There was a gang of bloggers at SAP’s SAPPHIRE conference that was organized by SAP’s Jeff Nolan.  The wiki has a bunch of context and links to the various folks that were part of this gang.  Niel Robertson – the CTO of Newmerix (one of my portfolio companies) – has started to trickle out missives from the conference.  Ross Mayfield – the CEO of SocialText – covered the keynote nicely (eliminating my need to be there) and – well – if you just had to see some pictures of the conference, they even existed on the web.

I received the following question recently:

Just want to ask you a question. I’m looking to bring in a couple of advisors for my startup, how much stock and the approximate % of equity should I give that’s fair to the advisors for their invaluable advice? I was thinking of 100,000 shares each that equates to 1% company equity. Can you advice me on what’s the norm?

1% is rich.  In the past, I’ve given some ground rules for equity grants for directors – 1% vesting over four years is at the top end of the range.  Advisors typically (although not always) contribute much less value to a company than directors and their equity grant should correspondingly be less.  Of course, the amount you give depends on a number of factors, including things like your expectation of what the advisor will provide, how much you value this involvement, and the existing capital structure of the company (e.g. larger grants if you are younger, smaller grants if you are a more mature company.)

Usually, you’ll be granting stock options (non-qualified stock options – “non-quals” or NQSO’s) to the advisor.  As a result you should think through vesting carefully.  Many advisors contribute much of their value early in the life of the relationship so rather than giving a grant that vests over four years, you might consider making an annual grant and then revisiting things in a year to see if the relationship is living up to expectations.  A savvy advisor will prefer to get a bigger grant that vests over four years since it will allow them to lock in a strike price at today’s fair market value (FMV) of the stock (which – in the success case – will likely be lower than the FMV in the future).  At the minimum, this will facilitate a conversation about revisiting things annually to make sure everyone’s expectation is being met with the relationship.

In Munich, der Lowe has eaten La Vache.  The Munchner Lowenparade (Lion Parade) was out in force.  I snapped about 50 pictures of beautifully painted lions like the one below with my favorite lioness.

Amy informed me that the female lions do all the work while the male lions lay around all day.

Amy and I had a great few days in Munich earlier this week.  The highlight was teaching Joachim Henkel’s class at Technische Universitat Munchen on the topic of “Why Innovations Often Come From Startup Companies.”  I met Joachim through Eric von Hippel – they’ve worked together on some Open Source research that’s part of Eric’s Democratizing Innovation theme.

The class was very engaged and humored me by speaking excellent English.  Rather than stick to a tight topic, I did a lot of story telling and Q&A, which I always expect is a nice change of pace for a class like this from the more standard academic lecture (at least they seemed to have fun.)

Joachim and his delightful wife Kathrin were excellent hosts.  We had an extraordinary meal at Schuhbeck and stayed at the beautiful Bayerischer Hof hotel.  In addition to some sightseeing, I managed to squeeze in a meeting with the founders of eCircle – an impressive email marketing company in Munich that is a potential partner for several of my portfolio companies.

Congrats to my friends at Gold Systems for winning the “Best Outbound Solution” as part of the Microsoft Speech Server Partner Spotlight Awards that were announced on Tuesday.  Terry Gold and his team have been working closely with Microsoft on their new Speech Server product and have done some really cool stuff with it, such as the Gold Systems Password Reset Solution that Microsoft is highlighting on the Microsoft Speech Server website.

John Funk, a partner in Evergreen Innovation Partners, recently had a nice summary of the minor victory eBay just had in at the Supreme Court in the universe of defending against software patents.  As John points out, it’s a minor victory, but helps reinforce that an injunction and system shutdown is not an automatic outcome when a court finds a company to be infringing on a patent.)

John and I have been colleagues (I was an investor in Exactis (fka Mercury Mail / Infobeat – his first company), adversaries (Infobeat sued a company I co-founded – Email Publishing – for patent infringement – which was eventually settled for $1 and a cross-licensing agreement between Exactis and MessageMedia (the company that acquired Email Publishing)), and once again friends and colleagues (I’m an investor in John’s latest company, Evergreen IP.) 

John has been around patents and the law for a long time – I expect he’ll continue to have great insights (some which I’ll agree with, some which I won’t) up on his blog in the future.

I had a superb run this morning through the English Garden in Munich.  This is only the second time I’ve ever been in Munich – the first time was with my friend Bruce over 20 years ago.  While it was cloudy, it was a lovely morning, the park was fresh, green, and hidden from the city, and there were some wackadoodle surfers practicing in the small river under a bridge with a water pipe.  I discovered the incredible value of the map function of my new Garmin Forerunner 305 – without it I would have been lost in the park and would have never been able to find my way back, especially since none of the signs made any sense to me except the ones that said “GaragePark” which weren’t of much use and I forgot to leave myself a trail of bread crumbs.

BoingBoing has noticed that something weird is going on with the clock on 24.  Rick Stratton asked me – with regard to my post that the first 25,000 users are irrelevant, whether I was referring to “free, ad-based ‘consumer’ web services” or did I also lump paying enterprise web services users into the mix.  Nice catch Rick – I only meant the free consumer ones (e.g. my portfolio company Rally Software has less than 25,000 individual users, but ever one of them is very relevant, especially since we get paid for each one each month.)  Finally, Tali Aben saved me 58 minutes by blogging a great summary of a breakfast “fireside chat” with Bruce Chizen, the CEO of Adobe.

Time to go have breakfast.  If I remember correctly, I’ll be presented with a buffet full of meat and sausage choices, surrounded by cheeses.

I received the following question on pricing stock options recently.

In a post you wrote last year, you said “Let’s also assume that company did a financing and is worth $10.5m post-money (e.g. $3 / share), that the financing was done with preferred stock, and the board determined that the fair market value (FMV) for the common stock is $0.30 / share (common stock in a venture-backed company is often valued at 10% – 25% of the preferred – I’ll leave that for a separate post.)” Could you help explain the justification for the 10% – 25%?

A year ago when I wrote that post, I hadn’t thought much about the implication of the new IRS regulation 409A.  While a draft had been published, it didn’t really catch the attention of the venture community until a critical memo was released in the fall.  As a result, when I wrote the post in mid 2005, I was referring to a typical rule of thumb that VCs have been using since fire was invented to set the strike price for stock options.

The old rule of thumb was to price them at roughly 10% of the price of the preferred shares if the company was a very early stage company.  As the company matured, the percentage would increase, usually slowly, and reach 25% of the current preferred price well before the company was profitable.  In the days when software companies went public, the SEC looked back 18 months to determine “cheap stock issues” and – as long as the board was making an appropriate fair market value (FMV) assessment of the common stock and increasing it over time, with more significant increases occurring as the target date for the IPO drew nearer – all was probably ok (plus – the cheap stock charges were P&L accounting charges but were non cash charges so no one really struggled with them much anyway.)  When the company went public, the stock would now have a market price that fluctuated regularly and stock options would be priced at whatever the stock traded with on the date of the grant.

This approach worked fine for a while. Serious lawyers would even encourage companies to price their options lower than a conservative board might suggest, as they were trained to use the 10% rule. 

With the emergence of 409A, all of that went out the window.  While the board still needs to determine the FMV of the common stock for purposes of pricing the stock option grant, the 10% rule no longer applies.  Instead, a more rigorous analysis needs to take place.  I’ve explained this extensively – with the help of my trusty sidekick Jason – in the 409A series on this blog.

Ironically, now that we’ve been living with 409A for a while, a bizarre unintended consequence has emerged.  In order to comply with the 409A statute while being extra conservative, we have our companies hire an outside valuation expert to do a 409A valuation.  In a number of cases, the FMV has come in at less than 10% of the preferred price (in one case it came in at under 5% of the preferred price.)  Presumably, one of the goals of 409A was to increase the strike price on common stock as the premise was that many boards were setting FMV too low.  Hah – be careful what you wish for.

Recently, I spent part of a day at the Computer History Museum in Mountain View, CA at the National Center for Women & Information Technology Entrepreneur Alliance Planning Session.  It was a good meeting – we covered a lot of ground with an interesting group of people as we explored whether or not it makes sense to create an NCWIT Entrepreneurial Alliance (it does) to go along with the Workforce Alliance, Academic Alliance, and the new K-12 Alliance.

One of the topics we discussed was networking.  Building effective social networks is an important part of being a successful entrepreneur and – in addition to talking about it generally, we spent some time talking about how good (or not good) women (and men) tend to be at this.  There was some discussion about how some of the organizations in the room helped both teach women how to build networks as well has help facilitate them.

As I was listening, all I could think about was how in so many cases people simply don’t know how to network effectively.  I blurted out “hey – one of the problems is that people don’t know how to network – all they are doing is stalking other people.”  I went on to explain two stories – one of a time that I was at an event where I ended up simply locking myself in my hotel room because I felt like a soccer ball at a game between teams consisting of five year olds – wherever the ball (I) went, all the kids (my stalkers trying to network with me) followed.  My other example was the endless supply of people offering to have coffee with me.  Since I don’t drink much coffee, it’s relatively easy to turn down these requests “to get to know [you] better”, and replace them with a “hey – why don’t you email me what you want to talk about instead.”

I’ve found that many people that try to “network” simply don’t have a clear purpose in mind.  I used to get frustrated by this and would occasionally go into stalker avoidance mode.  Now, rather than dodging the stalkers, I confront them head on and try to offer some practical advice by asking the simple question “Why do you want to talk to me?”  It’s not intended to be an arrogant question – rather it’s a focusing question – if you can tell me what you want, I’ll see if I can help. If you can’t, you should should spend some time thinking about the reason.  And – if I can’t help – I’ll tell you directly so that I don’t waste your time either.

The Computer History Museum was very cool, BTW.  I got to spend 30 minutes by myself with a bunch of old (and some very old) computers.  Some were even created before networking.