Every now and then I run into a new VC term in a term sheet that I’ve never seen before. My legs tremble with excitement as I stare at the words to dissect what they mean.  On Friday, a long time friend sent me the following new and exciting term.

Compelled Sale Right: So long as VC (together with its permitted transferees) continues to hold at least 10% of the outstanding common shares (on an as-converted basis), and so long as an IPO has not been completed, then, at any time from and after the seventh anniversary of the transaction, if VC or the Company shall receive a bona fide offer from an unaffiliated third party to purchase 100% of the equity of the Company, VC shall have the right to cause each other stockholder to sell such stockholder’s equity securities on the same terms and conditions applicable to VC.

My first reaction was “what the fuck?”  My second reaction was “eh – this is just a different twist on redemption rights.”  But – then I thought about it some more and thought “you’ve got to be kidding me!”

So – after seven years, if there hasn’t been a liquidity event, a VC that owns at least 10% of the company can force all the other shareholders to sell their shares to an unaffiliated third party.  Read it slowly and think about it.  Basically, this term gives a minority shareholder the right to sell the company after 7 years, with no input from any other shareholders.

Be forewarned – this is not a nice term.

Last Thursday, Tucows announced that it was buying Boulder’s NetIdentity.    At a deal value of over $20m, it’s healthy for a company with only 10 employees, although my understanding is that NetIdentity was very profitable.  Four other Boulder software companies have been bought in the past few months – @Last (Google), Vexcel (Microsoft), Wall Street on Demand (Goldman Sachs), and Micro Analysis & Design (Alion).  I sense opportunities for luxury goods retailers in the Boulder County area.

I got to spend Father’s Day with my dad.  We’re sitting at my dining room table, laptop to laptop, while I help him out with his blog. There was a priceless cartoon in the most recent New Yorker that shows two kids walking down the street with one saying to the other, “For Father’s Day, I’m giving my dad an hour of free tech support.”  Daniel (and all the other fathers out there) – happy father’s day to you also.

I had an awesome 80 minute run late yesterday.  The view above is a picture I took at the top of Rattlesnake Gulch.  2000’ up and then 2000’ feet down, no humans (except at the bottom), and 75 degrees.  It’s good to live in Colorado.

On my trip last week, I tried a few times to read Al Gore’s An Inconvenient Truth but just couldn’t get into on the road.  So – I gobbled down Barry Eisler’s new John Rain book (The Last Assassin) and the new 24 book (24 Declassified: Operation Hell Gate).  Both were awesome and helped pass the time on a couple of the flights where my brain was baked but I didn’t feel like sleeping.

Barry Eisler is in my top five favorite mental floss writer category right now.  The Last Assassin is book number five – you can’t start here – you have to start at the beginning with Rain Fall.  The book started off a little slow as Eisler spent a lot of the first 30 pages catching up new readers on the history and the main characters that we were going to spend time with.  However, he hit his stride around page 50 and the rest of the book was impossible to put down.  This book has a little more set up and character development and a little less action, but I was still really happy with the balance – Rain is getting older so you’d expect him to slow down and be more pensive and introspectful.  A+.

I thought I was going to have to wait until January 2007 for my next round of 24 when I stumbled on 24 Declassified: Operation Hell Gate.  There’s a whole series of 24 books coming out (yes – I’ve ordered them all) – this is the first one I’ve read.  It follows the 24 format, but is set in the past (Jack is head of CTU Los Angeles, Nina is Jack’s chief of staff, Ryan is still a bureaucratic ninny, Milo is still an annoying nerd.)  The action takes place in CTU Los Angeles and New York City, which is a delicious change of pace, although Jack still manages to get across parts of New York in impossibly short periods of time.  The action is non-stop although it takes a little time to get used to the descriptions of the characters and what they are thinking vs. just the pure action of the TV show.  However, it was riveting – envision me standing in a one hour security line at Dulles, realizing I’m going to miss my plane, but not caring all that much while I read my book in line.  A+.

I’ve written plenty on Work / Life balance and have spoken broadly about it with a number of people in the past year.  Howard Morgan – a long time VC and colleague (he was one of the first guys I ran into when I started working with Softbank in 1996) has an interesting post up about Work / Work balance.  Amy and I spent a lot of time talking about this on our “walk to the reservoir” this morning – managing one’s time within the context of work – especially if it’s distributed across a number of projects (or companies) is – in many cases – even harder than the elusive Work / Life balance thing.  Good thoughts Howard.

Eric has a great use case for the Slingbox and the World Cup.  Since the only real excitement in soccer is a goal or a penalty (I know, blasphemy), multitasking with soccer is easy.  The photo example is here.

I love to read Joel Spolsky’s stuff – in addition to being a well known software developer, he’s an excellent writer and superb story teller. His ode to Bill Gates – “My First BillG Review” – is a blast from the past.  In addition to a really interesting story, you get to find out why the data functions in early versions of Excel work differently for January and February 1900.

My dad has been blogging about his view of the crisis in our healthcare system for two months and is starting to hit his stride.  He’s been setting up the problem and building a base for his thoughts, while starting to recruit “a posse” (he’s a Texan – he can’t help himself) to help out.  My folks are staying with us this weekend – it’s really cool to see how enthusiastic my father has become about blogging.  Oh – my parents are also celebrating their 43 anniversary this week – congrats mom and dad – I can only hope Amy and I have as good a next 30 years ahead of us as your last 30 have been.

I got a great question the other day which highlights the tension that can emerge in an early stage company between VCs and entrepreneurs.

Company X – which is VC backed – has six months of cash in the bank.  Almost every employee could go without a paycheck.  The team is on full pay now – it’s a small team of under 10.  Not taking salaries buys the company another six months.  There is a major launch in about four months.

An option the team is discussing is that if the current investors won’t throw in another million now so they have room to raise money after the results of the launch, they will “self finance” the company by everyone cutting pay if the investors issue a significant additional chunk in common to the employees

What are the issues for the team in doing something like this have you seen it, when not in a “difficult” situation?

While there is no tension yet, here’s a negative view of how this could play out.  The entrepreneurs ask the VCs to put up money – presumably at a certain price – in exchange for buying another six months of runway.  The VCs don’t like the price the entrepreneurs suggestion (presumably it’s too high) and offer to do a bridge loan with warrant coverage or an equity round at a lower price.  The entrepreneurs don’t like this, so they tell the VCs they’d rather go without salary for six months and get stock equivalent to what the VCs would have gotten (at the lower price of course) for their investment.  The VCs don’t like this because (a) they aren’t getting money to work, (b) they are ending up with less, not more of the company, and (c) they potentially lose some of the control over the financing dynamics.  After much handwringing (and wasted time), everyone comes to an agreement on the amount of stock the entrepreneurs and staff get for going without salary for the next six months.

Wind the clock forward.  The entrepreneurs have an “ok” launch, but the valuation for the new round is lower than they expected or there is no outside lead and the VCs start talking about an inside round.  The VCs have no incentive to get the valuation up in this case – they are focused on buying up more ownership, so they’d rather have a lower valuation anyway.  The entrepreneurs are pissed because they just gave up salaries for six months but didn’t end up in the “better” position they wanted.  The VCs aren’t appropriately sympathetic (at least in the entrepreneurs mind) to the situation – the entrepreneurs just made an investment they aren’t getting credit for.

Tension mounts.  No one is happy. 

While it’s a logical trade, it’s an uncertain one for the entrepreneur because there is no way to predict whether or not the launch will be successful, so fundamentally the entrepreneur is buying more runway, but not necessarily for the exchange of more ownership.  Of course, in the positive situation (where the launch goes great and new investors show up willing to invest at meaningfully higher prices) this could work out nicely.