I just received a memo from a name-brand Silicon Valley law firm in response to a board discussion that I was part of about 409A (the company granted some options today, obligatory 409A discussion ensued.) While I’m sure the law firm in question was trying to be helpful, the first paragraph of the memo says “But section 409A does not apply to Incentive stock options, or “ISOs”. Grrr.
While this may be factually correct, it’s a logically false statement. The memo goes on to correct this notion on the bottom of the second page, ending with “Therefore, it will be advisable in the future to use care when valuing Common Stock, regardless of whether the options being granted are ISOs or NSOs.” Ok – thanks – but most entrepreneurs aren’t going to read past the first page!
I sent my lawyer friend the following note:
I’d like to suggest that the statement that 409A does not apply to ISO’s is misleading. While you clarify the dynamic later in the memo, a number of people (including lawyers, VCs, and entrepreneurs) have insisted that 409A doesn’t apply to ISO’s, so you don’t have to do anything to comply with 409A except grant ISOs. Obviously the conclusion being drawn by some is completely false and the concept is self-referential – if an ISO is granted below FMV, it no longer qualifies to be an ISO, becomes a NSO granted below market, and is subject to 409A. I don’t know if you have any influence on the way this memo is written / presented, but I’m personally tired of explaining to people that – in fact – ISOs are part of the discussion given that to be an ISO, they have to be granted at FMV, the determination of which is linked directly to 409A. Of course – I’m not a lawyer – so while I can’t include IRS Circular 230 in my emails about this, this is just my opinion and shouldn’t be relied on for anything by anyone.
Finally, someone in the AGILEAMY crowd has done a meaningful strategic deal. Google announced that they acquired dMarc Broadcasting today for $102 million cash and up to $1.1 billion of contingent cash payments over the next three years. Thank god someone finally did something more than acquire a few engineers, some technology, or a minor add-on to something they already did, but not so well. I was getting tired of hearing about all the sub $30 million “flip” deals that were “about to happen” and the new, exciting, and trendy prediction that “a crash of Web 2.0 companies is coming.”
Google’s acquisition is bold, smart, and completely logical if you step back and look at their business. As we all know, Google sells advertising. They are now expanding into audio and video. Hmmm. How about if we sell advertising on audio (that would be the radio – yeah – I know – there’s this thing called podcasting.) Google states clearly why they bought dMarc:
“Google is committed to exploring new ways to extend targeted, measurable advertising to other forms of media,” said Tim Armstrong, vice president of Advertising Sales, Google. “We anticipate that this acquisition will bring new ad dollars and accountability to radio by combining Google’s expansive network of advertisers with dMarc’s talented team and innovative radio advertising technology. We look forward to working together to continue to grow and improve the ecosystem of the radio industry.”
Got it – simple and strategic. I have no idea if this was a smart economic deal for Google – I’ll leave that for the financial analysts to prognosticate about.
Now – how about video advertising? Nick Grouf just launched SpotRunner and it appears his timing of this trend is right on the money. While Google, et. al. could “build this”, why not just wade in and keep making aggressive moves now? Oops – SpotRunner says “Beta” on it – eek – Nick – launch already!
Oh – did anyone notice that Warren Buffett’s Berkshire Hathaway bought Business Wire today? Ponder that one.
Not surprisingly, some lawyers have suggested that Jason and I are now 409A experts and that we have been dispensing 409A advice. Nothing could be further from the truth – we are merely expressing our opinions as lay people affected by 409A about what we think is going on. Of course, since lawyers have written us, we feel compelled to clarify. Fortunately, the IRS gives us a way to do this, as follows:
Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter(s) addressed herein.
Of course, since I’m neither a lawyer or an account, this all feels a little silly. However, Jason is a lawyer and – well – he thinks it’s patently absurd. Now, if you want any advice on the best way to watch 24 on Sunday night, feel free to ask.
There’s been some chatter – stimulated by Jeff Jarvis – about the generic advice given on many VC blogs (e.g. “Dear World, Here’s My Top 10 Tips For A Better Startup.”) While I hopefully don’t end up in the lame category, I expect that I produce my share of generic, generally uninspiring content.
Yesterday, I received a “Client Alert” from one of the name brand Silicon Valley law firms. I get these all the time from most law firms – they are “marketing activities” from them to show VCs how smart they are and – presumably – to help VCs stay on top of important issues. Ironically, while I expect most of these firms have double checked to make sure they comply with CAN-SPAM, I know that many of them don’t use good UCE hygiene (specifically, I never opted in – they simply put me on the email list since they have my email address in their system somewhere.)
When reading the advisory, titled “Website Tips and Suggestions”, two thoughts came to mind. Thought one was “man, these dudes have way too much time on their hands” and thought two was “aha – this is why many VC blogs (and websites) are so lame.” Here’s the specific section that talks about blogs.
Beware of Blogs
From a legal perspective, there may be little or no difference between a Firm’s “official” website and the business-related blogs maintained by one or more of the Firm’s members. So long as a blog’s content relates to the Firm’s activities, any statements or activities made or conducted through the blog may be attributed to the Firm. As a general matter, the best course is to treat blogs as part of the official website—if material is unsuitable for the official website, it most likely will be unsuitable for a blog as well.
