I’ve gotten plenty of humorous feedback on my post about abolishing the words traction, space, and thrilling from my vocabulary. Someone asked why I was so mean to words – although this was someone who prefaces each major point he makes with “to tell you the truth” (no, please don’t tell me the truth – lie to me.)
The best note so far was from Ryan Sabga, the CEO of RideonTime.com who donated a really cool scooter to the Boulder Philharmonic Fundraiser we had on Saturday. He said:
Why not try and introduce a new word to the VC world? I have yet to hear someone mentioned how “gruntled” they are, as in, “great work negotiating that contract, Saunders. I’m positively gruntled.” Sure, I hear “disgruntled” just about every day but what about it’s shorter, stockier antonym? That guy gets ignored more than the high school quarterback at a Back Street Boys back stage party. I think that perhaps you have a higher purpose, and that’s to introduce the world to your buddy “gruntled.”
I’m definitely gruntled by this – thanks Ryan!
Today is my periodic Fred Wilson blog love fest. Fred’s characterization of the Internet Axis of Evil, which currently consists of Phishing, Click Fraud, DNS Hacking, Comment Spam/Link Spam, Adware/Spyware, Spam, and Viruses is awesome. In sympathy with Fred and in an effort to help reign down terror on these evil fuckers, I’ve created a new category in my blog called Internet Axis of Evil.
As I a went through my daily early morning ritual of feeding the dogs, drinking some tea, reading various papers on line, and deleting trackback spam (who really responds to “poor credit loans” and “military cash loans”) I came across an article in the Denver Post on Scott Richter, the CEO of the spam firm OptInRealBig.com. Scott’s making a ton of money spamming people ($19.6m in revenue in 2004; Scott took down $1.2m last year), but the company filed for bankruptcy to help protect itself against a variety of law suits, including one from Microsoft / Hotmail. C’mon guys, the company is “absolutely profitable” (Scott’s dad and lawyer Steven’s words), but y’all go bankrupt to protect against lawsuits – could it be that you are actually concerned that the lawsuits are legit?
Fortunately, there are plenty of good guys fighting the bad guys. Today, the Email Service Provider Coalition added a number of members, including our company Return Path. ESPC also expanded their steering committee to including Return Path. ESPC exists because the folks involve “recognize the need for strong technological anti-spam solutions that ensure the delivery of legitimate email.”
While I’m sure this post will generate lots of comment spam, I’m trilled (shit, someone’s going to throw something at me today) that there are plenty of good guys in the world fighting the Internet Axis of Evil.
Fred – I’ll see you and raise you two.
Fred Wilson had a delightful post on the word “traction” today as part of his VC Cliche of the Week series. In it, Fred suggests that he’d like to hear the word traction used less in our business. I’ll go a step further. I’ll never mention the word traction again. It has become so overused as to mean nothing (since it’s used to refer to everything and is a placeholder for “we are making progress, whatever the hell progress is.”)
There are two other words that I am abolishing from my business vocabulary effectively immediately. If you catch me using any of them, please call me on it (feel free to throw something at me, spit on me, or just break out laughing.)
The first is “space.” Like traction, the word space is used constantly by VCs and entrepreneurs. This space, that space, we play in this space, we’re going after that space, we’re looking for white space (why doesn’t anyone ever look for purple space?) Humans used to use words / phrases like market, business, customer segment, product opportunity (and plenty that are actually specific). Die you generic words. I’m banishing space to … space.
“Thrilling” is my last annoying as shit word of the day. I can’t read a press release anymore (including a bunch from my own companies) without seeing how thrilled someone is about something. Matt Blumberg sent me the draft of the Return Path / IronPort / Bonded Sender press release and voila – there is was – Matt was thrilled. Matt’s a smart dude so when I told him he should limit being thrilled to his time with his wife Mariquita he got it and appropriately modified the press release.
My grandpa Jack used to have a blast massacring words to make his point. He was never “thrilled” – he was “trilled”, and my uncle Charlie and I were “typhoons” instead of “tycoons.” I’ll take it step further – I’ll simply delete them from my vocabulary.
As I watched 24 last night, I kept thinking to myself “Why the fuck does Jack have his cell phone ringer on – hasn’t he ever heard of vibrate?” immediately after his cell phone rang but right before he got shot at because the bad guys now knew where he was. I had a parallel thought this morning – “Why do we make all this term sheet stuff so long, verbose, and tedious.” The answer – word processers. If we had to type all this crap on a typewriter (or write it out by hand) it’d be a lot shorter. In both cases, technology is working against us. But – then again, we wouldn’t have blogs (and I can hear a few of you (and I know who you are) saying “and that would be a bad thing because?”)
While there is a lot to negotiate in a term sheet (as you can see from the series of posts on term sheets that Jason and I have written), a term sheet is simply a step on the way to an actual deal. Term sheets are often either non-binding (or mostly non-binding), and most investors will load them up with conditions precedent to financing. Entrepreneurs glance over these – usually because they are in the back sections of the term sheet and are typically pretty innocuous, but they occasionally have additional “back door outs” for the investor that the entrepreneur should watch out for, if only to better understand the current mindset of the investor proposing the investment.
A typical conditions precedent to financing clause looks as follows:
“Conditions Precedent to Financing: Except for the provisions contained herein entitled “Legal Fees and Expenses”, “No Shop Agreement”, and “Governing Law” which are explicitly agreed by the Investors and the Company to be binding upon execution of this term sheet, this summary of terms is not intended as a legally binding commitment by the Investors, and any obligation on the part of the Investors is subject to the following conditions precedent: 1. Completion of legal documentation satisfactory to the prospective Investors; 2. Satisfactory completion of due diligence by the prospective Investors; 3. Delivery of a customary management rights letter to Investors; and 4. Submission of detailed budget for the following twelve months, acceptable to Investors.”
Notice that the investor will try to make a few things binding – specifically (a) that his legal fees get paid whether or not a deal happens, (b) that the company can’t shop the deal once the term sheet is signed, and (c) that the governing law be set to a specific domicile – while explicitly stating “there are a bunch things that still have to happen before this deal is done and I can back out for any reason.”
There are a few conditions to watch out for since they usually signal something non-obvious on the part of the investor. They are:
1. “Approval by Investors’ partnerships” – this is super secret VC code for “this deal has not been approved by the investors who issued this term sheet. Therefore, even if you love the terms of the deal, you still may not have a deal.
2. “Rights offering to be completed by Company” – this indicates that the investors want the company to offer all previous investors in the company the ability to participate in the currently contemplated financing. This is not necessarily a bad thing – in fact in most cases this serves to protect all parties from liability – but does add time and expense to the deal.
3. “Employment Agreements signed by founders as acceptable to investors” – beware what the full terms are before signing the agreement. As an entrepreneur, when faced with this, it’s probably wise to understand (and negotiate) the form of employment agreement early in the process. While you’ll want to try to do this before you sign a term sheet and accept a no-shop, most VCs will wave you off and say “don’t worry about it – we’ll come up with something that works for everyone.” Our suggestion – at the minimum, make sure you understand the key terms (such as compensation and what happens on termination).
There are plenty of other wacky conditionals – if you can dream it, it has probably been done. Just make sure to look carefully at this paragraph and remember that just because you’ve signed a term sheet, you don’t have a deal.
Fred Wilson calls it one of the members of the Internet Axis of Evil. You know it as spam. Several of our companies (Return Path and Postini) are hard at work every day eliminating it from our inboxes.
Matt Blumberg, the CEO of Return Path made a pre-announcement on his blog today about Return Path’s acquisition of the Bonded Sender Program from IronPort. While this is huge weapon in Return Path’s arsenal, it’s also another big step forward in the war on spam. Rather than repeat what Matt said, I’ll simply refer you to his excellent post on why this matters and how it works.
I live in the mountains outside of Boulder. Once a year, every spring, for the last 10 years (since I moved here in 1995), I get snowed in for one to four days (the four day snow in included complete loss of power for three days, no water (since everything in our house is electric), no heat (electric), and no fridge / freezer (fortunately we had tons of snow to serve as our natural icebox.)
It started snowing late Saturday night and finished early Monday morning. When it was done, I had 30 inches at my house, DIA shut down all afternoon Sunday and I cancelled my trip for the week to hunker down and – in the words of REO Speedwagon – I’ve been Ridin’ The Storm Out.
My dogs love the snow. Since it’s now 50 degrees outside and the snow is receding, you don’t get the full early morning view (I didn’t have my camera act together – but trust me – it was massive.)
The view from my bedroom window gives you a better feel for the magnitude of it (after a bunch had melted from the mountains already – including anything on a brick surface.)
It’ll be 60 degrees tomorrow and I expect all the white stuff will be gone and replaced with mud.
I’m not a golfer, but I can appreciate an amazing play / shot / race in any sport. Fred Wilson had a beautiful picture of Tiger Woods up on his site today and then I bumped into Joseph Jaffe’s homemade Nike commercial of a beautiful putt from Tiger (I think on the 16th hole).
We got 30 inches of snow at my house last night so I’m off to the treadmill room to just do it for a while.
As a runner, I love a good running book. The Greatest – the biography of Haile Gebrselassie – a man who dominated distance running for a decade – was extremely inspiring. It balanced the racing with the personal story of Haile, along with a great overview of the Ethiopian running scene and the opportunities and challenges facing the country. In addition to being a champion athlete, Haile has become a very successful Ethiopian businessman and the vignettes about his businesses, why he does them (when he clearly doesn’t have to), and how he is focused on continuing to help Ethiopia evolve as a country was powerful. Heroic running, riveting race stories, good Ethiopian history, the passing of the torch of a champion to the next generation, and a guy that everyone would like – what more could you want from a running biography?
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.