly laughs out of me.  He manages to demonstration his range of interests by weaving some philosophy and history into the book, although each time I tested one of Taleb’s assertions about Hume or Popper on Amy, she went of on a rant that made me remember how difficult it was for me to read and understand this stuff.

Great stuff – I can’t wait for The Black Swan, Taleb’s next book.

The Last Day of Hanukkah

Jan 01, 2006
Category Random

Christmas is long gone.  New Years Eve is over.  The only stuff left is New Years Day, football (especially college), and – well – the last day of Hanukkah.  Last night, on the seventh day of Hanukkah, I learned something new.  My brother Daniel and his wife Laura introduced me to sufganiyot.  I’ve had 40 years of Hanukkah and not once has my mother mentioned to me that jelly doughnuts are an ancient Hanukkah tradition.  So – apparently – jelly doughnuts are to Hanukkah as candy canes are to Christmas.  We celebrated last night with a box of Krispy Kreme’s.