While lots of VCs posture during term sheet negotiations by saying “that is non-negotiable”, terms rarely are (as you’ve likely inferred from previous posts on term sheets be me and Jason.) Occasionally, a term will actually be non-negotiable. In all the VC deals we’ve ever seen, the preferred has the right – at any time – to convert its stake into common. Following is the standard language:
“Conversion: The holders of the Series A Preferred shall have the right to convert the Series A Preferred, at any time, into shares of Common Stock. The initial conversion rate shall be 1:1, subject to adjustment as provided below.”
This allows the buyer of preferred to convert to common should he determine on a liquidation that he is better off getting paid on a pro rata common basis rather than accepting the liquidation preference and participating amount. It can also be used in certain extreme circumstances whereby the preferred wants to control a vote of the common on a certain issue. Do note, however, that once converted, there is no provision for “re-converting” back to preferred.
A more interesting term is the automatic conversion, especially since it has several components that are negotiable.
“Automatic Conversion: All of the Series A Preferred shall be automatically converted into Common Stock, at the then applicable conversion price, upon the closing of a firmly underwritten public offering of shares of Common Stock of the Company at a per share price not less than [three] times the Original Purchase Price (as adjusted for stock splits, dividends and the like) per share and for a total offering of not less than [$15] million (before deduction of underwriters commissions and expenses) (a “Qualified IPO”). All, or a portion of, each share of the Series A Preferred shall be automatically converted into Common Stock, at the then applicable conversion price in the event that the holders of at least a majority of the outstanding Series A Preferred consent to such conversion.”
In an IPO of a venture-backed company, the investment bankers will want to see everyone convert into common stock at the time of the IPO (it is extremely rare for a venture backed company to go public with multiple classes of stock – it happens – but it’s rare). The thresholds of the automatic conversion are critical to negotiate – as the entrepreneur; you want them lower to insure more flexibility while your investors will want them higher to give them more control over the timing and terms of an IPO.
Regardless of the actual thresholds, one thing of crucial importance is to never allow investors to negotiate different automatic conversion terms for different series of preferred stock. There are many horror stories of companies on the brink of going public and having one class of preferred stockholders that have a threshold above what the proposed offering would consummate and therefore these stockholders have an effective veto right on the offering. We strongly recommend that – at each financing – you equalize the automatic conversion threshold among all series of stock.
If you love dogs, strong women, Colorado, hockey, ranches, complicated yet lifelike characters, and beautiful writing, Sight Hound is a must read. I haven’t read Pam Houston’s other books, but they are also highly acclaimed. It’s a little tough getting your bearings since each chapter is told in first person from a different character’s point of view, including several dogs and a cat, but once you put it together it’s a fast ski ride down a huge snow covered mountain on a warm spring day.
I’ve recently become obsessed with the notion that all my data should be integrated in one place and be able to be entered from one place. Of course, this isn’t true, but as my compute infrastructure gets smarter, this will become a lot easier.
I’ve got three types of data: (1) the stuff I want the world to see, (2) the stuff I want certain people to see, and (3) the stuff that is just for me. Logically, my blog (or “my website” – doh) should be the entry point for everything that I create that fits in category #1.
On my main page, the right sidebar has a new item in it: Page Two. This is my page for screwing around with integrating all the various web services available from sites that I current use to create stuff I want the world to see. The first one I’ve integrated is Judy’s Book. My good friend Andy Sack is the CEO – he and I have done several companies together, including Abuzz which was bought by New York Times Digital. Judy’s Book is Andy’s newest venture and he’s starting to shift in beta mode, so take a look.
Integrating the two most relevant categories in Judy’s Book – “Latest Posts” and “Friends” was trivial – it took less then 5 minutes once I’d set the Page 2 page up. For now, I’ll use Page 2 as a sandbox so as to not clutter up my main page. Eventually, I’ll figure out a more logical page layout / menu system for the site that incorporates all of this data.
I’ve got another month before I have to send flowers, chocolate, and my other special mothers day stuff, but an email from my mom today prompted me to write an apology to all mothers everywhere.
I’ll attribute the condescending remark about me understanding Bob Garfield’s comments to your very long plane ride. Welcome home. We’ll call before we leave on our ” even longer than your” plane ride on Tuesday. So long, I don’t even want to think about it.
Love,
Your Phi Beta Kappa Mom (now where is that darn pin?)
Mom – I’m sorry – it was a careless throw away comment – think of it as a “metaphor” for “described in a way someone not in the media or technology industry could understand easily.” (yeah – I know you know that and are just giving me shit.) I know I need to come up with a new metaphor, especially now that Larry Summers has been crucified for his comments about women in the sciences. I should know better and be more “motherly correct.” (Note to the world – my mom is extremely smart, understands technology (and lots of other things), has taught me all kinds of stuff (including how to apologize quickly when I make a mistake), and is an amazing artist who has somehow genetically (ok – environmentally) transfered her love of art to me.)
Sorry Mom(s) (and no – I’m not sucking up to you to get out of mother’s day).
I don’t write about broadcast media much – it’s not my thing. I’ve definitely had my entertaining moments – including a very strange lunch at Blackrock with Mel Karmizan when he was the president of CBS pre-Viacom (“the Internet – it is irrelevant to us – you just can’t sell enough ads on it”) and a due diligence trip to a South Carolina radio station when I was at Ameridata in 1994 (“Maybe we should buy them and try to introduce computers into the radio business” – at least lunch was good). However, I do like 24 (I plan to be Jack Bauer in my next life) and I thought last week’s West Wing was superb.
My trip home from the airport coincided with NPR so I listened to an hour of it. Near the end, Bob Garfield had a fun piece titled An Impending Period of Transitional Chaos for Media. He started out with the hypothesis – What if network broadcast media simply disappeared? What if TV as we know it was replaced by something really cool (cut to the theme from The Jetsons). Over the air network is gone, affiliates are gone, satellite radio is a 4 billion dollar eight track tape player pushed aside by free podcasting. What if the old model collapsed before the new model was ready?
Now, I always find it mildly entertaining when mainstream media (e.g. NPR) talks about its impending demise (it feels so self indulgent in a sick, twisted way), but Garfield deeply believes disruption on a mass scale is coming. He leads with the quote “I truly believe … that today’s marketing model is broken” by Jim Stengel, Global Marketing Officer of P&G telling ad agencies that network TV isn’t giving advertisers its money’s worth (and P&G – the biggest advertiser in the world – spends $5.5 billion per year on advertising). Then – the facts:
Ok – so now that broadcast media is going to die – he goes on to talk about vLogs and how mass media will be overthrown by micromedia. Then – cut to the ubiquitous Jeff Jarvis for a sound bite on the public flogging of Tucker Carlson by Jon Stewart (400k viewers on CNN, 5m viewers on the Internet) and pithy quotes from Drazen Pantic at Unmediated.org about how chaos must ensue.
The last half of the broadcast loses some steam as it devolves into more lightweight banter about what’s going to happen, how it’s going to be a mess, how traditional media (e.g. CBS) thinks they must survive to uphold the American way, and how absurd that notion is. But – overall – in 10 minutes – I thought Garfield did a good job of explaining what’s going on in a way that my mom could relate to.
I’ll end with my favorite West Wing quote of all time – when Josh is struggling with the NASA Mars chick that we think he’s going to have a romantic interlude with (but doesn’t – damn) and Leo is annoyed that Josh is wasting time on stupid NASA Mars stuff. Leo turns to Josh and grumbles, “My generation never got the future it was promised… Thirty-five years later, cars, air travel’s exactly the same. We don’t even have the Concorde anymore. Technology stopped.” Josh counters with “The personal computer,” but he can’t stop Leo who says “… Where’s my jet pack, my colonies on the Moon?”
Having spent the last 17 hours (door to door) getting from Paris to Boulder, all I can say is my teleporter can’t be ready too soon.
There are an increasing number of high profile CTO bloggers appearing, including Adam Bosworth, Greg Papadopoulos, and Grady Booch. Two close friends and CTO’s / founders of companies that I’ve funded have recently started blogging. While they are not as high profile, they are intensely smart and articulate guys that have had a lot of success and a wide range of experiences. Plus, they know each other, like each other, and have plenty of dirt on me.
Todd Vernon is the CTO of Raindance. I was one of the seed investors of Raindance and on the board from inception until about two years after they went public. Todd and his partners Paul Berberian and Jim Lejeal (now CEO of Oxlo – another company we’ve funded) were the architects behind the business. I’ll always treasure the first time I heard Todd refer to a major technical thing as “full of chocolately goodness.”
Tim Wolters was the CTO of Dante Group, which was acquired in 2003 by webMethods. We were first round investors in Dante and were pleasantly surprised when webMethods acquired the company six months later. Tim spent the last 15 months at webMethods insuring that the Dante technology and products were successfully integrated into webMethods and recently left to start working on his next big idea. Tim just put up a post describing his desire to blog about the process of creating his new company – if you are an entrepreneur, it’s bound to be filled with plenty of good stuff.
Welcome guys.
Jason Calacanis just forwarded me a fun post he just put up titled Sparring with VCs & Associates to sharpen your skills. While not all VCs are as clueless as the dmf that it appears Jason talked to, I’ve had plenty of conversations that resemble this one (where I’m on the receiving end – substitute “Brad” for “Me”) during “due diligence” calls with other VCs that are interested in companies I’m either looking at or already an investor in.
Someone (I can’t remember who – maybe my dad?) told me a long time ago that “the question is much more important than the answer.” While this probably fits in “the journey is the reward” cliche category, Jason’s dialogue points this out in spades.
I recently made an angel investment in Jonathan Weber’s (the former editor of The Industry Standard) new publishing venture – New West Network. I got turned on to Jonathan by Jerry Colonna who knew Jonathan well from the publishing business. New West isn’t a “venture deal”, so we chose not to fund it as a venture firm, but I like to support interesting projects that impact my community and New West definitely fit the bill as it’s a network of online communities devoted to the culture, economy, politics, environment, and overall atmosphere of the Rocky Mountain West, and currently includes specific sites for Missoula, Boulder, Salt Lake City, and Northern Idaho.
Jonathan’s having his Boulder launch party at the Boulder Museum of Contemporary Art on 4/14 from 6pm – 10pm (and – Amy and I are trustees of BMOCA – so yes – we helped get a good rate for the evening). If you are in town, come join us, enjoy BMOCA, listen to music from The Indulgers and The Ash Ganley Duo, and eat good Boulder food from New West’s event sponsors – Rhumba, Zolo Grill, Avery Brewery, Jax Fish House, West End Tavern, and booze from Superior Liquor. And yes – it’s Boulder – so there will be prizes.
NewsGator recently announced a broad European partnership with VNU. The first fruit of their labors went live today – the French VNU / NewsGator RSS reader. Coincidentally, I had breakfast with Dominique Busso who is in charge of this effort for VNU. Not surprisingly, Dominique is friends with Loic Le Muir at Six Apart and has embraced Typepad as part of their infrastructure, including the very clever nanopublishing effort called VNUNet Blogs. While I can’t understand much of the French on the blogs, it’s pretty impressive to see a mainstream publisher like VNU so aggressively embracing RSS, blogging, and nanopublishing.