Brad Feld

Month: January 2006

Yahoo! Ready Set …

Jan 06, 2006
Category Random

I came back from lunch to a bunch of posts on the new Yahoo! Go service.  I had 15 minutes before my next meeting – I figured I’d check it out.  Hi Terry – nice picture – but I’m a smart user and just want to get started.  Clicking on Get Started Now seems like the way to go.  Ah – a PC – I figure I’ll start there. 

The complete Yahoo! Go Desktop is coming soon but you can add life to your desktop now with Yahoo! Widgets.  Fun, stylish widgets that keep what’s important to you one click away.

Huh?  Nope – I don’t want Konfabulator (now fondly known as Yahoo! Widgets) – I already decided I didn’t like it when it was called Konfabulator.  Oh well – I’ll try the On Your TV thing. 

Yahoo! Go TV is coming soon and will be available for all Windows XP PCs. … Notify me when Yahoo! Go TV becomes available.

Well.  Ok.  How about On Your Mobile.

Yahoo! Go Mobile is available for download today on select Nokia Series 60 handsets.

Er, um, one handset type?

The next thing you know Google is going to be announcing that they are providing a free download of Symantec Norton Antivirus.

Not surprisingly, Guy Kawasaki has come out swinging.  Post #11 is The Top Ten Lies of Venture Capitalists.

Microsoft BizTalk is one of the sleeper products in the Microsoft Windows Server family.  BizTalk is at the core of Microsoft’s Business Process Automation (BPA) solutions and – with the release of BizTalk Server 2006 – is maturing nicely.

One of my investments – Oxlo Systems – has built its products for the auto industry on top of BizTalk and has had great success with the BizTalk Server platform.  Microsoft recently wrote up a nice case study on Oxlo and what they’ve done using BizTalk.  Oxlo has received a lot of help and support from Microsoft – both the BizTalk product team, the vertical sales organization, and Microsoft’s Emerging Business Team (lead by Dan’l Lewin.)

Scott Maxwell – a partner at Insight Venture Partners – has an extensive post up about Microsoft’s Emerging Business Team.  Scott and I sit on the Microsoft EBT VC Advisory Board, along with several other VCs – and have watched Microsoft continue to increase and improve their focus on working with and helping VC-backed companies.  Oxlo is one good example of where it is working.

I read You Need to Be a Little Crazy : The Truth about Starting and Growing Your Business over the holiday break.  Barry Moltz’s marketing and PR Director Sarah Moore sent me Barry’s book after sending me an email suggesting my blog fit with Barry’s writing.  While I probably have read my lifetime supply of “entrepreneur / startup books” I decided I’d give this a try since (a) Sarah asked nicely and (b) I once had the domain “” (with some weird idea of writing something about entrepreneurship) so the title of the book “spoke to me.”

This book is aimed at three types of people:

  • Someone considering starting a company for the first time
  • The first time entrepreneur
  • The “entrepreneur for a while” who is struggling with work / life balance and getting it all in perspective

If you fit in any of these categories, this book goes nicely with Greg Gianforte’s Bootstrapping Your Business: Start And Grow a Successful Company With Almost No Money.  It’s short, sweet, and full of anecdotes.  Barry is based in Chicago, so you get plenty of local Chicago stories and characters, including Matt McCall, my fellow board member at FeedBurner.

I received several comments and private emails about my post on Investment Agents – Good or Bad? A colleague sent me a good follow up note adding some flesh to my comment that the ratio of charlatans to qualified agents is 100:1.  He’s asked to remain anonymous, so I thought I’d summarize his comments here – the basic message being that there are some non-trivial legal considerations for the role the placement agent plays in soliciting investors and structuring the transaction.

In general, the SEC may turn a blind-eye if the agent (or “finder”, or “banker”, “advisor”, or “scam artist”) is only working on a one-off basis and is not involved with structuring the transaction.  However, if they do it as a line of business, receive contingent compensation, or are involved with structuring transactions it can be bad news for all concerned, including increased liability for the startup if things go south.

One interesting alternative for those that only perform services for private companies is the NASD Series 82 Examination Program. It’s a little known license offered by the NASD strictly for private placements. However you still need to be affiliated with a NASD firm to take the exam and transact securities.  For the legal minded among us:

“The Series 82 examination program is proposed in connection with a proposed change to NASD Rule 1032 to implement Section 203 of the Gramm-Leach-Bliley Act of 1999 (“GLBA”), which requires the NASD, as a registered securities association, to create a new limited registration category for any associated person of a member whose investment banking and securities business is limited solely to effecting sales of private securities offerings.”

Naturally this end of the capital markets is full of gray areas.  The SEC probably wouldn’t spend much time on a VC investor complaint (we’re supposed to be sophisticated after all), but if an entrepreneur takes angel – or worse – non-accredited investment – through an unregistered placement agent they could be setting themselves up for a world of hurt.

So – if you are considering hiring an agent to help you raise money, in addition to asking for a resume, list of previously completed deals, and references, you should ask for the agent’s regulatory status.  This will help you with the charlatan:legit_dude ratio.

Well – the first business day of the year is officially over.  Apparently Yahoo just rejected an offer from Microsoft for $80 billion because it wasn’t enough.  My guess is that Microsoft forgot to include the “!” in Yahoo! and pissed someone off (the “!” has got to be worth at least $20 billion.)  I felt like shit all day today, but my cold (the first one I’ve had this year) at least had a side effect of getting me out of a trip.

Regarding our Letter of Intent series, we are starting to get into the sticky stuff (if you need a visual, think of when you were a kid and you superglued your fingers together.) Every LOI will have some mention of representations and warranties (if you want to sound like you are in the know, you can call them “reps and warranties”, or just “reps”) being made by the seller in favor of the buyer. In our experience, the usual language of this paragraph is usually light in substance, but this section can have a profound effect on the deal and consume a ridiculous amount of legal time during the negotiation of the definitive agreement. 

The first thing to note is “who” is making the reps. Does it say the selling company will be making the reps, or does it say the selling company and its shareholders are on the hook? Or – more typically – is it silent as to who exactly is stepping up to the plate? Given that many shareholders (from VCs to individuals who hold shares of the seller) are unwilling or unable to represent and warrant to the seller’s situation, try to get this spelled out in the LOI as most buyers will eventually accept that the company (and not the shareholders) is making the reps. Even though this is not something that you will want to have the lawyers fight over as they’ll spent hours exhausting all the theoretical arguments, this is usually how it plays out, at which point the business people have to get involved to get resolution on this (think superglue and fingers again.)

All LOIs also will have something regarding indemnification in the event that one of the reps or warranties is breached. Considering how important this provision is to a merger, it’s a wonder why so many term sheets say: “The Company shall make standards representations and warranties and provide standard indemnification to Acquirer.” To us, this is code for “we are really going to screw you on the indemnification terms, but don’t want to tell you at this stage so that you’ll sign the LOI and become ‘pregnant’ with the deal.  Really – trust us – our deal guys and lawyers are nice and cuddly.”

Depending upon the situation of the seller (perhaps the seller is in a position whereby it wants to get the buyer ‘pregnant’ more than vise versa and is willing to take its chances with the lawyers arguing), we’d suggest that you at least sketch out what the indemnification will look like. Again, once the lawyers get involved, arguments like “it’s market and it’s non-negotiable” or “I get this on all of my deals” get bantered about and little good comes from it.

Oh – the buyer usually makes some reps also, but since they are paying for the seller, these are typically pretty light weight unless the buyer is paying in private company stock.  If you are a seller and you are getting private stock from the buyer, a completely logical starting point is to make all the reps and warranties reciprocal.  If you need a refresher on why, it’s analogous the to Unilateral or Serial Monogamy discussion that Tom Evslin and I had when the price of oil first hit $67 a barrel (or – if you just want a simple comeback when the buyer says “no way”, you can say “what is sauce for the goose is sauce for the gander.”)

It’s been a quiet day today as I sit in Amy’s office in downtown Boulder and get geared up for the year ahead.  My inbox is empty, my todo list is mostly empty, and my brain is clear.  There’s something really elegant about the first business day of the year which – apparently – wasn’t today but is tomorrow.

As I enjoy the sun going down over Boulder, I’ve been reflecting on my first company (Feld Technologies).  I looked at the Business Plan series to see where I had left off and – voila – the next section to talk about is The Company.  Since I’m in Boulder, land of hippies and crystals (and lots of Internet entrepreneurs, plenty of mountain bikers, and some amazing Olympic athletes) I thought this sychronicity warranted that I crank out another post on the Business Plan.

Once the setup to the business (e.g. what industry are we going to address) is out of the way, a business plan should cut to the chase and describe what the company is going to be doing in the context of the industry it is addressing.  This was short and sweet for Feld Technologies:

As a company, Feld Technologies will focus on encompassing the entire semi-custom software concept; it will use this concept to solve problems for small businesses. Because of its generic nature, the capabilities of semi-custom software covers most of the needs for business software used in small companies.

It could have been a little simpler – e.g. “we write custom software for small business and we try to be smart about it, using the “semi-custom software” idea we described earlier.”  One paragraph describing what the company is going to do doesn’t seem particularly ambitious, so we fleshed it out a little.

The Company will gain expertise in the use of various database packages. It will build up a library of reusable software, which will improve quality and efficiency in development. It will build a customer base of lead-users who will help steer the Company toward emerging trends and needs. In these ways, Feld Technologies will add a value to its products which no vendor of individual competitive products can match.

The founders will become authorities in the field of database application programming. We will use this status to develop and market numerous adjunct database products including software and literature. We will leverage our authority to become noted consultants who create computing solutions for small businesses. Finally, we will strive to make Feld Technologies a cornerstone upon which a new segment of the software industry is built – namely semi-custom software.

We were very specific and direct.  When I look back on this, the only thing we never got around to trying to do was “develop and market numerous adjunct database products including software and literature.” We never really developed a product focus – something that is very hard for a self-funded consulting firm to do, especially one run by a 25 year old and a 21 year old.

So many of the business plans that I see (and often don’t read) have endless vague generalities and extremely optimistic assertions about what the company will accomplish.  Keep it short, simple, and direct.  Don’t be afraid to have a big vision, but make sure it’s a clear one.

Another day, another question to answer that was stuck in my “answer this question on your blog” someday folder in Outlook. 

When I got my new IBM X41 tablet in September, I wrote a glowing review of it.  I recently was asked if I still like it – three months later I’m still loving it.  Laptops usually last me six months, so let’s see how I feel on April 1st.  Ironically, I’m not using it as a tablet much (occasionally when I’m lying on the couch reading while listening to music, I’ll flip it into tablet mode so it (a) takes up less space and (b) I can monitor my email without having to move around each time something arrives in my inbox.  However, as a standard, hardworking laptop, it’s great.

In our previous post – which started to get long and unwieldy (ah – the need for an editor – where are those guys when you need them) – we didn’t cover two critical issues: (1) What happens if the acquisition is in cash vs. public stock vs. private stock, and (2) Who pays for the “basis” of the stock options?

The form of consideration of the acquisition can be a many spendored thing. We’re going to ignore tax considerations for this post (although you shouldn’t – we just don’t want this to be 12 pages long.) If I’m an employee of a seller, I’m going to value cash differently than public stock (restricted or unrestricted?) differently than public stock options differently than private stock (or options). If the buyer is public or is paying cash, the calculation is pretty straightforward and can be easily explained to the employee. If the buyer is private, this becomes much more challenging and is something that management and the representatives of the seller who are structuring the transaction should think through carefully.

The “basis” of the stock options (also known as the “strike price” or “barter element”) reduces the value of the stock option. Specifically, if the value of a share of stock in a transaction is $1 and the basis of the stock option is $0.40, the actual value of the stock option at the time of the transaction is $0.60. For some bizarre reason, many sellers forget to try to recapture the value of the barter element in the purchase price and allow the total purchase price to be the gross value of the stock options (vested and unvested) rather than getting incremental credit on the purchase price for the barter element.

Yeah – a little confusing, but lets assume you’ve got a $100 million cash transaction with $10m going to option holders, 50% of which are vested and 50% are unvested. Assume – for simplicity – that the buyer is assuming unvested options but including them in the total purchase price (the $100m) and that the total barter element of the vested stock is $1m and the barter element of the unvested stock is $3m. The vested stock has a value of $4m ($5m value – $1m barter element) and the unvested stock has a value of $2m ($5m value – $3m barter element). So – the option holders are only going to net $6m total. Often the seller will catch the vested stock amount (e.g. vested options will account for $4m of the $100m) but the full $5m will be allocated to the unvested options (instead of the actual value / cost to the buyer of $2m). This is a material difference (e.g. the difference between $91m going to the non-option holders versus $94m).

Of course, all of this assumes that the stock options are in the money. If the purchase price of the transaction puts the options out of the money (e.g. the purchase price is below the liquidation preference) all of this is irrelevant since the options are worthless.