One of the greatest challenges associated with blogs is the informal style adopted by many blog writers. It is important to note that informal style is just that—a style. Whether a blog’s style is formal, informal, or somewhere in-between, its content should adhere to the same standards of care and propriety as any other document published by the Firm.
Similar considerations apply to “podcasts” and other evolving forms of communication.
The way I read this, it says “Don’t Blog – Too Dangerous.” Give me a break. How about a simpler approach.
Oops – I just gave my fellow VCs advice on something – not good – guys – this is not legal advice – just my opinion – please check with your law firm.
I’ve never really gotten into Desperate Housewives (I’m – well – more of a 24 guy). However, I saw a note forwarded to me today from another VC that is definitely a mashup between “Desperate Housewives” and “24”. It could also be subtitled “a note you should not send to VCs.”
From: Desperate Entrepreneur (not his real name)
Sent: Recently
To: A long list of VCs, including a bunch of “dead email addresses” like deals@vcfirm.com
Subject: As you know we need our financing today. Thank you for discriminating against me. Good thing I own the copyrights as well. Price is now 1 million per lateral ejection seat.
I know nothing about this particular deal, but I do know that – even in the most desperate situation – this is not a particularly effective approach to a VC.
Two things happened at both ends of the spectrum today in deal land. A little company named Truveo was acquired by AOL and a little company named SearchFox announced it will shut down on January 25, 2006. While congrats go out to Truveo, I expect we’ll be seeing plenty more of the “SearchFox case” in 2006 even as AGILEAMY (or GEMAYANI, or GYMAAAE) continue to do the acquisition thing.
On Thursday CA announced that it was buying Wily Technologies for $375 million. I had a busy day and didn’t fire up FeedDemon (2.0 Alpha 1 – very very cool) until the evening to go through my 400+ RSS feeds, but I figured I’d see some commentary on it. When I read through my feeds Thursday night, I saw lots on CES, GooglePack, Google / CBS, Google Video the impending release of Skype 2.0, and Microsoft Urge, but only one post on the CA / Wily deal. Huh? I had exactly the same feeling that I wrote about early in December after Liberty Media acquired Provide Commerce for $477 million but all anyone wanted to talk about was the Yahoo / del.icio.us deal.
Now – I know everyone (except me) was hanging out at CES, but this is a significant deal! Fred Wilson has his fantastic “VC Cliche of the Week” series and I pondered doing a “VC Deal of the Week” series. I decided that I didn’t want to pressure all of the investment bankers in the world to provide me with at least one notable deal each week, so I ended up deciding to simply create a new category called “Deals” and regularly write about ones that I think are sizeable and – for whatever reason – have eluded mainstream blog commentary. I’m not going to play Jr. Financial Analyst and give you reams of financial data – if you are interested in that, I’m sure one of the financial analysts that have written research about the deal will do that. Rather, I’ll try to give some qualitative context, tell a story or two, and try to explain what I think is interesting about the deal.
The CA / Wily deal is an important one because it’s another acquisition in the steady stream of companies that were possibly queued up to go public in 2005 (now 2006) that chose to be acquired instead. It’s also reinforcement of the multiples that buyers are willing to pay for sizeable, high growth companies even if they aren’t profitable (although – given Wily’s size – it’s likely that it could have easily been profitable if it wanted to be – merely by sacrificing some growth.) It also reinforces that CA continues to be one of the active acquirers in the IT Management software segment – in addition to IBM, HP, Microsoft, Quest, BEA, Oracle, and maybe Mercury if they dig themselves out of the SEC ditch they have found themselves in.
I’ve got a long indirect history with Wily. I was on the board of Cyanea – which was the #2 VC-backed provider of APM (Application Performance Management) software (behind Wily). Cyanea was coming on strong, inflicting some real competitive damage – especially because of their OEM agreement with IBM (where IBM actively sold Cyanea’s products under the IBM brand). At the time John Swainson (now the CEO of CA) was running the IBM Websphere group and was the internal IBM champion for Cyanea. While Cyanea was making great progress, as some point IBM made the proverbial “offer we couldn’t refuse” and acquired Cyanea in July of 2004.
At the time, my instinct was that this was a huge issue for Wily and the IBM acquisition of Cyanea was a potential threat to their long term well-being. Clearly I was wrong – it appears from the information that CA released that Wily has been growing over 70% per year and is in a position to continue this aggressive growth. Swainson knows this segment very well and is clearly attacking his old friends head on with this purchase. Dick Williams – the CEO of Wily – is also ex-IBM – showing a little more of the legacy that IBM has created in the IT Management market segment.
The VC investors – including Greylock, Accel, and Focus – appear to have had a very successful investment as the amount of capital that Wily has disclosed that they’ve raised is around $40 million. Finally, Dick Williams last company was Quokka Sports – an Internet boom and bust company that dissolved into dust. Once again, the entrepreneurial mantra of “step back up to the plate and keep trying” plays out nicely.
Not surprisingly, Guy Kawasaki has come out swinging. Post #11 is The Top Ten Lies of Venture Capitalists.
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.