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Dodd Banking Bill Aims Shotgun at Investor Fraud, Hits Early Stage Companies
There has been a lot of news recently about Senator Christopher Dodd’s banking reform bill, which was introduced in the Senate a couple of weeks ago. I dug into the details relevant to startup and private company financing transactions (with help from the comments on avc.com and an insightful piece on TechFlash), and thought a bit about how it would likely affect my client base.
Principal Terms
The entire bill runs 1036 pages, of which about 6 are relevant to angel and VC financings.
First, the proposal requires that the accredited investor dollar threshold be increased regularly to adjust for inflation. The current requirement (which dates from 1996) is that an investor earn at least $200,000 per year or have a net worth of at least $1,000,000. The Dodd bill requires that a retroactive inflation adjustment be applied to those figures and that they continue to be adjusted at least every 5 year going forward. I haven’t tried to do the math, but pundits say this would increase the threshold to $450,000/$2,300,000.
Second, the bill kicks oversight of Regulation D transactions (the principal exemption from public offering registration requirements used by private companies) largely to state authorities. The bill would (i) set a dollar threshold below which the SEC would not even try to regulate, saying that small transactions are exclusively overseen by state agencies, and (ii) for larger transactions provide a 120 day SEC review period, following which state authorities could also choose to review if the SEC did not.
Where This Comes From
The president of NASAA is also a Texas state securities regulator and in testimony to Congress explained NASAA’s belief that (i) fraud is most effectively prevented when SEC and state authorities can review/investigate problem cases, (ii) NSMIA prevents state authorities from preemptively investigating cases and only allows them to investigate after fraud has occurred, and (iii) lack of Reg D oversight contributed to the financial meltdown.
It looks to me as though NASAA is concerned about the Bernie Madoffs of the world and sees increased regulation over private securities transactions as the best way to reign in this type of fraud. Clearly NASAA also does not believe the SEC is up to the job of policing this environment.
Things I Don’t Understand
I don’t understand how the 120 day rule would work and I would love to ask Sen. Dodd the following questions:
-Will private companies be required to wait 120 days before closing financing transactions?
-If not formally required to wait, will investors have a rescission right if the SEC or state authorities find noncompliance with procedural or substantive requirements?
-How would this rescission right be enforced? Brokers are subject to bonding requirements so there is the possibility of recovery in a fraudulent sale by a stock broker, but seemingly none with early stage companies in particular. Six months after closing an angel financing a company may have already spent a decent chunk of the financing proceeds.
-Will state pre-closing notice requirements apply even prior to the SEC’s review period, so that e.g. a company would need to file a notice (and forms!) in NY, file an SEC notice 2 weeks later and then wait 6 months to see if NY would be able to pick up again?
What I Will Probably End Up Telling My Clients
In the most practical terms as a California lawyer, if this bill passes I will probably tell my clients that there is a sliding scale for transaction costs and timing that depends on where investors reside. My gut tells me neither the SEC nor the CA Department of Corporations wants to begin scrutinizing early stage investments, so my advice to clients will be to keep all their investors in CA, and if they have investors in XYZ other states then the cost of completing the transaction will be dramatically higher and riskier. This will be unfortunate.
What I Plan to Do
I am going to write a letter to both of my senators raising the questions above and asking them to look carefully at how this language will affect companies in California, and also how the concepts might be revised to avoid penalizing startup companies for the sins of hedge fund managers and unscrupulous securities brokers. I have also added my name to the online petition here: http://gopetition.com/online/32354.html Apart from that, I plan to watch this closely to see how it plays out.
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LLCs and Corporations in New Entity Formation
Limited liability companies (LLCs) have been around for 20 years now. Until somewhat recently the conventional wisdom was that LLCs are useful for businesses whose ownership won’t change frequently (a huge range that covers retail businesses, service companies and investment funds) while corporations are better for businesses that plan to raise money from angel or VC investors. That is changing fairly quickly and it is becoming more common to see LLCs set up in a way that looks a lot like an investment-driven corporation.
There are still big differences in the way ownership is divided among owners of LLCs and corporations. This post will offer a quick example of how these differences can manifest themselves. I need to emphasize that LLC structures are heavily tax-driven, I am not a tax lawyer and I am going to steer clear of tax discussion here as much as possible. Tax experts reading this are encouraged to set me straight if I oversimplify or inadvertently mis-state tax concepts.
The example is from a situation that a client brought to me somewhat recently. The client was a new company to be owned by two people. One was the passive investor who put in $100,000 in seed capital and got 40% of the company. The other owner was the day-to-day manager who invested nominal cash whose principal contribution was sweat equity and who was to own 60%. The question was whether to form a corporation or an LLC to do this.
Corporation
As I have described in a couple of prior posts, the core principle behind stock in a corporation is that two people buying the same type of stock at the same time need to pay the same price per share. If the client formed a corporation, Owner A’s $100,000 might buy her 1,000,000 shares at $0.10 per share. To get 60% of the company using a single class of stock, Owner B would need to invest $150,000 and receive 1,500,000 shares. We already know that Owner B is not going to do that, so if we use a corporation the only way to get the percentages to sync up with the amounts invested is to use preferred stock. Owner B could invest $15,000 at $0.10 to get 150,000 shares while Owner A invests her $100,000 at $1.00 share to get 100,000 shares. The table below is a simpler way to show how this works.
This gets the desired result but requires a lot of steps, two classes of stock, Owner B still needs to put in $15,000 and there is a 10x difference between the common and preferred stock prices that may or may not work well for accounting, 409A and general capitalization planning purposes.
LLC
LLCs are not restricted by this equal-price-per-share requirement. Instead, one of the structural principles behind LLCs the the concept of a capital account- essentially a ledger of cash (or other assets) invested in the business, profit allocated back to the investor and cash (or other assets) paid out. This accounting is also separate from voting, so we can easily set up an LLC that gives Owner A a 40% voting interest and a $100,000 capital account, while Owner B has a 60% voting interest with a $15,000 (or $1,500) capital account. The voting interests and the capital accounts do not need to follow the same ratio.
The part that becomes non-intuitive is that we might want to make our company look like a corporation so that the owners have Units rather than just percentages. Again, in a corporation we would need two classes of stock to get the desired result, but in an LLC we can provide that Owner A has 100,00 Units and Owner B as 150,000, meeting our desired a 60/40 ratio. Voting is linked to the Units, while accounting and economic outcomes follow capital accounts. We end up with a Units structure that looks similar to a corporation, but simpler because we only need one class of Units instead of the common/preferred shares described above.
Which is Better?
We can reach the desired outcome with either a corporation or an LLC. In this case, the LLC provides a somewhat simpler way to get there and I have seen a number of situations recently where an LLC made more sense for clients with issues like this. There are a half-dozen or so other factors to consider before deciding for sure which way to go (esp. ability to take tax losses for investment in the LLC and the likelihood that outside investors will be sought and that they will be comfortable with LLCs) so this is definitely not the beginning and end of the analysis.
This was a lot to pack into one post. Feel free to post any questions or comments in the comment section or contact me directly.
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Key Considerations in Negotiating Earnouts when Selling a Company
Last week the WSJ ran an article saying that Google is moving away from earnouts when it acquires companies. Earnouts are a tricky thing whether you are a buyer or seller in an M&A deal. The article gives a glimpse into some of the issues. Here is a rundown on some of the background considerations.
Definition of an Earnout
An earnout means that if you are a key employee in a company being acquired, some of the total purchase price in the deal gets paid to you over time based on your continued work on the product post-acquisition. The premise is that some people are passive shareholders who put in cash and don’t have a key role going forward, so they just get paid out at closing. On the other hand, some team members may be necessary after closing to keep development moving on the product, so their compensation in the deal is linked to continued success of the selling company’s product post-closing.
Keeping the Product Going
Implicit in this formula is the idea that the buyer will keep the seller’s product alive post-closing so that both sides can measure success and the sellers have confidence in their ability to achieve the earnout. The WSJ gives Disney’s purchase of Club Penguin as an example of this- Disney bought Club Penguin and has kept it as an independent product. This makes it easy(ier) to measure Club Penguin’s future results and calculate whether earnout metrics have been met.
Compare this with Google’s acquisition of Grand Central. The product essentially went dark for about two years and then re-emerged as the largely free Google Voice. I don’t know if the Grand Central acquisition involved an earnout. If it did, it would certainly be much more difficult to work out success metrics than in the Club Penguin situation. Google buys a lot of companies for the teams or for product sets that can be worked into larger Google suites, so I can see why they would have trouble measuring earnouts.
Key Considerations
When an earnout is involved in a deal there are several important factors that buyers and sellers need to consider.
-The first is the most objective metrics the deal will permit. Product revenue is ideal. It is a pretty easy number to track and works well if the product will be independent post-closing. If the product will be rolled into a suite of buyer’s products post-closing, or if the seller’s product is free then this metric doesn’t work as well. On top of that, even if revenue is the main goal we need to think about what would happen if the buyer decides to close down the product line. Would the earnout accelerate in that situation? Partially accelerate?
-Second is freedom to manage the business. This usually comes down to “best efforts” language so that the seller has something in writing to say the buyer will put enough resources behind the product to allow the earnout to be met. It is very hard to make an ironclad promise out of this, since the buyer usually wants freedom to change its business plans and goals as the market requires.
-The third factor is flexibility. It is impossible to predict what will happen to a product or business, so an ideal earnout will provide enough wiggle room so that if the buyer’s business plans change, the seller can still claim right to payment of some or all of the earnout.
-The last factor is trust. When a big part of the deal hinges on future performance, buyer and seller both need to have faith that everyone will behave going forward. The buyer wants to know that the seller personnel won’t make decisions that guarantee their earnout at the expense of the larger business, and the seller needs to believe that the buyer will keep the product alive and manage it in a way that lets the seller achieve the earnout.
Earnouts are usually the most contentious part of M&A deals. We always do our best to understand the other side’s needs and objectives in the deal, but there is inevitably a leap of faith on both sides that the deal will work out to everyone’s benefit.
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Reading Agreements Critically with a Contract Playbook
Followers of this blog may be aware that I avoid reading contracts front-to-back as much as possible. I find that breaking a contract into chunks lets me read more quickly, more effectively and more critically.
To do that, a client and I recently adopted a strategy that I have used informally for a long time, which is to develop a playbook of preferred terms that we incorporate in our form documents so that when I sit down to read a contract I know exactly what I am looking for.
I start my review by comparing the contract against my playbook and making notes on any differences. After I finish that I usually have a good sense of how the contract is structured, and I can then read through to put the sections together.
On top of the contract-review benefits, having a formal playbook makes it easier to coordinate contract strategy with clients, and also to maintain consistency over time. When we have a clear sense of what “normal” is, we can develop a set of arguments to support our preferred terms, and also keep track of which deals required us to deviate from our standards.
A contract playbook is a great tool to read difficult contracts quickly, carefully and comprehensively. I recommend it to anyone who needs to review a lot of documents.
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Making SaaS out of a Services Agreement
Many software companies build products that live on the web and don’t install on local computers at all. Enterprise-focused companies call this SaaS; everyone else just calls them web-based or hosted services.
Either way, developers of these products sometimes look for customers among big companies. It is really common then that the customer’s contracts manager doesn’t quite get the nuances and sends over some kind of Master Services Agreement to document the deal. Those agreements are generally based on the idea that the vendor is providing a specific, custom deliverable and don’t fit the situation very well. I have been through this drill a lot and have a few observations about some of the important differences between a custom services and a SaaS deal.
1) Work for hire language. A Master Services Agreement will almost always say that the customer owns all technology and works created by the SaaS vendor during the course of performance. This would be true if the vendor was writing custom software, but is the opposite of what the vendor wants in a SaaS situation. This should be replaced with something that says the vendor owns all the software and anything developed during the term of the contract, and that the customer has a license to use all of it (subject to payment of all fees).
2) Service levels. The Master Services Agreement may not have any service level terms, such as an uptime guarantee or detailed procedures for responding to service errors. This can work out well for the vendor since it allows more flexibility and avoids difficult conversations about discounts if the service goes down.
3) Source code escrow. Some companies feel strongly that if an important vendor goes out of business they should be able to take over the source code to preserve continuity. With SaaS products these terms are especially inappropriate because the service is hosted- a customer would have to take over the entire service rather than just getting the source code to maintain an installation at its own facility.
4) On-site services. Master Services Agreements can use a lot of ink on issues like vendor behavior on the customer’s premises and the customer’s ability to replace vendor personnel. This comes out of the idea that vendor personnel will be in the customer’s data center regularly, which is not correct in a SaaS relationship. I watch out for language that is really egregious here, but mostly try to leave this stuff alone since it just doesn’t apply very often.
The point of this post is that a Master Services Agreement is the wrong tool for the job in a SaaS deal. From the vendor’s side, some terms definitely need to be changed, while others are not applicable but can be left mostly alone. I always try to make the minimum set of changes that will let everyone sign the deal and get the relationship underway, while making sure there is nothing in the agreement that can come back to bite my clients later.
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IP Law for Startups Blog on Bratz vs. Barbie IP Dispute
I recently started reading Jill Hubbard Bowman’s excellent IP Law for Startups blog. I don’t practice IP law, but a lot of the work I do touches on intellectual property issues so I find her posts helpful and illuminating.
The “moonlighting” problem is pernicious for startup entrepreneurs. It can take months or years to nurture an idea to the point where it can pay a salary, so it is natural for many people to chip away at their plans while earning a paycheck somewhere else. The problem is that if their idea is closely related to their day job activities, and if they are not extraordinarily careful to avoid using work resources for the side project, then their employer can claim ownership of the new business ideas.
Jill has a great example up on her blog based on the Bratz dolls. You should click through to read the whole thing (and subscribe to the blog), but some key facts include:
* $1 billion in claimed damages
* $100 million in legal fees for defendants MGA Entertainment, Inc. and Carter Bryant.
Ouch.
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6 Important Terms in Your Website Terms of Use
Website Terms of Use are challenging for many entrepreneurs. Many new companies have limited cash resources so deciding to pay a lawyer for a set of TOU can be a hard decision, especially with so many free examplars out on the web. You should definitely review existing TOU prepared by other companies in your space. At the same time, details matter a lot. A company in your sector may have a different set of features that makes its TOU mostly, but not quite applicable to your exact circumstances. I can’t tell you exactly what should go in your terms or whether you always need to pay a lawyer to prepare them, but here are some key terms to think about when you review the TOU landscape in your field.
Pricing
This is a fairly obvious one, but will your site’s model be free, freemium or full-fare to users? Will there be a trial period? You would get extremely different pictures of what is standard for a news website depending on whether you used WSJ.com or NYTimes.com as a model.
Use and Content Licensing
This point is critical. Will your users principally browse content on your site? Will they use it to filter content from other sites? Will they post a lot of original content? Reblogged content? Will their information all be publicly available or will users maintain private information? There are a lot of variables here and good terms of use will tailor themselves to your site’s particular needs.
For example, if your site is social like Flickr, your terms will reflect a higher degree of concern for ownership rights and you will want your users to affirm that they own or have rights to the content they post in very clear terms. You also want unequivocal rights to display posted content publicly.
At the other end of the spectrum is a site like Mint, where users import private information on their banking and financial records. You would want your users to grant you a license to incorporate their financial information within their accounts, but you would probably not want a lot of language about public display lest you cause confusion about what information you can/will make public.
Social Networking
Will your users interact on the site? If so terms regarding a code of conduct are warranted. Nearly all new web businesses I talk to these days envision some kinds of user interaction, so this is pretty close to “boilerplate” but I beef it up or trim it down depending on the site’s exact model.
Third Parties
If your site relies on advertising, sponsorship or other types of promotional content from third parties you need to explain to users what types of interaction to expect, what types of user information you can give to third parties and when you can/will give it. This is a touchy area since sites need to develop partnerships and mine value from their user bases, but users are very wary of being spammed. There is a delicate balance to be found depending on a site’s model.
Governing Law/Disputes
This one varies a bit less from site to site. The important thing to know is that website TOU are enforceable in court, but fairness is a strong consideration. If your TOU require users to come to a specific location to bring action against you, be aware that a court may well decide to throw out the term if the value users get is low. Having a bunch of onerous provisions in your TOU may well lead a judge to look unfavorably on the whole thing as well. There hasn’t been that much litigation over TOU in the last 15 years so it is hard to draw strict rules here, but the rule of thumb is to be reasonable.
Notice of Changes
The last important point is- what happens when you need to change your terms? Most TOU say that changes are effective when posted to the site, and there is also case law saying that it is not reasonable to require users to check up on the current TOU continually. Opinions vary widely on how to manage this, but my own view is that (i) non-material changes are ok to simply post, but (ii) if you need to add significant provisions or change material terms, you should let your users know by email as well. That is why my practice with TOU is to tailor terms as carefully as possible to a client’s needs, and also leave room for the model to evolve so that we don’t need to revisit the TOU frequently and/or send out notices to users except in rare situations.
This is a complex topic and I have certainly not tried to be comprehensive. Proper treatment of this subject would also include key terms in a Privacy Policy, since privacy policies and TOU go hand in hand. This post is long enough already, though. I will come back to privacy another day.
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How to Allocate Shares in a Startup When One Founder is Also an Investor
I frequently talk to entrepreneurs starting a company where one founder is putting up seed capital while the others are putting in sweat equity alone. The founders want to divide the company ownership according to some formula they have figured out, and then ask me how to document it properly. This are several variables required to do this correctly. Here is how I think about it:
Percentage Ownership
The founders have figured out an ownership ratio that makes sense to them. Let’s say there are 3 co-founders, all of whom will be active day-to-day. One founder will invest $100,000 in seed capital and the others will invest only nominal cash. The founders have agreed that each of them should get 33.33% of the initial shares. For simplicity let’s say that each founder gets 1,000,000 shares.
Stock Price
We always want to keep the price of common stock low so that as new employees, co-founders or others come along they can buy stock (or get stock options) at a low price. I usually like to start with a founder stock price of $0.001 per share. Stock should always be bought for cash, so we immediately have a problem matching the 1/3-1/3-1/3 ownership ratio with the varying amounts of cash being invested.
Using our hypothetical numbers, Founders A and B are getting 1,000,000 shares at $0.001 per share, which means they need to put in $1,000 each. If Founder C is buying the same type of stock, also at $0.001, his $100,000 will buy him 100,000,000 shares; he will own 99.99% of the company.
Preferred Stock to the Rescue
My recommendation here is to treat Founder C an investor as well as a sweat equity founder. By this I mean that we can issue some of his shares as common stock like the other founders, and some of it as preferred stock, which lets us set a higher per share stock price.
Preferred stock is “worth” more because it has rights preferential to common stock. The rights can vary a lot, and in this case I would provide only a nominal step-up in rights compared to the common stock, so that if our company gets sold Founder C would get his money back before any money is distributed among the common stock holders. If the company is sold in an extreme fire sale, it is possible that Founder C would be the only one to get any money out, but with luck we will be able to sell this company for more than $100,000.
Stock Repurchase Right
The last important piece here is that all founders should have their sweat equity shares subject to a company repurchase right. The stock “vests” so that if a founder leaves after a year or two, she only gets to keep the equity she has earned through service. In my view, all of the common stock should be subject to the repurchase right, but since the preferred stock is purchased for a cash investment, it should not have a repurchase right attached.
In this example, 100% of Founder A and B’s shares are subject to repurchase, but 90% of Founder C’s are not. This might be the right outcome- or we could adjust the Preferred Stock price and the relative amounts invested for common stock and preferred stock so that Founder C owns more common stock, and has more stock subject to repurchase. There are a no “right” answers here and it is just a matter of finding the set of conditions that best represents the founders’ relationships.
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Promise and Pitfalls of Convertible Debt
Attorney Scott Edward Walker has a post up today on VentureBeat about angel financings. His tips on due diligence and personal liability are superb and well recommended. He also advises entrepreneurs to push for convertible debt as a way to take on small investments in a simple way. I left a comment on his post with a caveat about debt financings and this blog is an extension of that.
(Convertible debt means that instead of purchasing stock in the company at $0.xxx per share, an investor buys a promissory note with the intent that when a larger financing happens in the future, the promissory note and accrued interest will convert into the same kind of stock sold in the large financing).
I agree 100% with everything Scott says about convertible debt. It is simpler to document and it avoids having to put a valuation on the company. I also know a lot of angels who know how to evaluate great technology, but have no idea how to figure out how much it is worth. Convertible debt helps get money to entrepreneurs more quickly and with a bit less discussion of valuation.
There are a few gotchas, though. The biggest one is that if the later financing never happens, or doesn’t raise the minimum amount needed to convert the notes, the company is stuck with a bunch of debt it generally can’t repay. This becomes awkward. The investors came on board expecting to end up with equity and instead hold a bunch of near-worthless promissory notes. The notes themselves come ahead of the founders’ stock in line for repayment, so until the company can find a new source of cash to pay them down, management’s stock is completely worthless and the founders are working 100% for the investors.
Investors would end up with $0 if they foreclosed on their notes in this situation so they tend to be very accommodating, but entrepreneurs still spend a lot of time managing the relationships.
I have seen convertible debt work best as a bridge, where everyone knows the large financing is coming and one of the investors in that deal puts up a little short-term cash to see a company through a tight spot. In a pure startup situation, taking on convertible debt is a gamble that the big money will present itself.
I talk to clients about their early-stage financing options all the time. Here’s how I break it down to them in a nutshell:
Debt
Pro: Convertible debt is useful to document small investments quickly and without having to place a valuation on the company in its earliest days.
Con: If the later financing doesn’t come through, or if it takes longer than expected, entrepreneurs can spend a lot more time managing the company structure than if they had sold stock at the outset. In the worst case, note holders could force a company to sell and shut down before the founders are ready.
Equity
Con: Preferred stock requires more paperwork to document. It also requires that the founders commit to sell __% of the company to the investors, and the valuation can cause trickle-down issues for stock options and other equity incentive compensation, including the dreaded 409A rules.
Pro: Once done, it’s done. If founders and investors can agree on the valuation (and the investors can agree to do a stripped-down set of financing terms), I generally recommend going the equity route since then the investors’ situation is locked down and less likely to require time spent managing the equity relationship.
Good post, Scott.
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Jason Calacanis, Meet the Current State of the Legal Profession
I don’t generally write about the business of lawyering, but a few things came together recently that I want to make note of to readers.
First, those who don’t follow legal news should be aware that 2008-09 has been brutal for the legal profession. The best summary I can find is this chart, showing well over 100,000 jobs lost at big law firms since the start of 2008.
(image courtesy lawshucks.com)
Most recently, the entire US economy lost 11,000 jobs in November, of which 2,900 were in the legal profession. As a friend put it, the legal industry is “shrinking faster than any that I can think of“.
Into this environment steps Jason Calacanis, who last week announced plans for his Open Angel Forum. The forum is a great idea and I certainly wish him well with it. Here is the part that rubs me the wrong way, though:
The organization is charging a small group of service providers $1,500 each to attend.
I certainly understand the concept here. My old firm used to run an event we called Angel Law Forum for entrepreneurs and service providers would routinely outnumber entrepreneurs and investors.
To say that lawyers can easily afford it, though, is comical for two reasons:
1) Easily is the wrong word. Lawyers (and other service providers) are struggling along with everyone else this year;
2) Jason doesn’t seem to have worked through his own math. The only way any service provider can afford a $1,500 seat at a networking dinner is by charging high rates to clients.
As I said in my comment on the OAF’s announcement (awaiting approval as of this writing), I hope the event goes superbly and I look forward to hearing great things about it. In the meantime, I will be attending cheapie networking events so that I can keep my rates low.
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Class A/B Stock Structures
News came out yesterday that Facebook has created a dual-class stock structure where Class B Common Stock has 10 votes per share compared to the ordinary 1 vote for Class A shares. I certainly don’t know what Facebook plans to do with this type of stock, but Google has a similar deal (Cypress Semiconductor does as well), which has caused a lot of entrepreneurs to ask me about this type of setup. Here’s what I think.
The Good – Voting Control
This type of structure allows founders to retain a lot of control over a company even as it grows enormously. To use a very simple example, as founder of a company I could issue 1,000,000 shares to myself. If the company grows rapidly and takes on a lot of employees I might want to issue 3,000,000 shares to them.
When I do that, I incur economic dilution and voting dilution. This blog won’t speak to the economic side at all and will just assume the money all works out. On the voting side, though, you can see that I went from controlling 100% of the stock to a mere 25%. I have lost most of my control over the company.
I could issue more shares to myself to bring my percentage ownership back up, but there are a bunch of tax and logistical issues that make that hard to do.
Instead, I could convert my shares into supervoting stock. If my shares all vote 10:1 and the other 3M shares are 1:1, then I keep control of the company because my 1M shares have 10M votes compared to everyone else’s 3M.
Google has said it adopted this system before going public because it wanted to think long-term and the founders did not want to risk being outvoted on shareholder matters. B corporations can use similar structures to ensure that their companies’ core social missions can not be easily stripped away.
The Bad -Investors Hate it
My experience with these structures is that investors have a hard time getting comfortable. Professional investors want to know that they can influence major decisions by the company, so it takes a while to get folks comfortable with the idea that founders have super-special voting rights.
My advice to entrepreneurs is not to rock the boat. There are lots of perfectly good, non-investor-threatening reasons to create supervoting stock, but if the setup makes it harder to raise money then it’s a big gamble for a startup.
These things work for Facebook and Google because those are well-established, already successful companies. They have negotiating leverage on their side. Most startups are not so fortunate.
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On Zero-Sum Deals
Most of my work is building connections between two companies or people, which sometimes means negotiating a software license agreement and sometimes helping a group of founders start a new company together. In most of these cases everyone benefits in some way.
A few times a year I help people unwind difficult situations as well. These are much harder deals to do- emotions run high and frequently the two sides don’t trust each other at all. There is a tendency to look at these disputes as zero-sum situations: one side needs to lose something for the other to benefit.
Occasionally that is right. I worked on a transaction a while ago where there was only 1 substantive issue between the two sides- one guy thought he was owed a bunch of money and the other thought the amount was much lower. In the end neither side got what they really wanted out of it, which was unfortunate. The deal later fell apart and I believe it was mostly because neither side got enough value from the agreement.
Most disputes don’t work that way. Usually each side has something it doesn’t really need but the other side wants, and vice versa. My job as counsel is (i) to help my clients figure out what the other side really wants and how to give it to them (this was a great quote from Hiten Shah- if only I could find the tweet), and (ii) help my clients figure out what they can give in order to get the deal done, move on and stop talking to me as much. Some of the “give” items are material; frequently there are intangible items as well like reputational benefit and helping someone exit a bad situation gracefully.
So how do I help clients figure these things out? This post has been stuck in draft form all week because this is the hardest thing to do. I talk to my clients a lot about all the facts in the situation, we use legal arguments as a backstop to think about what the result would be in litigation, and we spend a bunch of time assessing the other side’s needs.
We then make a series of offers intended to reflect our needs, the value we place on the things we want from the other side and the items we think the other side wants. If we are lucky, the other side has done the same thing and we can find a small patch of common ground in short order. From there, the thoughtful back-and-forth process lets us feel each other out and eventually find the key terms to avoid a zero-sum equation.
In other words, the alternative to a zero sum equation is probably something like: 40% part pragmatics (esp. how much money everyone is willing to spend on lawyers), 30% legal knowledge, 25% psychology, 10% intuition. The rest is luck.
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Licensing in Plain English; or How (and When) to Write Contracts People can Understand
Most of my work is with medium and large companies negotiating software licenses between one another. The documents tend to be long and assume deep knowledge of license terms, indemnification, warranties, damages and other key concepts. I recently had a very different assignment, though, that turned into a fascinating exercise in minimalist licensing terms.
A high profile company needed to obtain rights to use photographs of some extremely unsophisticated members of the general public (i.e. people who don’t read legal contracts very often, if ever). We needed to obtain a license to use people’s likenesses in a way that made clear the people understood the rights they were providing, and of course we wanted the language to be legally defensible. The assignment turned into a great opportunity to go back to the most basic licensing principles. As a bonus I got to poke around at how other people handle the same problems.
Licensing Concepts
The first thing I did was to strip down a license into is most basic components. At a minimum, a license needs to identify (i) the material being licensed, (ii) the fields in which the material may be used (or the areas from which material may be excluded), (iii) the geographic scope, if any, and (iv) the price being paid for the license.
A typical license agreement has loads of other terms that are important in various circumstances. I certainly would not recommend that companies omit these provisions- they are important in those types of transactions.
At the same time, most people don’t do these types of transactions and don’t have the benefit of experience in looking at license terms. Sometimes it can be appropriate to use a very basic set of provisions that focus more on clarity and covering the basics than on detail. It is very possible to write plain English that covers items (i)-(iv) above simply and completely.
What Other People Do
Creative Commons is my favorite example of complex license terms described simply. CC helps laypeople people select license terms that are appropriate for specific situations and they have developed a friendly set of mix-and-match logos to indicate what rights are imparted by the various choices. The logos are backed by human-readable descriptions of the terms as well as traditional legalese.
Image by spinster via Flickr
This a nice approach since it offers multiple ways to understand the essential provisions.
When to Use What Language
The real question is- when is it appropriate to use full-blown legalese and when can we make do with less? For me it comes down to three basic considerations:
1) The people giving up rights need to understand what they are agreeing to. This is Creative Commons’ basic principle, and also the one I follow with my clients. In that case we came up with a very stripped-down, nonlegalistic license provision so that we could clearly communicate what we were asking of people and have a decent expectation that they understood it the same way we do.
2) What is the downside of leaving things out? In many cases companies expect to see license terms written in a certain way. Sticking with the tried-and-true format can actually move the deal along faster.
3) Leaving out big items like warranties, post-termination obligations and indemnification language can create risk for one side or the other, so I consider litigation risk as well before I start cutting things out of agreements. Does the other side have the means to sue? Would we cause undue exposure for ourselves by omitting certain terms?
In the end, I put all these items together and try to find the right spot on the plain English-legalese continuum for any given agreement. I like this process because it means I don’t hew blindly to certain forms, but instead think about purpose and how to meet everyone’s needs as efficiently as possible.
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Reading a Negotiation: Who Wants to Do the Deal and Who Wants to Argue?
My normal strategy in a negotiation is to be frank about my client’s needs and try to find a collaborative solution for both sides. Here is an example of when that worked really well, another one where it didn’t and what I could have done to improve the outcome.
Negotiation as Collaboration
In one recent transaction my client and its business partner had reached agreement on about 90% of the issues in the deal. The last few were somewhat sticky because they were less about business terms than allocation of risk. I explained our situation to the other side, then listened carefully to the other side’s points. When we started going through the draft agreement I realized that the first two points were much more important to them, while some later ones were bigger points for us. After hearing them out we agreed we could concede the first two items. The mood on the call immediately improved, the other side agreed to concede the items we explained were important to us and we breezed through the rest of the call.
Negotiation as My Way or the Highway
This strategy worked so well that I tried it again in another deal and it blew up. The difference was that the attorney in the second deal had no interest in collaborating- she simply wanted to “win” every point. That call was so adversarial, in fact, that everyone started shouting and stopped listening. My client ended up getting everything it needed, but only by going around the attorney after the call and convincing the business principal that his attorney was standing in the way of the deal.
How I Avoid Making the Same Mistake Twice
The lesson I took away from negotiation #2 is to read the tone of the discussion as quickly as possible. The people on the first call started out wary, then quickly warmed up through a candid discussion of the issues. The attorney on the second call was belligerent from the outset and had no interest in talking through the business points.
Fundamentally I believe in my approach- I know my clients’ products cold, have business reasons to justify almost every point and a strong sense of which purely legal items we can give up in order to do the deal. In my second deal, I should have avoided letting emotion take over, stuck to the business points and gotten off the call as quickly as possible so that both sides could work through the facts without having the attorneys showing off for their clients. The call might still have been unsuccessful but we could have avoided polarizing everyone.
My clients and I work as a team. My job is not to win every point in a negotiation but to put the business terms into language both sides can benefit from. I love this job because even though I have spent 11 years practicing my approach I still learn new things every time.
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Sad, Sad Week; Saying Goodbye to Craig Johnson
Last week Craig Johnson, co-founder of my law firm, Virtual Law Partners, suffered a massive stroke. He died Saturday evening surrounded by his family members.
VLP was formed when co-founders RoseAnn Rotandaro and Andrea Chavez approached Craig for advice on how to grow their small firm practices. Craig immediately saw an opportunity to do something larger and more interesting. VLP launched in May 2008 with a mission to provide personalized, efficient legal services to clients with minimal overhead.
A mere 14 months later one can not read legal news outlets without finding a slew of articles on client demands for higher efficiency, closer contact with partner-level attorneys and predictable legal expenses. I mention this in order to point out that Craig was ahead of the curve throughout his career- from his start at the brand-new Wilson Sonsini in the 1970s, to Venture Law Group in the 1990s where he rode the Internet boom, to VLP Craig’s vision was prescient and many of us in the legal community and elsewhere have been well served by his guidance.
I had not met Craig before I joined VLP. He was impressively smart, confident and creative. He was a role model for me in my legal career; like me, he was also an avid cyclist and I will miss talking to him about his cycling trips as well as his career advice.
All of us at VLP consider ourselves part of Craig’s extended family and will miss him greatly.
(image courtesy ABA Journal)
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Use a Low-Cost Filing Service Instead of Me? Sure, Why Not?
I talk to a lot of people about forming new corporations. Some of them ask me “why do you charge $2,500 – $3,000 to form a new corporation when I can have it done by ABC filing service for $375? The answer is that you get different things when you use a filing service versus me and there may be good reasons to use both. Here is my rundown of what you get from a filing service, what you get from me and how to think about using your time and money most wisely.
Filing Service. The service should provide you with the following:
* Articles/Certificate of Incorporation, plain vanilla version, signed and filed with the Secretary of State of your choice
* Statement of Incorporator naming the initial Board of Directors. Be sure to get this! It is a one-pager that causes big problems if inadvertently missed
* Bylaws, probably not the best form ever, but probably good enough 99% of the time
* Initial consent of Board of Directors, plain vanilla form finalizing incorporation and issuing shares to founder(s)
* Form of stock certificate to issue founder shares
Me. Here is what I provide:
* Discussion of which state is the best in which to incorporate. Delaware? California? Other?
* Plan for capitalization of the company, including founder equity, possible stock option plan, roadmap to potential equity financing, vesting terms for founder & early contributor shares
* Complete documentation of founder contributions to the company via founder stock purchase agreements so that there is no question that the company acquired ___ assets or that $XYZ were paid for founder stock
* Detailed Board action that reflects all the same information so that future generations of lawyers can check off all the right boxes in due diligence review
* Securities filings to document that stock was sold legally
You can see that the filing service focuses on a bare set of very generic documents, while I spend time working with clients to make sure the documents fit the plan we develop together.
I know a lot of people (of whom one was a partial inspiration for this post) who believe that services like corporate formation are going to become totally free in the future and that the model forms provided by Orrick, Cooley and probably every other firm as soon as they can get the documents published are the vanguard of this movement. I am not totally convinced on that- lawyers have a duty of care to clients that seems hard to meet if we don’t put some effort into working through the planning items I mentioned above- but I see the point. The forms are out there and the services are straightforward. Costs will probably trend downward, so it is really just a question of how close to $0 they get.
While we wait for that discussion to evolve, here is how I recommend you think about how to best spend their time and money.
1) Talk to me. I will give anyone a (free) hour of my time to discuss plans, figure out what will work and what is going to take you down the wrong path. I don’t try to hold back the “key steps” so that people are forced to hire me. You should walk away thinking you could incorporate on your own if you so choose.
2) Research the costs. Once we develop the roadmap, figure out how much it will cost to have the filing service handle your documents. Some clients do this and decide to have a service file for them (I have sent people to getincnow.com); for others it is easier to have me handle everything. I am fine with it either way.
3) If you decide to use the service, tell me. I won’t be upset or offended. I will give you the summary of information you need to do it properly the first time: how many shares to authorize, what state to file in, etc.
My job to help clients incorporate their businesses efficiently and properly. It honestly is not a big money-making part of my law practice, but I enjoy it and get a lot of satisfaction seeing clients launch their businesses. The important thing for me is getting it all right the first time, not whether clients use my forms or someone else’s.
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Equity Grants for Company Advisors
Clients frequently ask me how much equity they should give out to advisors. It’s a multi-layered question and worth pulling apart a little bit. Here is how I think about it, following by my basic rule on how to allocate equity in an early-stage startup.
Low Value Proposition – to the Company and to the Advisor
Most startups are cash-constrained; many get enormous benefit from informal advisors on business models, finance, sales strategy, etc. The companies want to reward these people for giving their time; they also want to reward the behavior so that the advisors will be more likely to continue helping.
At the same time, most advisors have only limited capacity to donate their time so most advisory stints are short term. On top of that,brand-new startups are about as risky as any investment gets and the return on equity for most advisory-level stock grants is incredibly low. If I start out with 1% of a startup and I hold on to as much as 0.1% by the time of a sale, the sale price needs to be $100M in order for me to get $10,000 out.
So- potentially big short-term help for the company; low return to the advisor in most situations. Everyone needs advisors and fortunately there are plenty of people will to help others along, but be aware that the principal reward is not economic. Every once in a while someone does a good deed and gets a big windfall for it, but that is not and should not be the norm.
Where Does the Advisor Equity Grant Fit In?
I am a rules-oriented guy, especially when it comes to equity. My rule here is that an advisor’s equity should be proportional to his/her contribution to the company and should fit in the cap table scheme. The typical early stage cap table should look something like:
* Founders at 60 – 80% ownership (depending on investment)
* Seed investors at 15 – 33% ownership (depending on investment amount)
* Equity pool for employees and advisors at 15%
Put the advisors in the equity pool, then compare their contributions to those of the employees. Equity grants less than about 0.5% become meaningless really quickly and I don’t see companies going below that in most cases, but the amount of equity given to an advisor should be compared to employee grants. If the lead engineer gets 2% and the person who made several introductions and advised on sales channel development also gets 2%, those introductions should be giving the company serious traction.
Advisor Equity is the Tip, Not the Full Payment
There is a balancing act here for sure: an advisor’s short-term help needs to be weighed against the long-term contributions of the full time team members. In the end, it becomes unfair to the team to give out large advisor grants in most cases. My favorite way to think about it is that advisor equity is like the tip paid at a restaurant- it is not the full meal ticket. Sometimes the advisor gets her/his full bill paid in cash too, and sometimes the payment is in goodwill and the satisfaction of having helped out. Equity grants that reflect this do the best job of treating everyone appropriately across the board.
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Compare/Contrast: Microsoft vs. Google vs. Yahoo Search API Terms of Service
Pete Warden is an entrepreneur working on ways to find the value in one’s social networks through his company Mailana. We’ve only met online, though I hope one day we can connect in person because I like what he’s doing a lot.
Pete blogged last week about why he switched from Yahoo’s search API to Bing to Google. I wouldn’t know a REST interface from a stick in the ground, but he makes a point about terms of use where I can definitely weigh in. For kicks, I looked up the terms of use for Yahoo BOSS, Bing and Google search APIs. It is fascinating to me that the terms are substantially different.
I won’t go into all the differences in great detail and readers certainly should not take this listing as comprehensive in any way, but for example:
Delivery of Search Results.
Google cares a lot about this. They say that developers can not reorder search results or intermix results from other sources. No surprise here; integrity of search results is key to public acceptance.
Bing is almost identical to Google.
Yahoo asks developers to acknowledge that reordering may affect “relevance or performance” and leaves it to the developer to decide what to do about it.
Yahoo really surprises me here. I read the TOS 4 times to be sure I wasn’t missing something, but they seem to accept a laissez faire approach that would let me reorder search results or insert paid listings. There is some language about the way queries and search results should be presented that might be read to limit this a little, but it is nowhere close to Google or Microsoft’s blanket proscription. It is also possible that some other document adds this restriction, but I couldn’t find it on quick review.
Integration with other products.
Google says that search results can only be overlaid on Google maps and that Google retains the right to insert ads in search listing, which is a fairly narrow set of restrictions.
Yahoo puts a blanket prohibition of use of any Yahoo APIs “in a product or service that competes with products or services offered by Yahoo!”. That seems incredibly broad and hard to understand to me.
Bing mentions MSFT’s Virtual Earth maps, but doesn’t make a big deal of other online products.
I am a little surprised that Google doesn’t mention any of its other products, but maybe there are technical reasons around use of the APIs that make it unnecessary. Yahoo has so many properties doing so many different things (and Microsoft so few) that the language on this item doesn’t surprise me at all, though I wonder how a developer could possibly know its product doesn’t compete with some Yahoo product somewhere.
Content.
Yahoo offers a long list of content its APIs can’t be used to promote, including spyware, cigarettes, illegal drugs and paraphernalia, pornography, prostitution, body parts and bodily fluids, and professional services regulated by state licensing regimes.
Google tells developers not to upload, post, email, transmit or make available inappropriate, defamatory, infringing, obscene or unlawful content.
Bing says only that developers may not “promote or provide instructional information about illegal activities or promote physical harm or injury against any group or individual”.
Bing is the clear winner here for porn sites in need a search API. Google runs a close second with its local-standards-dependent “inappropriate” and “obscene” restrictions, and Yahoo is by far the most family-friendly search API.
On a serious note, it looks like Yahoo would not allow my law firm to use its search API on our web site. I can’t see the rationale for this whatsoever, but the point is duly noted.
This was an interesting exercise. Search products look awfully similar from the outside and it is easy to lump them all in a basket. The companies behind them have different motives for making the APIs available and it is instructive to review the requirements.
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What is the Best Structure for Social Ventures?
The SOCAP09 conference on social entrepreneurship has swamped my Twitter feed for most of this week and I had a chance to stop in Wednesday evening to check it out. The conference is for people starting companies looking to do well by doing good.
Todd Johnson, a preeminent lawyer in this area, posed a question via Twitter last week about the best type of entity structure for social ventures. It’s a good question and there are some very interesting developments in the staid realm of corporate law that can help these types of companies along. At the same time, there is tremendous diversity in the types of businesses being created, so if I had to give a one-line answer it would be “whatever structure makes partner organizations yawn the most”.
That’s probably not tremendously helpful, so here is my quick survey of social venture entity structures. I’ve posted on this topic before and will continue to revisit as the landscape changes. If readers know of other entity structures, and especially if you have seen certain structures work well in specific environments, please leave a note in the comments.
Nonprofit. With apologies to non-profits and their lawyers everywhere for collapsing an entire sector into a pithy sentence, what most differentiates a nonprofit from a for-profit company is that the nonprofit has no owners in the financial-return sense. Benefits are potential tax deductions for donors to the business and pure focus on the mission without having to consider shareholder returns. A major drawback is that if the mission changes and participants wish to take profits out of the business it can be difficult or impossible to do so. I have worked with nonprofits only in passing, so I won’t go any further except to note that non-profits run the gamut from entirely donation-dependent organizations such as the General Assistance Advocacy Project I worked with in law school to significant revenue-generating businesses like Kiva.org.
L3C. This is a new flavor of for-profit entity intended to help charitable foundations make grants more easily. I don’t do anything remotely like this kind of work, so I can’t speak much to it except to say that the L3C was designed to allow foundations to meet their Program Related Investment guidelines under federal tax law more easily. The first L3C was adopted in Vermont in February 2008 and as of today (Sept 4, 2009) there are at least 6 states with similar statutes in effect or pending, so I will assume they fill a need and leave it to more knowledgeable people to advise further.
Plain Old Company. In many cases this is a great option and all a social entrepreneur needs. A “regular” corporation or LLC is simple, well-understood and easy to form. One drawback is that while the owner/managers can dedicate the business to social goals, there is nothing to prevent the mission from being overridden. Many social venture experts look to Ben & Jerry’s acquisition by Unilever as an example of this shortcoming- the B&J Board had an offer that was financially rewarding, but there were apprehensions that Unilever would not retain B&J’s commitment to support communities around its stores. In the end, the Board decided it did not have discretion to put social-welfare goals over shareholder returns and accepted the Unilever buyout. Many of B&J’s social programs ended shortly thereafter.
B Corporation. The good folks at B Labs are setting standards to address this problem, along with many others. A B corporation is a “regular” corporation (or LLC or other entity) that has made a commitment its charter documents to consider factors other than shareholder returns in determining corporate actions, esp. environmental, community, social and employee welfare. The benefit of this is that the Board can, if necessary, choose paths that may lead to a lower shareholder return if circumstances require. The problem is that only 32 US states allow this type of language in corporate charters, so businesses in California and elsewhere need to incorporate in B-corp friendly states to get the full benefit.
Social Venture Company. You may be able to see where this is going. There are groups in California, Minnesota (I think) and possibly other states working on legislation to create a new type of entity that permits the broad-constituency language promoted by B corp and others. Like England’s Community Interest Company, these entities would be separate from “plain old” corporations or LLCs by their commitment to work toward positive outcomes for shareholders and non-financial stakeholders. We don’t know much about these proposed entities yet and many of the draft ideas are subject to change so there isn’t much to say about them currently.
Going back to the start of this post, I strongly believe that the best entity structure for a given project is the one that investors, donors and business partners can gloss over without thinking about much. We don’t quite have a standardized approach that allows this yet. With luck in a few more years we will.
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Fixed Fee Billing and Other Legal Red Herrings
There has been a great deal of talk this year about fixed fee billing as way to address problems in lawyer-client relationships, starting with major clients like Cisco and major firm leaders like Cravath Swain & Moore’s presiding partner Evan Chesler. Richard Susskind also talk a lot about the idea that fixed fees align client and firm interests better by encouraging efficiency.
I have no doubt this may be true. Flat fees can reduce double-billing, the multiple rounds of review that occur as documents are prepared by junior attorneys, then reviewed by mid-level ones and then senior partners. Legal invoices generally don’t relate time spent to specific goals or deliverables either, so they can leave the reader/client confused about what has been accomplished in the time spent. Flat fees could make that clearer.
Or, flat fees could simply be a way to throw a thicker blanket over firm billing practices. I wish I could find again the cynical viewpoint I read recently about how large firms have gotten about as big as they can get and the lawyers physically can’t bill more hours in a year, so they have turned to fixed fees to continue to increase partner profitability.
I have never worked in a large firm, never mind managed one, so I won’t presume to know what drive’s any firm’s billing practices. I will say, though, that there are not many clients sophisticated enough to know that XX transaction should cost $YY. Most clients simply need to take the firm’s estimate at face value, or solicit multiple bids. A firm that wished to could certainly estimate the likely cost of a matter, round up slightly, then streamline its internal resources in order to bill the fixed-fee equivalent of 10 hours for work that can be performed in 8.
The point here is not to accuse any person or firm of bilking clients, but merely to note that the discussion of billing practices *per se* is a red herring. It is just as easy to obfuscate and pad a fixed-fee invoice as an hourly one.
So what, I was asked over the weekend, is my approach?
The Grand Scheme
The master plan includes initiatives like the ones Mark Chandler describes in the ILTA speech linked at the top of this post. He talks about letting Cisco attorneys dive into outside-firm knowledge management systems directly, reverse auctioning patent prosecution matters and a service level agreement that requires Cisco to take back low value-add (but expensive at outside firm rates) matters from outside counsel. My firm is developing technology that will let us collaborate more closely with our clients on many matters.
The Day to Day
In the meantime, there is the day-to-day process of meeting new clients, assessing their needs and getting the work done cost-effectively. Every client wants to know how much the work is going to cost so it can budget appropriately. Here’s the simple, low-tech approach that works for me:
Listen carefully to what the client needs and ask a lot of questions Be honest with the client and with myself about how much time a transaction will likely take Communicate regularly about progress. If something major happens that seems likely to increase the scope of a project, work through it as early as possible Strive to show that each invoice shows value provided, whether the bill is broken down hourly or on a fixed-fee basis
In the end, it’s developing relationships of trust and mutual advantage with clients. Billing practices are a means to the end, not the end itself.
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Lesson in Legal History and Negotiation – John Adams and Samuel Quincy
Image by wallyg via Flickr
I grew up outside Boston, though I have not been back there in a long time. Last week at the tail end of a family vacation we stopped in Boston to follow the Freedom Trail and show my kids a slice of American history.
On the trip, we walked past Boston’s old State House, the site of the Boston Massacre in 1770. Five civilians were shot by British troops following a riot and the event is cited as one of many that led to the American Revolution.
The soldiers were arrested and brought to trial. I find it fascinating that the political environment was so charged that no lawyers could be found to represent the defendant soldiers. Colonials were already bitterly divided between those loyal to England and Patriots seeking a higher degree of autonomy or outright independence and apparently even the Loyalists feared collateral damage to their careers if they took the case.
The solution was an elegant exercise in negotiating strategy. John Adams, whose credentials as a lawyer and a Patriot were unimpeachable, represented the soldiers. Loyalist Samuel Quincy, the colony’s Solicitor General, acted as prosecutor.
The legal history here is interesting. The compromises required to get the case to trial are fascinating. Adams the Patriot defended the British soldiers; Quincy the Loyalist worked to convict them. The trial depended on both men putting their full efforts into pursuing cases that (on some level, at least) ran against their personal convictions. I’m sure that must have been a tremendously difficult assignment for both sides.
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Reading Contracts: What am I Missing?
One of the hardest things to do when reading a new contract is to figure out what is not covered. It’s relatively easy to review an agreement and pick out things that are completely wrong or run contrary to one’s interests. On the other hand, the sea of words can prevent readers from noticing, for example, that a license agreement provides a nonexclusive, worldwide, perpetual license, but doesn’t say clearly whether the license fee must be paid and once paid whether it must be periodically renewed.
The best way to be sure a contract contains all the terms one needs is to do the same type of transaction over and over until you know it cold. Next best is to find someone else who has to rely on. Those aren’t particularly helpful suggestions to someone in unfamiliar territory with a deal on the line, though, so here are some suggestions to help identify missing terms.
1) Make up a hit list. Before you start reading, write down list of the important terms. This step takes a surprising amount of mental discipline but it is incredibly important. Avoid the temptation to dive straight in and “see what the contract says”. Even if you think you know what terms you need, write them down before you start reading.
2) Take the contract in sections. This goes along with my piece on How to Read a License Agreement. Instead of reading front-to-back, search the contract to find all the terms on your hit list. Do they match your requirements? Is anything from your list missing? Bonus points for lining up your hit list in one column on a piece of paper and writing down the comparable terms in the contract in the next column. I have only taken this extra step a handful of times, but found it very helpful when the deal was complex or I was having a hard time getting through the contract language.
3) Put it Back Together. Now that you have found the biggest points, you can read through and see how other terms flow around them. Do all the defined terms match your understanding of what they should be? Do any subparagraphs under one of the big points limit its applicability?
4) Try to Break it. It’s also easy to read a sentence, squint a bit and say “yeah, that basically covers it”. Instead of trying to read the contract in a way that fits your needs, do the opposite. How could a paragraph be read against you? E.g. if you quit vs. being terminated by your employer, will you lose any vesting in your stock?
5) Read with a Friend. If the deal is important it merits more than one set of eyes. I frequently find that useful points come out of discussion with a co-reader.
6) Search for Exemplars. I am putting this last because it’s really hard to find good examples of many types of agreements. The SEC’s EDGAR database is a good source, but search is very limited unless you pay for advanced search capabilities. Docstoc and Scribd have pretty good libraries but since there is no clear way to judge quality it is best to look for at least 3 samples of the type of agreement you need, then compare terms carefully before relying on any one contract.
I hope these ideas are helpful. Reading carefully and catching everything is a genuinely hard task. Practice very much makes perfect and these are some of my favorite practice tools.
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Thinking Out Loud About Contract Survival – Please Contribute
I have recently come across a number of contracts with extensive survival provisions. For the non lawyer-wonks out there, a survival clause says that when the contract is terminated certain provisions will continue to govern the parties’ behavior toward one another.
There is a part of me that hates the concept of these provisions- they turn the whole deal into a kind of roach motel that the parties can enter, but can’t fully leave for a long time.
The other part of me understands that survival clauses have value, but wants to find the right logic for using them.
Confidentiality – Yes
For example, parties to a deal may well learn a bunch of confidential information about one another. Terminating the agreement might be used as a way to escape the need to keep that information confidential, so I commonly see language that says the parties will be required to keep information confidential for 3-5 years, and that the confidentiality language will continue to bind the parties after the agreement is terminated.
Indemnification – No
On the other side, I also see language that says one party’s indemnification obligations will continue after the deal ends. Indemnification means that, in an agreement between A and B, if C sues both A and B because of something A did, then A will take charge of the litigation and cover all of B’s damages and legal costs.
I can certainly see why B might want this, but B is really saying there that it wants the ability to terminate the deal- ending A’s economic advantages- and still keep A on the hook for any downside issues that come up. As lawyer for A, I push back on this idea. If B wants out so be it, but B shouldn’t get to keep the economic advantages and push all the risk onto A.
In Search of a Rule
Is there a principle goverining which provisions should survive termination of an agreement? I’ m not sure and this is the thinking out loud part. Here are my ideas to date:
-> Leverage wins. If one side to a deal has significantly greater negotiating leverage then it can probably dictate the type of risk-allocation point above.
-> When the parties are in equal positions, my idea is that “passive” activities can/should survive, but the parties should not be required to affirmatively do anything. E.g. confidentiality doesn’t require anyone to step forward and take action, so it can survive. Indemnity is an active obligation by one side to litigate and pay costs. It should not survive.
Seeing this written down, I am not sure if this is the right way to think about it. E.g. the parties may negotiate limitations of liability in a deal (e.g. in a dispute damages payable by A are limited to fees paid to A by B during the term of the deal). Should one side be able to terminate the agreement and dump the liability cap or should both sides be held to the negotiated terms forever?
Comments Requested
Is there a rule here or is every deal a unique set of circumstances? I’d love to hear your thoughts in the comments.
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Privacy and Employer-Owned Materials
I have probably generated 500 standard-form employee confidentiality/inventions agreements, and a good number of employee manuals, all of which say that basically anything an employee does on work time with employer-owned equipment (computers) belongs to the employer.
It is very useful to see the limits of these policies. A recent case from the New Jersey Appellate Division has some useful guidelines. Here is my summary of the helpful considerations in under 500 words.
Case Facts
The CEO of a company got into a dispute with her employer. The employer took back its computer when the CEO quit and found on it cached copies of emails the CEO had sent to her attorney from her personal Yahoo account.
The employer said that the emails belonged to it since *everything* on the computer belonged to it pursuant to the employer’s policies. The CEO said that purely personal matters fell outside the scope of the policy.
Court Ruling
The appeals court said that it is not enough for a company to say it owns everything done on its computers- there has to be a need to reach out and take ownership of entirely personal matters. Based on that, the court held that the emails were not the property of the employer and the employer had no right to hold and use them.
Useful Concepts
None of this is strictly relevant outside of New Jersey, of course, but the case brings up a few interesting ideas:
1) Personal vs. work email. The CEO did not use her work email account to communicate with her lawyer. This was an important point in establishing the CEO’s expectation that her emails would remain private.
2) The court likens the employer’s actions to rifling “a folder containing an employee’s private papers” or examining “the contents of an employee’s pockets”. To me, this is the most important point. An employer can certainly *review* an employee’s file folders, but if it finds purely personal items it is obligated to return those to the employee. Computers are no different- people may store personal information on them. Employers need to be aware that they are not entitled to review or use these simply because the employer owns the computer.
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Winding Down a Co-Founder Equity Relationship
I have had several questions about this topic recently from different angles, so here are the basic concepts when a co-founder or early employee leaves a company. Note that there are overlapping employment, noncompetition and other issues here that I am not going to touch in this post.
The Setup
CloudWidget, Inc. has three co-founders. They own equal 1/3 shares of the company and everything goes along swimmingly until Founder B moves away/gets a new job/has irreconcilable differences with Founders A&C. Whatever the reason, B decides to exit CloudWidget and move on.
A&C come to me and ask questions that include:
-> Does B own his stock?
-> Can we get some or all of it back?
-> What should we do?
Threshold Questions
We start with the following key points:
1) Does B own *stock* outright or stock options? This is a critical point that many first-time entrepreneurs gloss over and that colors everything else that follows.
2) Is there a vesting period attached to the stock/stock options? If so, what is it?
Important Concept #1 – Earning into Equity
Every participant in a startup should earn into his/her shares over time so that if/when the person leaves s/he won’t get a free ride on the backs of the people still plugging away. If B’s equity was stock options, then almost certainly the options are subject to vesting. Leaving the company stops the vesting and B must exercise the option and pay the purchase price to get actual shares within 90 days (usually) or the option expires and all right to buy shares vanishes.
It is more common for co-founders to buy stock at the outset than to get stock options, though. I encourage all my startup clients to put this founder stock on a vesting schedule as well. This gives the company the right to buy the stock back at the price paid by the founder. The right expires over time: typically 25% of the shares are owned outright and not subject to repurchase after 1 year, and the repurchase right lapses as to the remainder in monthly increments for another 3 years after that.
For some reason lots of people accept the idea of stock option vesting as a matter of course, but don’t put stock on a repurchase schedule. Again, I highly advise that everyone do this.
Important Concept #2 – Getting the Stock Back
If B holds a stock option CloudWidget needs to do very little. On termination the option automatically stops vesting. Good employment practice dictates that CloudWidget give notice that any vested shares must be exercised within [90] days or will lapse, but that’s the extent of CloudWidget’s affirmative duties.
Let’s assume instead that B bought his stock outright, that it was subject to a repurchase right and that some, but not all of the right had lapsed. CloudWidget needs to find B’s stock purchase agreement and read it carefully. Some agreements require that CloudWidget buy back the stock within a set period of time (90 days) and some say that the repurchase is automatic on termination. It is important to know what B’s agreement says so that CloudWidget doesn’t blow its opportunity.
If procedures are followed and the agreement is written correctly, B agreed to the repurchase terms when he signed the agreement, so his consent is not required now. CloudWidget merely needs to exercise the repurchase right, cancel his stock certificate (hopefully in escrow with CloudWidget or its attorneys) and send him a check along with a new certificate for the vested, un-repurchased shares. If B had vested in 1/3 of his shares he will end up with 1/9th of CloudWidget; A&C each own 4/9ths going forward.
Important Concept #3 – Not Burning Bridges in the Process
This is frequently the hardest part of the whole situation. Companies need to know what their rights are, and then exercise them judiciously. Circumstances vary dramatically case by case, and I always let my clients now that the agreement is the baseline for ending a relationship but is not definitive- everyone is free to reach any other agreement that makes sense, and it is often worth trading a little cash or equity in order to maintain a friendly relationship where possible.
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Ideas Becoming Conversations on the Web
I had a happy milestone this week, when Carolyn Elefant picked up on my recent post about free and low-cost legal services. She looked at the concepts from the angle of solo and small firm practice. Her post was then subjected to close scrutiny at AdamsDrafting before finally ending up on the ABA Journal’s web site.
This is clearly a topic of great interest to lawyers and I am thrilled to see it discussed. It was also a first for me to see a meme posted in this blog picked up and analyzed by others from multiple viewpoints. Thanks to Carolyn, Ken at AdamsDrafting and Sarah at the ABA Journal for adding your thoughts. The discussion becomes a fluid, roving one and I learned a lot from your posts.
[In ~2 years of blogging I think this is my very first post *about* blogging. I promise not to do it often. I love to see ideas turn into conversations- as long as the conversations are about more than the blogs themselves]
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HUB Berkeley Fireside Chat on the Edge Between Nonprofit and for-Profits
I attended a fascinating talk on social entrepreneurship at the brand new HUB Berkeley last night. HUB is a shared workspace concept especially for socially innovative people. They have facilities in 12 cities around the world, including the brand new, gorgeous David Brower Center in Berkeley, CA. This event + last week’s Cleantech Open event at AutoDesk’s One Market gallery made for two LEED Platinum building visits for me in a week, which was a minor milestone for me.
The talk featured Matt Flannery from Kiva.org, Steve Newcomb from Virgance and Ben Rattray from Change.org. Discussion was lively and instructive on a number of levels. I was especially fascinated by the fact that all three businesses stand on the line between traditional nonprofits and for-profit businesses. All three panelists spoke about why they chose one form over another. If I understood them correctly, Kiva’s founders simply felt that non-profit status was the right fit; Virgance and Change.org both raised money from investors and that required them to use for-profit entities.
From the discussion, though, I got the impression that any of them could have gone either way with their businesses. As Newcomb said, it is a great moment in history when people can be capitalists and activists at the same time.
The legal framework needed to build businesses at this balance point is not fully developed, but through the efforts of B corporation and others they are coming into shape quickly. I love working in this space and look forward to its full development.
Related articles How to run a startup, Steve Newcomb-style: Naked Thursdays (entrepreneur.venturebeat.com) The Charismatic Social Entrepreneur – A Conversation Worth Relating (clearlyso.com) ![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=16662974-fe2a-442e-9047-cd963761a5b6)
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On Commoditized Free and Low Cost Legal Work and the Future of Legal Services
This post weaves together several threads for me: a speech by “legal futurist” Richard Susskind I just finished listening to on the future of legal services (he talks about a move toward commoditized, low-cost legal services), Orrick’s free library of basic corporate documents and the extraordinary amount of hand-wringing and teeth-gnashing I see around me in the legal industry these days.
Here’s the premise: legal services are mostly offered on an individualized, fully custom basis for each client. Attorney rules of professional conduct create a duty of care to clients that make it hard to give people forms and help them a little. Firms can give away documents with disclaimers about making any changes, but the duty of care makes it hard (today) to create a high volume/low margin business of this.
Orrick has released a set of corporate forms that anyone can download and use; WSGR has a term sheet generator for venture financings that uses a detailed questionnaire to produce a term sheet based (presumably) on WSGR’s extensive expertise negotiating these types of arrangements. D.C. Toedt’s Firstdrafter project works along the same lines, allowing anyone to find, fill in and use various contract forms.
These are great steps and very much in line with Susskind’s premise. They aren’t quite the same thing, though. First, they are freemium products intended to bring new clients in the door. By giving away a teaser, the firms hope to sign up a bunch of new clients to customize and work through the transactions behind the documents.
I was fortunate to demo a product recently called FirstDocs that promises to change the landscape significantly. FirstDocs lets law firms use best-of-breed documents to create document templates with fill-in or multiple-choice sections for custom terms. Things like names can be entered once and populated across multiple documents, saving a bunch of time.
More to the point of this post, a law firm could give clients access to this forms library so that the clients themselves can create documents, but with only limited ability to make changes (note: I haven’t talked to FirstDocs about this and I am not sure if their product currently allows exactly this ability). Alteration of substantive terms would need to come back to the lawyer, which would help ensure that the documents are used only for their intended purposes.
I know there are firms and companies doing things like this today and I am sure FirstDocs is not the only company innovating in this area, but it was an eye-opener for me to see it in action. It became immediately clear to me that this type of document preparation is the future of legal services. So much of what we do is form and template-based already, but our habits and tools still require us to maintain substantial oversight of each project. We need ways to generate careful, top-quality documents with less attorney input on each project.
As Susskind says, more and more legal services are going to slide across the spectrum from custom/high-cost to commoditized/low-cost. Figuring out which ones, how to make it happen without sacrificing the duty of care to each client and how quickly it will all come about is the fun part. VLP is developing organizational and technology structures that will let us work at the vanguard of this trend and it is exciting to be part of.
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On Not Making a Federal Case of Every Transaction
Clients hire me for subject matter expertise and to help negotiate transactions. Having worked through a lot of deals in my 10 years as a lawyer, I have some sense of what works, what doesn’t, how to evaluate risk in a deal and how to draft an agreement that takes on just the right amount of risk.
The other side in the deal has an attorney doing the same thing, and once the deal is done we both step out and let the business principals begin the relationship that the agreement covers. In this process it is really easy for the lawyers to get hung up trying to perfectly craft every term in the agreement. This can drag out the negotiation and run up costs. If the negotiations are especially bruising it can also create a bit of tension for the principals at the start of the relationship.
How, then, can one avoid turning every contract into a major battle? Here are a few ideas:
1) Don’t get personal. Contract negotiation is not a battle of wills. It feels that way sometimes, especially when it seems like the other side is determined to throw out all of my suggestions and force its own terms on my client, but the focus needs to stay on reaching a deal that works, not a document I created. Egos should be checked at the door so the parties can focus on the facts.
2) Work with those facts. I talk through scenarios with my client and the other side and use concrete examples as much as possible so that everyone can understand why a certain term is important. Tit-for-tat negotiation where each side can only concede something if the other does can stay in the bazaar as far as I am concerned. I talk through my client’s economics (without giving up confidential information, of course) so the other side can understand why prices are set where they are, why insurance provisions can’t change for this deal, etc. When the other side understands the *reasons* they need to work much harder to counter my client’s proposals.
3) Listen actively. Asking questions and making a visible effort to understand the other side’s business requirements pays huge dividends. It might seem counterintuitive based on #2 above (if I ask the other side for its reasoning won’t it be harder for me to say no to them?), but it isn’t. The acts of listening, acknowledging concerns and finding ways to help the other side cover those concerns encourages them to do the same with us. When we all understand one another’s needs really well we can jointly work out collaborative solutions.
Every deal is different and some definitely go sideways despite everyone’s best efforts to keep things moving properly. Still, when I am able to approach a negotiation with these best practices in mind I find that the deal moves much more smoothly, quickly and with the best legal fees/contract value ratio. My clients like that.
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Urgency vs. Panic in Bike Racing and Software Licensing
At the beginning of this year Brad Feld posted a terrific piece on the Difference Between Panic and Urgency. The concept- that urgency is the steady, relentless pursuit of a goal while panic is overwhelming fear that causes irrational behavior- has been stuck in my head ever since and has begun to influence how I look at a number of situations. Here are a couple:
#1 Bicycle Racing. I race bicycles in my spare time. I entered a race recently that I thought I could win if everything went well. It didn’t and I had a mechanical problem that caused me to stop my bike while the other 35 people in my race kept on going.
I checked out my bike methodically and quickly, then hopped back on and tried to catch up by riding a little faster than the group. I knew that if I went all out I might catch up, but would probably run out of gas before the end of the race and finish poorly.
I didn’t catch everyone, but managed to pass a bunch of people and finish ninth. I would have liked to finish higher, but I was proud of myself for riding steady, smart and salvaging a result from a bad situation instead of surging forward and then blowing up before the finish.
#2 Software Licensing. I work with a lot of software companies that sell products in negotiated transactions- i.e. ones where I get involved to help work through agreements. Deadlines are always tight and sales personnel are under constant pressure to close deals.
The salespeople that impress me most in this environment are the ones who view each transaction as essential and work hard to keep things moving quickly, but without creating a fire drill every time or sacrificing terms in order to close a deal by X date.
The people who view each deal as urgent, but not panic-inducing seem to do the best job of conveying their company’s requirements to a customer and working through the deal terms most expeditiously. I model this behavior in every transaction I do, working through it steadily and with a sense of purpose to reach the best result in the fastest possible time frame.
As I said, the urgency vs. panic idea has been in my head all year. It’s a great way to think about how to reach goals.
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Keeping Things all in Context
[Note: I have taken about a 5 month hiatus from this blog and am suitably refreshed and ready to get back in the habit. This is a copy of a newsletter I sent recently. I hope you enjoy it.]
I worked through a complex contract recently where the other side had heavily revised my client’s standard form agreement. A number of terms were extremely important, and others less so.
I got to one paragraph about shipping requirements and rolled my eyes slightly when I saw that the other side had changed our “FOB origin” term to “FOB customer’s facility”, meaning that my client would be on the hook for lost property until the goods reached the customer’s facility.
The same day, I found the amazing photo below on the Web, courtesy of Clay Shirky’s Twitter page.
It was a timely visual reminder that much as we might like to take things like shipping for granted, we can’t always count on them.
With that in mind, I looked at the full context of the agreement:
*Do we have insurance to cover these kinds of losses? Yes- good.
*Does the agreement have “time of the essence” language, liquidated damages clauses or other penalties that could apply here? No- terrific.
Knowing that, we determined that this point was not likely to have major repercussions and we could focus on other terms in the deal.
The lesson? Context matters, and little points can turn into big ones if we don’t look at everything together. Great photos help.
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Managing Cash and Payroll Risk in Troubled Times
Payroll is the biggest expense for most businesses, especially young companies. When times get lean management looks for ways to stretch cash out as far as possible. The dilemma is that most companies would like to reduce their payroll expenses without reducing headcount, since with fewer people to do the work it may take even longer to get through a tight spot and get business flowing again. Here are some of the biggest traps to avoid.
Note- employment law is completely different from state to state in the US, so this post is even more California-centric than most I write. The *right* answer for a given situation is also entirely fact-specific, so don’t rely on this as advice for your company. Use this information to be forearmed, then go talk to your lawyer about strategies that will work for you.
1) Salary reduction. Everyone takes a haircut in their salaries. The question is how far salaries can be reduced. In many cases, it can go all the way down to minimum wage. The gotcha here is that there is a “special” minimum wage for computer professionals. I wish I knew how this law came to be, but the gist of it is that administrative employees can go down to minimum wage ($8.00 in California; $9.79 in San Francisco) but computer professionals need to be paid at least $79,050 per year (~$36/hour). Figuring out who is a computer professional goes beyond the scope of this blog and is a job for your friendly neighborhood employment lawyer.
2) Stock in Lieu of Cash. This is a popular one and a major gotcha. Don’t do it. The IRS sees stock and cash as equal compensation, so if Startup, Inc. pays Employee $50,000 worth of stock instead of $50,000 cash, Employee will still have $50,000 worth of income to report- and no cash to pay the taxes on it. Ouch.
California doesn’t like this strategy either. Under California law Employee will continue to have a claim for payment of the $50,000 until it is paid in cash. The claim can not be legally waived by payment of any other type of compensation, esp. company stock.
The even worse news is that employee wage claims are one area where directors and officers of a company can be held personally liable. There are cases where courts have declined to hold officers liable, but don’t count on it. The rule of thumb here is to act as if any wage-related actions are backed by the directors’ and officers’ personal bank accounts.
3) “Deferred” Salary. It is much easier to tell employees that you need to reduce their salaries temporarily and will catch them up once ___ event happens (e.g. a funding event, major customer deal, etc.) than to cut salaries permanently. Don’t do this either. In legal terms “deferred” means they are entitled to the full salary amount and can file claims for payment if it never comes through. If you need to reduce salaries do it permanently and tell people that *if* certain positive events happen the company will do its best to offer bonuses that recognize the sacrifices employees have made. No side-of-the-mouth promises to catch up, either. The bonus has to be truly discretionary to avoid the deferred/unpaid trap.
4) Switching to Independent Contractor Status. This is another common practice that can work in some cases, but gets overused. A company can reduce payroll expense dramatically by laying people off and then re-hiring them as independent contractors. The problem is that the IRS and California authorities have the final say as to who is a W-2 employee and who is a genuine contractor. An audit by either entity can result in huge penalties for companies that mis-classify personnel. There is so much gray area here as well that you can be certain either entity will find violations once they start looking. Again, talk to an employment lawyer for more information on how to properly classify people.
Tough times require creative measures. If my experiences during the last downturn are any guide a lot of companies will take on uncomfortable amounts of risk in the employment area so they can keep stay afloat. I hope this helps to point out some spots where the risk outweighs the benefits.
And once again, this is not legal advice for your company. These are complex issues and you need to talk to a lawyer in order to figure out the best way to navigate your company’s own particular minefield. Be careful out there!
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The Case of the Late Co-Founder
This situation comes up for me all the time and it is really hard to manage in a way that makes everyone happy.
The scenario is that founders A and B start a company and split the initial shares. Time passes, business happens. The company may or may not take on investors or issue equity to employees, but the business grows one way or another to the point that even by the most conservative valuation methodology- free cash on the balance sheet- the company can no longer justify the super-duper-low stock price the founders paid.
Person C them comes into the picture. C is an extremely high-powered executive who can bring tremendous value. A and B want to treat C as effectively a co-founder and give her a share of equity equal to theirs. The challenge is that since the company now has real value, C’s share of it can be expensive.
A, B and C come to me and say “please do your legal magic and make this all work out right”. Sadly, there is no magic here, just a bunch of unhappy compromises. There are three main intertwined issues: how much the stock costs, when to pay for it and what the tax consequences will be. Here’s my shot at acknowledging them and pointing out the options in 500 words or less.
What the Stock Costs
This is simple on its face. Per share value = company valuation / number of shares. The valuation number is the toughest variable to work out, and the methodology we use depends in part on IRS rules.
When to Pay For the Stock
Wherever possible, we want to buy the stock early. Owning stock outright starts the capital gains clock ticking and that can make a big difference when the company is sold (the SEC’s Rule 144 holding period starts at the same time). Owning a stock option does not count toward the capital gains period until the option is exercised.
What are the Tax Issues to Dodge?
The two big ones are capital gains rules, which require the stock to be held for one year before it is sold, and Section 409A, which imposes a penalty on stock or options issued as “deferred compensation” (i.e. basically any equity issued now and paid for later) if the stock or options are issued at a price deemed below fair market value (more on 409A here).
And here are the preferred ways to handle this situation, with their attendant drawbacks.
Buy the Stock
This is the cleanest option. Buying the stock outright avoids 409A issues completely and starts the capital gains clock. In my experience, though, most people do the math and decide that a year or two of sweat equity is one level of risk, but cash is something else entirely. Most people opt not to take this option, especially when the price is in the 5, 6 or 7 figure range.
Stock Options
This used to be everyone’s favorite way to handle this situation, and it may still be the best. If the company has real value, co-founder C could have a huge bill to get her stock. Options let her defer payment of the price until she knows the company is going to be worth something (esp. the night before the company is sold).
409A throws up one roadblock here. To avoid the 20% penalties, the company will need a valuation of its stock. This is often manageable, though no one likes paying ~$10,000 for the valuation.
The bigger drawback is that she will probably lose her shot at capital gains treatment. She would need to exercise a year before the company is sold to get into capital gains land, and if the exercise price is high that may not be feasible.
Historically, more of my clients have elected this option than any other. No one likes paying taxes, but at least this option limits the risks (assuming the 409A issue is handled well).
Promissory Note
Back in the dot-com days this was popular. Executive buys the stock and gives the company a promissory note for the purchase price, intending that the company would either forgive repayment or Executive would repay it from sale of the stock in a merger or IPO. When the companies hit the wall, however, bankruptcy trustees seized on these notes as collectible debt and a number of very unhappy conversations followed (”you mean I got almost no salary, my stock is worthless *and* I need to pay you $200,000?!?”).
A promissory note would work for C’s purposes, but it carries a lot of risk. It is a promise to pay the company and if things don’t go as expected C can find herself not merely uncompensated for her time spent with the company, but actually owing money to it. Once in a while a situation arises where this arrangement can make sense, but it is rare.
Is That It?
That’s what A, B and C always ask me when we talk through the possibilities. Unfortunately the answer is yes. We use the most favorable valuation we can justify to bring the price down (assuming we have any flexibility there), but in the end the whole purchase price must be paid. C can pay up front or she can pay later, but there is no way to do what clients really want- which is to sneak C in at the original founder price.
The lesson? There are two, I think. (1) get in as early as possible; and (2) get your stock documented right when you arrive before the deal gets any worse.
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Doing Something About Twitter User Name Conflict
I have recently lamented the lack of clarity around user name ownership on Twitter and other social networks. My friend Erik Heels has a proposal to do something about it- namely to create a uniform username dispute resolution policy promoted by the major social networking sites.
One of his main points is that trying to differentiate user name conflict from domain name conflict is wrong. Companies have brands and use those brand names as domain names and user names. E.g. yahoo.com is also twitter.com/yahoo.
User name policies have a Wild West feeling right now. Businesses are just figuring out how to work with lightweight social networks. It won’t take too long for them to get tired of fighting the same user name battles over and over. Erik has a great proposal. Heavyweight advertisers everywhere take note: start leaning on the social networks to get their acts together and set some clear rules for the game.
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Contract Management Strategies
Enterprise software companies sooner or later accumulate a lot of paper governing customer contracts. Maybe half the time customers accept a company’s standard sales or license agreement without substantive comment, but the other half gets negotiated- sometimes a little, sometimes heavily and sometimes the customer insists that its own paperwork govern.
Managing all these terms is complex and painstaking work. I know a few large companies that take a draconian approach to the task- they only circulate agreements in pdf form (to prevent changes) and any revised terms go in an amendment instead of the original document. The theory is that the presence of an amendment flags the fact that there are non-standard terms.
In practice this makes a giant mess. It should be possible to draft amendments that are very specific and clear about which terms have been changed and how, but it never seems to work that way. I think the companies that get to the stage of doing this get overly caught up in process, the lawyers making the changes are not connected to the deal being done and the terms end up more confusing than they should be.
You need to be a really big company to take that approach in any case, so what works better for the average company? As with many other things, the answer is to make sure that the information doesn’t live only in the heads of certain people. Write it down. Put someone in charge of collecting signed contracts and tell that person to make up a spreadsheet (for starters, at least) that notes any variations from standard.
As the lawyer I wish I could tell the sales teams they won’t get paid until they tell the contract managers about any wrinkles, but I know I’d get overruled. Still, collect the info right when the deal closes before everyone forgets about it, then work on keeping it up to date. It’s an ugly “uh-oh” when you realize you have inadvertently been in breach of a contract’s terms because you didn’t know it was non-standard.
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Digital Rights Progress in the So-called Internet-Speed Era
I just watched this video of Lawrence Lessig’s talk in 2007 at the TED Conference (thanks LA). It gives a brief history of copyright and recorded media, going back to John Philip Sousa’s vehement opposition to the very first audio recordings for fear that they would cause people to stop playing music and singing on the porch at night, and eventually lose their vocal cords entirely (!).
The thing that really grabbed me was a fight between ASCAP and upstart copyright clearinghouse BMI in 1939. ASCAP have the “top shelf” artists and recordings locked up, but was so afraid of radio that it kept raising royalty rates beyond what any broadcasters were willing to pay. BMI had second-tier content, but its pricing was better so it got its music on the radio and forced ASCAP in 1941 to cave in to the new radio-driven marketplace realities.
Contrast this with the RIAA today. They have been fighting online distribution of music for 10 years now (the Napster case was decided in 2001) and the battle shows no sign of ending soon.
The issues are different and more complex these days for sure (where *exactly* is the line between fair-use mashups and flat-out copying songs without paying for them?), but still- it’s gone on far enough.
One of Lessig’s best points is that the battle has created two extreme polar mindsets: the “sue ‘em all” studios on one side and the “all music should be free” zealots on the other. Let’s just agree now that digital music is going to cost less than it did on CD, most people will still pay something for it and a few will persistently refuse. Then we can all focus on finding new and interesting ways to increase the ratio of buyers to non-buyers instead of harassing bands’ biggest fans.
Related articles by Zemanta RIAA finds its soul, will stop suing individuals downloading music Metallica stops punishing fans on YouTube [Copyfight] Outdated Copyright Laws Need a Do Over DiMA, NARM Fight Royalties on Audio Clips End the Copyright War ![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=7d4144b9-ef0a-4f96-8842-0084d6fdef52)
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Passion, Idealism and Gross Domestic Happiness in 2009
There is a sweet spot for companies (and individuals) between the profit motive and the idea of making the world a better place. Milton Friedman notwithstanding, most corporate managers hope to do more than line shareholders’ pockets.
Glenn Kelman, CEO of online real estate company Redfin, has a post about the “mercenaries” vs. the “idealists” in business. He makes two insightful, tightly intertwined points:
1) Many top-performing companies get that way- in part- by pursuing an idealistic goal. His best example was of Alcoa chasing a specific, hard-nosed figure. It wasn’t cash-related, though. It was reducing the number of employee work-related injuries, which improved morale and reduced labor costs, one of Alcoa’s biggest expenses.
2) We frequently work the other way too- caring deeply about something and then figuring out how to make money from it.
Glenn’s point is that the green-eyeshade types will miss the boat by focusing only on the numbers. It takes ideals- focused ideals- to build a really successful business.
Jumping threads only slightly, one of my goals for 2009 is to focus on my family’s equivalent of Bhutan’s Gross National Happiness index:
GNH, like the Genuine Progress Indicator, refers to the concept of a quantitative measurement of well-being and happiness. The two measures are both motivated by the notion that subjective measures like well-being are more relevant and important than more objective measures like consumption.
Here’s to a year of economic and personal well-being in 2009.
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A Twitter Name Conflict Resolved in Record Time
Steve Poland’s open letter to Evan Williams last week hit Techmeme and apparently got widely read. Another Twitter user name “dispute” sparked, caught fire and went out all in one Saturday- yesterday- on what is probably one of the slowest weekends of the year.
The Dispute
A school teacher named Colin adopted the user name @room214, which also happens to be the name of a social media agency.
I think the episode started with this tweet from the agency, using the name @room_214: 
Colin responded that he likes the name and uses it in other places as well, so no. From what I can tell the agency did not file a complaint with Twitter itself, though it sounds like someone might have sent Colin a nastygram threatening to do so.
The Speedy Resolution
The episode ended about 12 hours later when the co-founder of the agency posted a note saying that the note came from an overeager employee, and that the agency itself had no desire to push Colin off the name.
The name itself is totally banal- @room214. There is no practical way for anyone to know that it is also the name of a business, and there is nothing famous or proprietary about it. Twitter’s terms of service have two sections that might allow them to change a user name (”You must not abuse, harass, threaten, impersonate or intimidate other Twitter users”; and “We reserve the right to reclaim usernames on behalf of businesses or individuals that hold legal claim or trademark on those usernames”) and Colin violated neither as far as I can tell, so by my reading the agency would be out of luck.
The Conclusion
This episode ended up a whole lot of nothing. It does show that people get attached to their names and are starting to wonder how much to rely on them. Steve’s suggestion is to create paid Twitter premium accounts that “protect” user names like telephone numbers or domain names.
Twitter is the biggest network that uses unique user names to identify users (I think) rather than email addresses or Facebook-style numerical identifiers, but the issue goes beyond just Twitter. I probably have accounts as @park3 on 20 different services. I would not pay money for that name on most of them, but I might pay a very small amount on 3-5 or so- probably not more than $10/year or so since I don’t make money from any of them (and i’m cheap!). Would I use fewer services if I knew I had to pay to be guaranteed my preferred name? Would I search harder to find a really “unique” name? Probably not on both counts. Do I just need to start a user name-reservation-and-arbitration business? Hmm.
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Twitter Username Conflict and Password Function Creep
My friend Steve Poland blogged a few days ago about the experience of losing his @celtics Twitter account. The story got picked up on Techmeme and made the rounds on the Internet, which was a wondeful thing. It sounds as though the Boston Celtics decided they wanted to try out Twitter, saw that @celtics was taken and successfully petitioned Twitter to yank it from Steve.
I feel bad for Steve not so much for the fact that the name was taken from him as for the way it was done. He posted the notification email from Twitter and it was blunt, unsympathetic and offered no recourse to someone who believed he had been wronged. There are good ways and bad ways to convey a message and if ever there was one likely to inspire a rant this was it.
The consensus from around the Internet agrees here, and says that while everyone understands intellectually that Twitter owns user names (unlike phone numbers or domain names) there should be a fair review process. Steve has a great example in @STP, his personal Twitter account and also the name of a brand of motor oil. Steve never Twitters about motor oil that I am aware of, so by Twitter’s own rules there is no “impersonation” happening and Twitter should not be permitted to take the name away.
But what if it does anyway? And what if Steve also has “STP” accounts on 17 other social media sites (or every one listed at Username Check)? As the social media business figures out how to charge people for services I wonder if someone needs to step up as a global user name mediator so that individuals and companies don’t end up fighting the same battle in multiple forums simultaneously, where they might well win some and lose some.
Twitter seems to have jumped way up in the public consciousness recently. I imagine they are dealing with a lot of these issues right now. I bet they wish they could hand them off to someone else as well.
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And as long as I am on the subject of Twitter growing pains, I am fervently looking forward to the day I don’t have to give my Twitter password to every site that wants to plug into my account. Erik Heels recommends changing Twitter passwords regularly, probably for this very reason. I am going to have to write down all the places that have my Twitter credentials so that I can start doing that.
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The World’s Longest-Running Trademark Dispute
I don’t know for a fact that the fight between Anheuser-Busch and Budejovicky Budvar NP over the marks “Budweiser” and “Bud” is officially the oldest continually active trademark dispute in the world (Erik?), but it must be close.
The Budvar brewery was founded in 1895. The beer was named for the Germanized version of the city in which it was founded, Budweis (České Budějovice in Czech). Distribution was extremely limited until the second half of the twentieth century. Anheuser-Busch was founded in the 1850s and introduced the Budweiser brand in 1876.
For decades the two brands existed in parallel, using very similar names and script for their logos, but not directly competing on a large scale. That changed when Anheuser started selling Budweiser in Europe in earnest and the two companies have been playing a real-world version of the game Risk ever since, locking up trademark rights country by country. Budvar obtained first rights in Czechoslovakia, France and Austria and Anheuser had primary rights in the US.
Anheuser won in Australia, New Zealand and 23 or 27 EU member states, among others. Budvar won in Japan, but seems to be losing the war. This week, though, a European Union court denied Anheuser’s move to register the Budweiser mark across the EU.
It may not be much more than a symbolic victory for Budvar. One has to think that the cost of litigation is a much bigger issue for tiny Budvar than for giant Anheuser, now owned by mega-giant InBev. The multi-jurisdiction chess match is fascinating to watch, though.
[Full disclosure: I once carried a six pack of Czech Budweiser home from Prague]
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Have Your Social Benefit and Work off that Excess Energy
A friend of mine turned me on to a company called One. They sell bottled water and donate all the profits to a foundation that build playground-water pumps in southern Africa.
What on Earth, one might ask, is a playground-water pump? It is an extremely clever device that harnesses a nearly
Image courtesy www.playpumps.org
inexhaustible supply of energy to pump clean water from deep wells by turning the pump “engine” into a playground-style merry-go-round for kids.
This is very clever. If my kids are any measure, this pump will have enough energy to run for hours on end, and at the same time the kids’ natural energy can be channeled to good effect bringing clean water to people who need it.
When my kids get hyperactive I threaten to install a giant hamster wheel in the house and putting them on it for an hour or so, but I’ve never followed through. PlayPumps has done just that- in a much smarter way. Kudos to them.
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Managing Cash and Payroll Risk in Troubled Times
Payroll is the biggest expense for most businesses, especially young companies. When times get lean management looks for ways to stretch cash out as far as possible. The dilemma is that most companies would like to reduce their payroll expenses without reducing headcount, since with fewer people to do the work it may take even longer to get through a tight spot and get business flowing again. Here are some of the biggest traps to avoid.
Note- employment law is completely different from state to state in the US, so this post is even more California-centric than most I write. The *right* answer for a given situation is also entirely fact-specific, so don’t rely on this as advice for your company. Use this information to be forearmed, then go talk to your lawyer about strategies that will work for you.
1) Salary reduction. Everyone takes a haircut in their salaries. The question is how far salaries can be reduced. In many cases, it can go all the way down to minimum wage. The gotcha here is that there is a “special” minimum wage for computer professionals. I wish I knew how this law came to be, but the gist of it is that administrative employees can go down to minimum wage ($8.00 in California; $9.79 in San Francisco) but computer professionals need to be paid at least $79,050 per year (~$36/hour). Figuring out who is a computer professional goes beyond the scope of this blog and is a job for your friendly neighborhood employment lawyer.
2) Stock in Lieu of Cash. This is a popular one and a major gotcha. Don’t do it. The IRS sees stock and cash as equal compensation, so if Startup, Inc. pays Employee $50,000 worth of stock instead of $50,000 cash, Employee will still have $50,000 worth of income to report- and no cash to pay the taxes on it. Ouch.
California doesn’t like this strategy either. Under California law Employee will continue to have a claim for payment of the $50,000 until it is paid in cash. The claim can not be legally waived by payment of any other type of compensation, esp. company stock.
The even worse news is that employee wage claims are one area where directors and officers of a company can be held personally liable. There are cases where courts have declined to hold officers liable, but don’t count on it. The rule of thumb here is to act as if any wage-related actions are backed by the directors’ and officers’ personal bank accounts.
3) “Deferred” Salary. It is much easier to tell employees that you need to reduce their salaries temporarily and will catch them up once ___ event happens (e.g. a funding event, major customer deal, etc.) than to cut salaries permanently. Don’t do this either. In legal terms “deferred” means they are entitled to the full salary amount and can file claims for payment if it never comes through. If you need to reduce salaries do it permanently and tell people that *if* certain positive events happen the company will do its best to offer bonuses that recognize the sacrifices employees have made. No side-of-the-mouth promises to catch up, either. The bonus has to be truly discretionary to avoid the deferred/unpaid trap.
4) Switching to Independent Contractor Status. This is another common practice that can work in some cases, but gets overused. A company can reduce payroll expense dramatically by laying people off and then re-hiring them as independent contractors. The problem is that the IRS and California authorities have the final say as to who is a W-2 employee and who is a genuine contractor. An audit by either entity can result in huge penalties for companies that mis-classify personnel. There is so much gray area here as well that you can be certain either entity will find violations once they start looking. Again, talk to an employment lawyer for more information on how to properly classify people.
Tough times require creative measures. If my experiences during the last downturn are any guide a lot of companies will take on uncomfortable amounts of risk in the employment area so they can keep stay afloat. I hope this helps to point out some spots where the risk outweighs the benefits.
And once again, this is not legal advice for your company. These are complex issues and you need to talk to a lawyer in order to figure out the best way to navigate your company’s own particular minefield. Be careful out there!
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The Case of the Late Co-Founder
This situation comes up for me all the time and it is really hard to manage in a way that makes everyone happy.
The scenario is that founders A and B start a company and split the initial shares. Time passes, business happens. The company may or may not take on investors or issue equity to employees, but the business grows one way or another to the point that even by the most conservative valuation methodology- free cash on the balance sheet- the company can no longer justify the super-duper-low stock price the founders paid.
Person C them comes into the picture. C is an extremely high-powered executive who can bring tremendous value. A and B want to treat C as effectively a co-founder and give her a share of equity equal to theirs. The challenge is that since the company now has real value, C’s share of it can be expensive.
A, B and C come to me and say “please do your legal magic and make this all work out right”. Sadly, there is no magic here, just a bunch of unhappy compromises. There are three main intertwined issues: how much the stock costs, when to pay for it and what the tax consequences will be. Here’s my shot at acknowledging them and pointing out the options in 500 words or less.
What the Stock Costs
This is simple on its face. Per share value = company valuation / number of shares. The valuation number is the toughest variable to work out, and the methodology we use depends in part on IRS rules.
When to Pay For the Stock
Wherever possible, we want to buy the stock early. Owning stock outright starts the capital gains clock ticking and that can make a big difference when the company is sold (the SEC’s Rule 144 holding period starts at the same time). Owning a stock option does not count toward the capital gains period until the option is exercised.
What are the Tax Issues to Dodge?
The two big ones are capital gains rules, which require the stock to be held for one year before it is sold, and Section 409A, which imposes a penalty on stock or options issued as “deferred compensation” (i.e. basically any equity issued now and paid for later) if the stock or options are issued at a price deemed below fair market value (more on 409A here).
And here are the preferred ways to handle this situation, with their attendant drawbacks.
Buy the Stock
This is the cleanest option. Buying the stock outright avoids 409A issues completely and starts the capital gains clock. In my experience, though, most people do the math and decide that a year or two of sweat equity is one level of risk, but cash is something else entirely. Most people opt not to take this option, especially when the price is in the 5, 6 or 7 figure range.
Stock Options
This used to be everyone’s favorite way to handle this situation, and it may still be the best. If the company has real value, co-founder C could have a huge bill to get her stock. Options let her defer payment of the price until she knows the company is going to be worth something (esp. the night before the company is sold).
409A throws up one roadblock here. To avoid the 20% penalties, the company will need a valuation of its stock. This is often manageable, though no one likes paying ~$10,000 for the valuation.
The bigger drawback is that she will probably lose her shot at capital gains treatment. She would need to exercise a year before the company is sold to get into capital gains land, and if the exercise price is high that may not be feasible.
Historically, more of my clients have elected this option than any other. No one likes paying taxes, but at least this option limits the risks (assuming the 409A issue is handled well).
Promissory Note
Back in the dot-com days this was popular. Executive buys the stock and gives the company a promissory note for the purchase price, intending that the company would either forgive repayment or Executive would repay it from sale of the stock in a merger or IPO. When the companies hit the wall, however, bankruptcy trustees seized on these notes as collectible debt and a number of very unhappy conversations followed (”you mean I got almost no salary, my stock is worthless *and* I need to pay you $200,000?!?”).
A promissory note would work for C’s purposes, but it carries a lot of risk. It is a promise to pay the company and if things don’t go as expected C can find herself not merely uncompensated for her time spent with the company, but actually owing money to it. Once in a while a situation arises where this arrangement can make sense, but it is rare.
Is That It?
That’s what A, B and C always ask me when we talk through the possibilities. Unfortunately the answer is yes. We use the most favorable valuation we can justify to bring the price down (assuming we have any flexibility there), but in the end the whole purchase price must be paid. C can pay up front or she can pay later, but there is no way to do what clients really want- which is to sneak C in at the original founder price.
The lesson? There are two, I think. (1) get in as early as possible; and (2) get your stock documented right when you arrive before the deal gets any worse.
Related articles by Zemanta 409A: the worst single tax provision of the Bush era When to Issue Stock Options
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Doing Something About Twitter User Name Conflict
I have recently lamented the lack of clarity around user name ownership on Twitter and other social networks. My friend Erik Heels has a proposal to do something about it- namely to create a uniform username dispute resolution policy promoted by the major social networking sites.
One of his main points is that trying to differentiate user name conflict from domain name conflict is wrong. Companies have brands and use those brand names as domain names and user names. E.g. yahoo.com is also twitter.com/yahoo.
User name policies have a Wild West feeling right now. Businesses are just figuring out how to work with lightweight social networks. It won’t take too long for them to get tired of fighting the same user name battles over and over. Erik has a great proposal. Heavyweight advertisers everywhere take note: start leaning on the social networks to get their acts together and set some clear rules for the game.
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Contract Management Strategies
Enterprise software companies sooner or later accumulate a lot of paper governing customer contracts. Maybe half the time customers accept a company’s standard sales or license agreement without substantive comment, but the other half gets negotiated- sometimes a little, sometimes heavily and sometimes the customer insists that its own paperwork govern.
Managing all these terms is complex and painstaking work. I know a few large companies that take a draconian approach to the task- they only circulate agreements in pdf form (to prevent changes) and any revised terms go in an amendment instead of the original document. The theory is that the presence of an amendment flags the fact that there are non-standard terms.
In practice this makes a giant mess. It should be possible to draft amendments that are very specific and clear about which terms have been changed and how, but it never seems to work that way. I think the companies that get to the stage of doing this get overly caught up in process, the lawyers making the changes are not connected to the deal being done and the terms end up more confusing than they should be.
You need to be a really big company to take that approach in any case, so what works better for the average company? As with many other things, the answer is to make sure that the information doesn’t live only in the heads of certain people. Write it down. Put someone in charge of collecting signed contracts and tell that person to make up a spreadsheet (for starters, at least) that notes any variations from standard.
As the lawyer I wish I could tell the sales teams they won’t get paid until they tell the contract managers about any wrinkles, but I know I’d get overruled. Still, collect the info right when the deal closes before everyone forgets about it, then work on keeping it up to date. It’s an ugly “uh-oh” when you realize you have inadvertently been in breach of a contract’s terms because you didn’t know it was non-standard.
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Digital Rights Progress in the So-called Internet-Speed Era
I just watched this video of Lawrence Lessig’s talk in 2007 at the TED Conference (thanks LA). It gives a brief history of copyright and recorded media, going back to John Philip Sousa’s vehement opposition to the very first audio recordings for fear that they would cause people to stop playing music and singing on the porch at night, and eventually lose their vocal cords entirely (!).
The thing that really grabbed me was a fight between ASCAP and upstart copyright clearinghouse BMI in 1939. ASCAP have the “top shelf” artists and recordings locked up, but was so afraid of radio that it kept raising royalty rates beyond what any broadcasters were willing to pay. BMI had second-tier content, but its pricing was better so it got its music on the radio and forced ASCAP in 1941 to cave in to the new radio-driven marketplace realities.
Contrast this with the RIAA today. They have been fighting online distribution of music for 10 years now (the Napster case was decided in 2001) and the battle shows no sign of ending soon.
The issues are different and more complex these days for sure (where *exactly* is the line between fair-use mashups and flat-out copying songs without paying for them?), but still- it’s gone on far enough.
One of Lessig’s best points is that the battle has created two extreme polar mindsets: the “sue ‘em all” studios on one side and the “all music should be free” zealots on the other. Let’s just agree now that digital music is going to cost less than it did on CD, most people will still pay something for it and a few will persistently refuse. Then we can all focus on finding new and interesting ways to increase the ratio of buyers to non-buyers instead of harassing bands’ biggest fans.
Related articles by Zemanta RIAA finds its soul, will stop suing individuals downloading music Metallica stops punishing fans on YouTube [Copyfight] Outdated Copyright Laws Need a Do Over DiMA, NARM Fight Royalties on Audio Clips End the Copyright War
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Passion, Idealism and Gross Domestic Happiness in 2009
There is a sweet spot for companies (and individuals) between the profit motive and the idea of making the world a better place. Milton Friedman notwithstanding, most corporate managers hope to do more than line shareholders’ pockets.
Glenn Kelman, CEO of online real estate company Redfin, has a post about the “mercenaries” vs. the “idealists” in business. He makes two insightful, tightly intertwined points:
1) Many top-performing companies get that way- in part- by pursuing an idealistic goal. His best example was of Alcoa chasing a specific, hard-nosed figure. It wasn’t cash-related, though. It was reducing the number of employee work-related injuries, which improved morale and reduced labor costs, one of Alcoa’s biggest expenses.
2) We frequently work the other way too- caring deeply about something and then figuring out how to make money from it.
Glenn’s point is that the green-eyeshade types will miss the boat by focusing only on the numbers. It takes ideals- focused ideals- to build a really successful business.
Jumping threads only slightly, one of my goals for 2009 is to focus on my family’s equivalent of Bhutan’s Gross National Happiness index:
GNH, like the Genuine Progress Indicator, refers to the concept of a quantitative measurement of well-being and happiness. The two measures are both motivated by the notion that subjective measures like well-being are more relevant and important than more objective measures like consumption.
Here’s to a year of economic and personal well-being in 2009.
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A Twitter Name Conflict Resolved in Record Time
Steve Poland’s open letter to Evan Williams last week hit Techmeme and apparently got widely read. Another Twitter user name “dispute” sparked, caught fire and went out all in one Saturday- yesterday- on what is probably one of the slowest weekends of the year.
The Dispute
A school teacher named Colin adopted the user name @room214, which also happens to be the name of a social media agency.
I think the episode started with this tweet from the agency, using the name @room_214:
Colin responded that he likes the name and uses it in other places as well, so no. From what I can tell the agency did not file a complaint with Twitter itself, though it sounds like someone might have sent Colin a nastygram threatening to do so.
The Speedy Resolution
The episode ended about 12 hours later when the co-founder of the agency posted a note saying that the note came from an overeager employee, and that the agency itself had no desire to push Colin off the name.
The name itself is totally banal- @room214. There is no practical way for anyone to know that it is also the name of a business, and there is nothing famous or proprietary about it. Twitter’s terms of service have two sections that might allow them to change a user name (”You must not abuse, harass, threaten, impersonate or intimidate other Twitter users”; and “We reserve the right to reclaim usernames on behalf of businesses or individuals that hold legal claim or trademark on those usernames”) and Colin violated neither as far as I can tell, so by my reading the agency would be out of luck.
The Conclusion
This episode ended up a whole lot of nothing. It does show that people get attached to their names and are starting to wonder how much to rely on them. Steve’s suggestion is to create paid Twitter premium accounts that “protect” user names like telephone numbers or domain names.
Twitter is the biggest network that uses unique user names to identify users (I think) rather than email addresses or Facebook-style numerical identifiers, but the issue goes beyond just Twitter. I probably have accounts as @park3 on 20 different services. I would not pay money for that name on most of them, but I might pay a very small amount on 3-5 or so- probably not more than $10/year or so since I don’t make money from any of them (and i’m cheap!). Would I use fewer services if I knew I had to pay to be guaranteed my preferred name? Would I search harder to find a really “unique” name? Probably not on both counts. Do I just need to start a user name-reservation-and-arbitration business? Hmm.
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Twitter Username Conflict and Password Function Creep
My friend Steve Poland blogged a few days ago about the experience of losing his @celtics Twitter account. The story got picked up on Techmeme and made the rounds on the Internet, which was a wondeful thing. It sounds as though the Boston Celtics decided they wanted to try out Twitter, saw that @celtics was taken and successfully petitioned Twitter to yank it from Steve.
I feel bad for Steve not so much for the fact that the name was taken from him as for the way it was done. He posted the notification email from Twitter and it was blunt, unsympathetic and offered no recourse to someone who believed he had been wronged. There are good ways and bad ways to convey a message and if ever there was one likely to inspire a rant this was it.
The consensus from around the Internet agrees here, and says that while everyone understands intellectually that Twitter owns user names (unlike phone numbers or domain names) there should be a fair review process. Steve has a great example in @STP, his personal Twitter account and also the name of a brand of motor oil. Steve never Twitters about motor oil that I am aware of, so by Twitter’s own rules there is no “impersonation” happening and Twitter should not be permitted to take the name away.
But what if it does anyway? And what if Steve also has “STP” accounts on 17 other social media sites (or every one listed at Username Check)? As the social media business figures out how to charge people for services I wonder if someone needs to step up as a global user name mediator so that individuals and companies don’t end up fighting the same battle in multiple forums simultaneously, where they might well win some and lose some.
Twitter seems to have jumped way up in the public consciousness recently. I imagine they are dealing with a lot of these issues right now. I bet they wish they could hand them off to someone else as well.
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And as long as I am on the subject of Twitter growing pains, I am fervently looking forward to the day I don’t have to give my Twitter password to every site that wants to plug into my account. Erik Heels recommends changing Twitter passwords regularly, probably for this very reason. I am going to have to write down all the places that have my Twitter credentials so that I can start doing that.
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The World’s Longest-Running Trademark Dispute
I don’t know for a fact that the fight between Anheuser-Busch and Budejovicky Budvar NP over the marks “Budweiser” and “Bud” is officially the oldest continually active trademark dispute in the world (Erik?), but it must be close.
The Budvar brewery was founded in 1895. The beer was named for the Germanized version of the city in which it was founded, Budweis (České Budějovice in Czech). Distribution was extremely limited until the second half of the twentieth century. Anheuser-Busch was founded in the 1850s and introduced the Budweiser brand in 1876.
For decades the two brands existed in parallel, using very similar names and script for their logos, but not directly competing on a large scale. That changed when Anheuser started selling Budweiser in Europe in earnest and the two companies have been playing a real-world version of the game Risk ever since, locking up trademark rights country by country. Budvar obtained first rights in Czechoslovakia, France and Austria and Anheuser had primary rights in the US.
Anheuser won in Australia, New Zealand and 23 or 27 EU member states, among others. Budvar won in Japan, but seems to be losing the war. This week, though, a European Union court denied Anheuser’s move to register the Budweiser mark across the EU.
It may not be much more than a symbolic victory for Budvar. One has to think that the cost of litigation is a much bigger issue for tiny Budvar than for giant Anheuser, now owned by mega-giant InBev. The multi-jurisdiction chess match is fascinating to watch, though.
[Full disclosure: I once carried a six pack of Czech Budweiser home from Prague]
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Have Your Social Benefit and Work off that Excess Energy
A friend of mine turned me on to a company called One. They sell bottled water and donate all the profits to a foundation that build playground-water pumps in southern Africa.
What on Earth, one might ask, is a playground-water pump? It is an extremely clever device that harnesses a nearly
Image courtesy www.playpumps.org
inexhaustible supply of energy to pump clean water from deep wells by turning the pump “engine” into a playground-style merry-go-round for kids.
This is very clever. If my kids are any measure, this pump will have enough energy to run for hours on end, and at the same time the kids’ natural energy can be channeled to good effect bringing clean water to people who need it.
When my kids get hyperactive I threaten to install a giant hamster wheel in the house and putting them on it for an hour or so, but I’ve never followed through. PlayPumps has done just that- in a much smarter way. Kudos to them.
Related articles by Zemanta Josh Dozoretz: Play Pumps
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Joe Satriani vs. Coldplay
Plenty of mashups have ended up in copyright disputes and litigation over sampling rights. Here’s one that runs things in the other direction.
Joe Satriani sued Coldplay last week for plaigiarizing his song If I Could Fly in Coldplay’s Viva La Vida. Someone made a mashup of the two songs after the suit was filed to show the similarities, reversing the normal order of these things and making a case of life imitating litigation.
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Every Stupid Thing You Ever Do Will Wind up on the Internet
Until I saw the recent story about a New England Patriots cheerleader fired over pictures posted on Facebook I wasn’t aware of people actually losing their jobs over things posted on the internet. Maybe I just wasn’t paying attention.
In the past week I have seen stories about a woman disqualified from an education degree program because of a photo she posted of her teacher-mentor (though it sounds like that may have been the last of many problems), an entire Virgin Atlantic flight crew fired for posting on Virgin’s Facebook group page that planes were full of cockroaches and passengers were white trash (or the English equivalent) and incoming White House speechwriting candidate Jon Favreau embarrassed by a photo of himself groping a lifesize cardboard cutout of Hillary Clinton.
The latter article points out that the Obama administration’s screening process includes questions about applicants’ social network profiles, copies of all writings, including blogs or comments on blogs, or sent emails, text messages or IMs that could be a source of embarrassment to the applicant or the administration.
The purpose is clearly to bring out as many skeletons as possible, but the scope of the questions points out the futility. Drunken camera phone photos will emerge, and in another 20 years they may be pictures of candidates themselves rather than lower-level job applicants.
What I find most interesting is the comments on the education degree article cited above. A number of readers seem to feel that people should be free to post whatever they like without impact to their professional lives. I don’t agree- the things a person chooses to post publicly speaks to his/her judgment. At the same time, context is everything. Everyone does stupid things from time to time and people shouldn’t be judged solely on them.
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License Agreement Review Checklist
License Agreement Review Checklist
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Insurance | |
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How to Read a License Agreement
I read a lot of license agreements. A few of them are concise and simple to figure out, but most are far too long and confusing.
It is not effective to read the agreements straight through from start to finish. My eyes usually start to glaze over after about page 3, and after page 6 almost anything else within reach seems more interesting than the line I am on at the time.
A better way to read is to take it apart into sections. Figure out the important points you need to know and go find those first, then go back and see how all the other words come together around the important elements.
I made a checklist to help me do this well. When I get a new agreement I print out the checklist, then comb the agreement looking for all of these parts. With that basic information in hand I can go back to the whole thing and pay attention to all the picky details. As a bonus, once I force myself to find and write down the key terms I tend to understand them much more deeply.
Note that my checklist has lots of extra blank lines. It is a work in progress and should ideally be modified every time to cover the special attributes of each deal. Try it out and let me know what other essential terms should be included as “standard”.
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Another Hard Knock for Crowdsourced Securities, and a Glimmer of Hope
I have written a bunch about applying principles of crowdsourcing to securities offerings, including an article last year in Business Week. The prospects have been dim. I also met Kiva.org founder Matt Flannery a couple of years ago and asked him if the company would pay interest on Kiva loans. His response was “No. We do not want to be regulated like a bank”.
It comes as no surprise, then, that the SEC has told crowdsourced lender Prosper.com that it needs to stop matching lenders with buyers on its site. Borrowers on Prosper submit loan requests, lenders bid for them, then Prosper packages the loans and manages the borrower-lender relationships. Borrowers and lenders never know one another’s identities.
The SEC reviewed the facts and applicable law and decided that the operation was really a sale of securities that needed to be registered, esp. based on the facts that the lenders put money in explicitly looking for a return and have essentially no ability to affect transactions- the loans are passive investments intended to make money.
Again, no great surprise here. There is (still) a lot of capital available in retail-level amounts and it would be great to see Prosper go through the SEC registration process and come out the other side with a vehicle people can use to borrow money and to make some additional income in a novel way.
My guess is that Prosper has known this was coming for some time and was simply building enough business to make the registration process worth the expense. The SEC reports that it has facilitated $174M in loans, so it could well be there. I look forward to seeing them register, come back with an SEC-compliant and take a big step forward for crowdsourced securities everywhere. Fittingly, the SEC registration documents are all public records, so maybe the next company can use Prosper’s process and SEC feedback to make the process a little smoother the next time around.
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How to (and how not to) Break Bad News
I have been a micro-lender to Kiva.org (nano-lender might a more accurate description of the loans I have made) since I met and was inspired by co-founder Matt Flannery a couple years ago.
I have made a couple of loans in that period, all of which were paid back quietly and timely. I got updates on the borrower’s businesses and it seemed like the loans had helped the borrowers a lot. So far so good.
I got an email this evening regarding my most recent loan, which was partially repaid several months ago, but has been quiet for a long time. The message said:
After detailed investigation by Kiva representatives, our team has determined that further repayments on your loan are highly unlikely.
The message goes on to say that 95% of Kiva loans are repaid. Default on this loan doesn’t bother me much and I will continue to lend through Kiva.
What I liked about the message was it simple directness. It didn’t try to sugarcoat the message. It just came out and said “it didn’t work”.
At the same time, I had to click a link in the email to get all the facts. In this case it was not that the entrepreneur I lent money to went out of business, but that the field partner they worked with in the country had systematically over-requested loans and kept some of the cash for itself.
This is a more serious problem for Kiva. I really appreciate their candor in telling me I am not likely to get my money back, but if I hadn’t clicked through I would have gotten a completely different view of the problem.
I don’t mean to bash Kiva here. They do fantastic work. Still, the way to deal with setbacks in my book is to acknowledge them and let people know how you are going to avoid them happening again (note- this applies to multinational banking companies as well as microlenders). I have definitely had my share of errors and setbacks, and I have found that the best way to deal with them by far has always been to address them promptly, fully and with a solution in hand.
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Microblogging and Effective Communcation Methods in the Enterprise
I have been on Twitter for about 18 months now and continually marvel at how it has helped me connect and re-connect with people I see infrequently. I joined my new law firm, Virtual Law Partners, in August of this year and Yammer launched shortly thereafter. VLP has no offices, so there is no water cooler around which people can congregate and socialize. I created a Yammer network for VLP in the hope that it could serve that purpose virtually.
After two months on the network we have 20 members and I have posted 153 times. The next-most frequent members have posted 60, 30 and 6 times, respectively. It is fair to say that the idea of network was well received, but the network itself has not been overwhelmingly popular to date. This is a data point for me rather than a success/fail metric.
We are a completely virtual business, and also a brand new, rapidly growing organization. We are going to try a lot of different communication methods before we find ones that work best, and we will probably find that different people have different favorites. The NY Times has these quotes that for me encapsulate the appeal of microblogging- it can be pithy and valuable for both business and social matters:
“I’m personally learning about things I wouldn’t normally hear about until we’re getting ready for a monthly board meeting,” he said. His company, with offices on both coasts and soon in London, uses Yammer. “I’m constantly sending messages about what I’m doing,” he said. “The rest of the company gets excited, and they’re using that info to communicate with customers and partners.”
Companies with many employees who work from home or in far-flung offices may get the most out of internal microblogging, which can help fill the inherent social gaps among remote workers. Even simple updates like, “Going to the dentist” or “Mopping coffee off the keyboard” can make co-workers feel more connected to one another.
It isn’t for everyone, though, and never will be. We have a host of other online tools to communicate intra-firm: IM, discussion board, internal blogs, phones(!) and a nascent social network. I can’t wait to see how people use all these tools. They each have their own set of benefits and drawbacks. We are in the throw-things-at-the-wall-and-see-what sticks-phase. I bet that over time we will start using things in ways no one ever expected.
As a social web nerd, I really enjoy watching the process unfold. VLP is a brand-new firm with a plan to do something no one else has done before in any industry: build a major business with no offices at all. Communication is even more critical for us than for many other businesses. I am really looking forward to seeing what works and what doesn’t over the next year or two.
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Reblog Flowing Data: US Oil Doesn’t Come From Where You Think it Does
Flowing Data has a map graphic this morning that makes two great points.
US Oil Doesn’t Come From Where You Think it Does | FlowingData
First is that most US oil comes not from the Middle East but from Canada. Did you know that? It may not be a geopolitical bombshell but it’s a fascinating tidbit nonetheless.
The second point is how easy it can be to find data, chart it and publish it on the web. The post says the map came from Department of Energy data that one person dropped into an online database and cranked out into a map. Good stuff- go web!
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Legal Marketing with a Big Upside for Startups: FreeTrademarksForStartups.com
This is not my marketing concept, though I wish I had thought of it. Trademark lawyer and Red Sox diehard Erik J. Heels has a new initiative to help startups understand and protect their trademark rights.
FreeTrademarksForStartups.com: Free Trademarks For Startups » @ErikJHeels
If your company is a bona fide startup, Erik will help you file a trademark application for free. He is up front about the fact that he is doing this to get your future paying business as well, which sounds entirely reasonable to me.
If you have a startup and need help evaluating your preferred trademarks and filing an application, go check Erik out.
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Reblog NY Times - Steps in the Search for Rewarding Work
I love my work. It can be stressful, demanding and sometimes the nuts and bolts overwhelm the feeling that I make a difference. This article from today’s New York Times is a good reminder of what to focus on during the tough times. Here are a couple of good quotes:
“We found that people working in very challenging professions or settings who were technically excellent might find their work difficult unless it was also important to their mission in life,” Mr. Gardner said. An unexpected finding was that joy was a crucial ingredient of good work. Mr. Gardner said: “Take teachers in American inner cities. They may be good technically and feel deeply about their responsibility to their students. But if they don’t find joy in their work, they burn out; it’s just too hard. You have to build into hard jobs like that supports and rewards, so that what was initially meaningful and engaging will continue to be so.”
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There are, Mr. Gardner said, three questions people can ask about their jobs to evaluate their good-work level: Does it fit your values? Does it evoke excellence; are you highly competent and effective at what you do? