Author: Brad Feld
There have been many different language translations of Venture Deals since it was first published in 2012. The first German translation of Venture Deals 4e is out, and Florian Kreis did an amazing job.
Florian aimed to modify the book as little as possible, even if the relevant passages did not correspond 100% to German best practices but were still feasible to implement. He believes the structures originally developed in the U.S. have become the international standard and are a great role model for Germany.
However, the challenge in revising the book this way is putting these structures into the context of German law. Sometimes, this required minor changes or simply using the correct language. In other cases, it was a lot more challenging.
Following, in Florian’s words, are several examples of things he had to modify more extensively.
Corporate law: In Germany, most companies in general and most VC-financed companies are structured in the legal form of a “Gesellschaft mit beschränkter Haftung” (GmbH). Larger companies often convert to the “Aktiengesellschaft” (AG) later, especially if they want to go public. Both the GmbH and the AG are corporations. In addition, many GmbH & Co. KG companies exist in Germany. They correspond in their structure roughly to a Limited Liability Company (LLC). GmbH & Co. KG companies have decisive tax disadvantages for startups and are, therefore, rarely used in this area. The GmbH has a great advantage in that it can be structured very flexibly. You can deviate from the legal regulations to a very large extent, and in practice, you do so. Most of the VC structures from the US best practice can be integrated into the GmbH structure. Often, this integration results in VC-financed GmbH companies having little to do with the GmbH as envisaged by the law.
Board of Directors: There is no board of directors in Germany. In the GmbH, the most important body is the shareholders’ meeting. The shareholders are represented there and usually have voting rights in proportion to their shareholdings. In addition, there are the managing directors as executive bodies. In the VC sector, it is common to introduce a third body in addition to the shareholders’ meeting and the management. This third body is often referred to as an advisory board (Beirat), sometimes also as a supervisory board (Aufsichtsrat). In practice, certain functions of the shareholders’ meeting are transferred to such an advisory board, for example, the appointment and supervision of the managing directors or the decision-making capacity in the case of protective provisions. In the end, however, it is the shareholders’ meeting that remains the most important body in the GmbH.
Conversion right: In Germany, there is generally no conversion right entitling the holder of preferred shares to convert them into common shares at any time. This may not seem like a big deal at first glance, but it has extensive implications under various aspects, such as the structure of the liquidation preference. In the USA, the conversion right ensures that holders of preferred shares are not disadvantaged compared to holders of common shares; in Germany, this legal consequence must result directly from the structure of the preferred shares. In some cases, this causes confusion in terms of terminology: In Germany, the participating preference is referred to as the “nicht anrechenbare Liquidationspräferenz” (non-compensable liquidation preference), while the non-participating preference is referred to as the “anrechenbare Liquidationspräferenz” (compensable liquidation preference). Hence, the negation is exactly in reverse. However, the lack of a conversion right also has implications for anti-dilution protection: in the U.S., this is usually done by adjusting the conversion price. In Germany, anti-dilution protection is achieved by issuing additional preferred shares. The lack of conversion rights must also be considered when structuring voting rights.
IPO issues: Possibly the biggest problem for German venture-backed companies is the very low number of IPOs in Germany. The boom years of 1998 (79 IPOs), 1999 (175 IPOs), and 2000 (142 IPOs) are long gone. In 2022, just as in 2009, there was only one IPO; typically, there are between three and 16 per year. Since the attractiveness of investments is also largely related to exit channels, this aspect affects the availability of capital and company valuation at every stage. It is not uncommon for companies wanting to go public to relocate their registered office to the USA at an early stage. There are also legal differences: Registration Rights, for example, are not legally binding. Piggyback rights are permissible, but due to legal regulations, they are not mandatory. Even though the regulations may not be binding or necessary in individual cases, they can help to bring the topic of going public into focus at an early stage and make it a subject of discussion.
Employment Issues: There are significant differences between Germany and the U.S. regarding employee issues. There is a reason why on page 264 of Venture Deals 4e, it states, “We’ve encountered some challenging situations in certain states in the United States that made firing almost as challenging as firing in parts of Europe.” This must have meant Germany… If a company regularly has more than ten full-time employees, terminations may only be made for certain reasons. Then you may only terminate those employees you actually still want to keep. These issues were problematic twenty years ago when the unemployment rate in Germany was relatively high, and terminated employees could not easily get a new job. Today, things are different: For some years, German has had a shortage of skilled workers, and companies are usually happy if they can find suitable employees.
Employee option pool: The framework conditions for employee option pools remain a major problem in Germany. The tax framework and valuation issues are particularly complex and not very employee-friendly. While there was a major law reform in 2021, the regulations are still inadequate. Even after the 2021 reform, employee option pools will continue to be structured via phantom stocks, as this is the only way to reliably avoid the dry-income problem. This topic is important and complex, so I dedicated a separate chapter (chapter 20) to it in the German edition.
Regulatory framework: There are major differences between the U.S. and Germany in the regulatory framework, which in Germany is supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). This affects not only the large IPO in the late stage but also the small crowdfunding round in the early stage.
Other special features: At various points in the book, there are references to the German Standards Setting Institute (GESSI), which was founded by the Business Angels Netzwerk Deutschland e.V. (BAND) and the Bundesverband Deutsche Startups e.V. (German Startups Association). GESSI develops standardized sample contracts comparable to the National Venture Capital Association in the USA, which are available online at www.standardsinstitute.de. The book also contains information on the INVEST program, with which the Federal Republic of Germany supports investments in early-stage companies. Unfortunately, some of the explanations in this regard are already out of date following the most recent amendment to the law on February 6, 2023.
Samples: The samples in the Annex of the German edition, i.e., the Term Sheet and the Letter of Intent, are essentially based on the samples of the U.S. edition. The detailed work here was probably the most time-consuming. In the case of sample contracts, every word and every concept must be correct and corresponds 100% to the German legal situation. Both samples are bilingual. I partially dealt with the additional space requirements associated with bilingualism by merging the two-term sheet samples from the US edition into a single document.
Florian – thank you for the incredible and time-consuming effort here.
The course is free and starts on March 21, 2023.
This is the third time we are running the new version of the course (v2!) that was co-created with Techstars and Kauffman Fellows.
If interested, sign up now. I hope to see you there in one of the AMAs we will host for anyone who takes the course.
Amy and I have been sponsors of the Boulder International Film Festival for a while. We’ve also been helping fund documentaries and have received several executive producer credits. Two of these films are in the 2023 Boulder International Film Festival on March 2 – 5, 2023.
Afghan Dreamers is the story of an all-girls robotics team in Afghanistan who risks it all to prove that they can compete against anyone worldwide. Working in secret in a province under strong Taliban influence and the threat of violent retribution, the high-school-aged team members struggle in the face of immense odds and ever-present danger. They single-handedly begin to change perceptions in their entrenched Islamic culture. The film focuses on three team members – Fatemah, Somaya, and Lida – who become role models for the next generation.
I met David Cowan in 1988 when he was an undergraduate at Harvard and I was a graduate student at MIT. We became friends and regulars at Maven’s Deli in Harvard Square. Our first project was Feld Technologies reselling (not very successfully) a software product called DataRoute that David wrote for his father’s law firm. The phrase “Today is the day to route with DataRoute” still hangs out in the dark recesses of my memory.
David has produced several films and called me up when he started working on Afghan Dreamers. He knew I’d be an easy mark for joining in on the film based on my support of women and girls in computing. He did all the work, so I merely provided some money and moral support. I saw an early cut, but that was before the final withdrawal of U.S. troops from Afghanistan, which added some extreme plot twists to the story. Amnesty International gave the film the Best Human Rights Film Award for 2022 at the Galway premiere, and the Woodstock Film Festival gave it Honorary Mention for Best Documentary Feature.
I look forward to seeing the final cut at Boulder High School on Saturday, March 4th.
My Sister Liv is the story of two inseparable sisters, Tess and Liv. However, as Liv enters adolescence and struggles with the relentless pressures of social media, depression, body dysmorphia, and, often, suicidal thoughts, her big sister Tess desperately struggles to save her. My Sister Liv is a rare and riveting journey into Liv’s raw emotions and fears as a young life on the edge. As Tess and her family learn to cope after unthinkable loss, they begin the heartbreaking journey to understanding the circumstances that led to Liv’s death and talk to experts to provide hope and solutions for this ever-growing epidemic.
Three of our friends—Grant Besser, Melissa Grumhaus, and Jason Lynch—introduced or mentioned Olivia Ahnemann, one of the producers of My Sister Liv, to us. After some discussion, we also decided to provide financial support for this film. We will also be watching it for the first time at Boulder High School on Saturday, March 4th.
Amy and I will have a double feature day at the Boulder International Film Festival on March 4th. I hope to see you there.
I’ve co-founded or been an early investor in many things. One of my favorites is the MIT Banana Lounge. I will be hanging out there Tuesday afternoon and doing an AMA from 2pm to 4pm.
It began with an email from Zoe Sheill. I met Zoe at PSL when she was an intern the summer before her freshman year at MIT. We stayed in touch, and I went bananas when I got the following email from her on May 3rd, 2021.
… Right now, though, we’re running into a bit of trouble raising the money for starting the banana lounge again in the fall. In the past, we’ve given out about a quarter of a million bananas per semester, and about 76% of our budget is just bananas. The Undergraduate Association funded us in previous years – they are now using their limited money for newer projects now that the banana lounge has gotten a lot bigger (over 15k students would visit the lounge per week). Malte (the student that started the banana lounge 3 years ago), me, and Greg had a meeting a while ago and Greg recommended talking to you as a successful MIT alum and someone also excited about the possibilities with bananas.
After some back and forth, I agreed to provide the needed funding. Zoe responded with:
Our banana guy for 2021-22, I’m so excited! You are saving Banana Lounge. So many students will benefit from this and we are very much looking forward to sharing your story with them. I’m humbled by your generosity and the team is grateful and excited, thank you.
The MIT Banana Lounge has become a core part of the institution. Its fame began with a tweetstorm by Iain Cheeseman, a professor at the Whitehead Institute and the MIT Department of Biology.
More fame followed with articles in Boston Magazine (The World Needs More Ideas Like the MIT Banana Lounge) and the Boston Globe (At MIT’s ‘Banana Lounge,’ it’s not just the free food that’s a-peeling.) It appeared in Psychology Today (The Psychology of MIT’s Banana Lounge). The MIT Class of ’62 hunted it down, and MIT President L. Rafael Reif spent about five minutes on it in his Charge to the Class of 2022.
I get an update from the team every few months. The stats so far for the 22-23 academic year (through January) follow:
- Bananas: 299,460 at 97.8% reliability and 0.53% waste
- Drinks: 36,240 cups
- Deliveries: 50
The complete 22-23 academic year plans include 600,000 bananas and 500,000 student visits.
After I provided the funding in 21-22, I was joined by Alex Rigopulos and Eran Egozy (co-founders of Harmonix) along with MIT Undergraduate Asociation and some students and recent alumni.
Because it’s MIT, I get graphs in my periodic updates.
I’ve moved on from sponsoring bathrooms, although I finally did get a bathroom sponsored at MIT. It’s top secret where it is, so don’t tell the MIT administration if you happen to find it.
Dave Jilk and I had a long discussion last night, which included some rambling about AI. If you have been following me for a while, you know that in 2010 I stated that the machines have already taken over for us and are patiently waiting for us to feed all human knowledge into them.
This morning, Dave told me about the new HyperEncabulator project by SANS ICS as part of their ICS initiative. If you aren’t aware of the ICS initiative, it’s essential for industrial applications, especially IoT and security.
But first, some history, since it’s an evolution of, and inspired by, the Retro Encabulator initiative, which was foundational but little known in the arc of encabultors.
The HyperEncabulator came out in the middle of 2022. Notably, side fumbling is still effectively prevented.
When I asked ChatGPT, “How does a Retro Encabulator work?” they had an accurate but humorless response.
The Retro Encabulator is a fictional machine invented for an engineering-themed comedy sketch in the 1970s. It is described as “an intricate and implausible device for the purpose of regaining lost energy.” The Retro Encabulator is a humorous parody of an electromechanical machine and its purpose is to perform useless tasks. The machine consists of numerous components, such as pistons, flywheels, and other components, that serve no real purpose. The device usually ends up producing more energy than it consumes, although this is never explained.
Grammarly had a few suggestions to improve ChatGPT’s writing.
The Retro Encabulator is the fictional machine invented for an engineering-themed comedy sketch in the 1970s. It is described as “an intricate and implausible device to regain lost energy.” The Retro Encabulator is a humorous parody of an electromechanical machine whose purpose is to perform useless tasks. The machine consists of numerous components, such as pistons, flywheels, and other components, that serve no real purpose. The device usually produces more energy than it consumes, although this is never explained.
When I asked ChatGPT, “Are you aware how little a sense of humor you have?” they said, “No, I do not have self-awareness.” So I hope they figure out how to connect to the HyperEncabulator.
FYI – when I asked ChatGPT, “What are your pronouns” so I could write the previous paragraph correctly, they said, “My pronouns are they/them.”
Some day there will be a genre called “startup fiction.” I mean, if science fiction, which is a sub-genre of fiction, can have libertarian science fiction and recursive science fiction, surely startup fiction belongs in a sub-genre of a sub-genre of a sub-genre.
Please Report Your Bug Here by Josh Reidel is an excellent example of startup fiction. I began reading it at the end of the day Saturday after finishing The Age of A.I. and Our Human Future. I enjoyed Reidel much more than Kissinger, Schmidt, and Huttenlocher (even though I greatly respect them.)
Reidel was the first employee at Instagram. While the first thirty pages started like yet another explore the bay area startup thing book, it quickly twisted into something more enjoyable. When I picked it up yesterday afternoon after a long run and a nap, I didn’t put it down until it was time to go to sleep, which meant I was finished with the book.
I hope there are a lot more books like this. It balances startup stuff with the cynicism of the experience while placing it in a fictional world. It unexpectedly merges with believable near-term science fiction, which has a delicious parallel universe theme. And, if you believe in the infinite parallel universe theory (or just the multiverse) and haven’t yet renamed your company multiverse (yes, there is one), you can quickly get lost in a sequoia tree. In Oakland.
I assume that Reidel meant to riddle the book with tech industry easter eggs. If this was unintentional, it’s even more fun since that would be my brain doing its thing on Planet Brad.
I hope there are a lot more books like this. I’ve been thinking about writing a fictionalized version of my SPAC experience, and Please Report Your Bug Here inspired me to take that idea more seriously.
I usually do a few interviews (podcasts?) at the beginning of the year. I avoid all of the end of the prior year “what do you predict for next year” stuff and find that several long-form interviews at the beginning of the year allow me to get out of my head what’s going on from my frame of reference.
If you know me, you know that I learn by doing, writing, reading, and thinking out loud. I find these interviews to be a good way for me to think out loud to solidify my transition into the new year.
I did two interviews right after the new year. One with Andrew Keen …
… and one with Jason Calacanis.
(0:00) Jason Kicks off the show
(2:49) Brad Feld, Co-founder of Foundry, talks about starting out in investing
(13:30) LinkedIn Jobs – Post your first job for free at https://linkedin.com/twist
(14:56) Brad’s thesis for whom he’ll get in the “trenches” with
(20:48) MasterClass – Get 15% off an annual membership at https://masterclass.com/startups
(22:22) Fighting to the end + Investing through the dot-com bubble
(38:13) Microsoft for Startups Founders Hub – Apply in 5 minutes, no funding required, sign up at http://aka.ms/thisweekinstartups
(39:43) Surviving the GFC
(44:23) Brad’s perspective on the investor/CEO dynamic + being a leader in a down market
(1:00:02) Reflecting on the speculative asset bubble
(1:16:44) Looking forward into 2023
They are both great interviewers willing to let me ramble when prompted vs. tie me into a structured interview.
So, if you like hearing me think out loud, I encourage both of them. Jason’s show notes include links to specific segments (listed above) if something specific catches your attention.
I read two books by Ted Conover over the weekend.
Amy gave me the first one as a present. A few years ago, we bought a bunch of land about an hour’s drive away from Aspen. I’ve been spending a lot more time in the middle of nowhere Colorado, especially now that I have a trailer on the land and Starlink. My hikes and trail runs (without Starlink, but with a Garmin inReach for safety), which are still in the day hike category, take me deeper into the middle of nowhere.
Amy’s been highly supportive of this new hobby of mine. She’s not interested in the hiking or trailer, but she likes to visit the middle of nowhere for limited periods, as long as she gets to drive back to Aspen.
Conover’s Cheap Land Colorado was outstanding. He writes about his experience in the San Luis Valley, where he lived part-time for extended periods (commuting back to New York to see his wife and teach at NYU.) Conover didn’t just observe – he became part of the community. He eventually bought some land and made it habitable for him. The texture of his writing is beautiful. The characters are fascinating. The history was all new to me about a part of Colorado I know little about and have only been to once when I visited the Great Sand Dunes.
Looking through his biography, I noticed another book by him titled Whiteout: Lost In Aspen. He’d written it 30 years earlier. After Amy and I bought a place there in 2017 and started living there part-time, I read a few books about the history of Aspen. But I hadn’t read much recently other than The Slums of Aspen: Immigrants vs. the Environment in America’s Eden, which I discovered when reading the extremely disheartening Billionaire Wilderness: The Ultra-Wealthy and the Remaking of the American West.
Even though it was written 30 years earlier, Conover’s style was similar. Whiteout: Lost In Aspen (as does Cheap Land Colorado) takes an ethnographic research approach, similar to what I learned from a graduate school class I took with John Van Maanen in 1988. In the parallel universe / path not taken life, I’d be an ethnographer. Maybe there is still time.
Aspen of 1991 has a lot of similarities, and issues, to Aspen of 2022. As I’ve gotten to know people who have lived there full-time for more than a decade, I hear many of the same complaints that appear in Whiteout. The names of the restaurants are different, but the feel of the town and surrounding area is the same. The notion that Aspen was about to lose all of its beauty and special magic was a big part of the narrative in 1991 and is still around today.
Amy and I have lived in Colorado for over 27 years. This is home now. Conover writes beautifully about it.
Well, that was interesting.
I get many more private emails in response to blog posts than comments. Yesterday, in response to Reflecting on Ponzi Schemes, I got a few that said anyone under 35 needs a net native currency, and that’s crypto. A few others said some versions of all governments are Ponzi schemes. And I got a few that implied I hated crypto.
Earlier last year, one of my partners told me that I’d developed a reputation with other VCs (presumably our partner funds) that I hate crypto. At the time, I deflected and said that I didn’t hate crypto; I just thought there was considerable Ponzi-like behavior in crypto. I’m regularly cynical about things on our internal Slack channel and periodically post about big blowups, including in crypto.
I realize that I’m conflating speculation vs. investment. The part of crypto I don’t like is the rampant speculation. This morning, a friend of mine sent me an email about some money I owed him for a thing we are doing together. He said, “If you paypal me I’ll buy some bitcoin with it. Looks like it’s starting to firm up.”
Here were the bitcoin prices when he sent me the email and when I Paypalled him the money ($1,456.42).
1/15/23 9:51 PM MT: $21,158.55
1/16/23 7:28 PM MT: $20,879.14
That’s a 1.33% difference. It cost me nothing to Paypal him the money. It would have cost me $19.37 to pay him via Bitcoin just because of the timing difference. That has nothing to do with the transaction cost. It’s entirely a result of speculative activity.
I mean, c’mon. Yeah, I know credit cards have fees, and endless payment rails in the system extract money along the way. But there are also ACH and Debit Cards. And free checking accounts, although I guess it would cost me $0.60 for a stamp. Wait, $0.60 for a stamp? The last time I bought a stamp, they were $0.29. And yes, I know some of you out there have never bought a stamp.
It’s hard for me to hate crypto. It’s been economically very good to me. I accidentally bought twice as many bitcoins as I needed for an online programming course I took in 2013 for about $100 each. I sold the FIL I got from investing in their SAFT as it vested (daily) and was amazed at how much money resulted. The Helium that I earned, which seemed to have no functional utility whatsoever, generated a nice multiple on the cost of all the routers I bought, even though today I earn nothing because of whatever algorithm changes they’ve made, so the network is now functionally and economically worthless. And, the crypto funds we have invested in have done exceptionally well … mostly.
I regularly hear to be patient. It’s like the Internet was in 1999 – ahead of its time. The builders are building, and it’ll take over everything in the future.
Ok. That’s cool. Just beware of the Ponzi schemes.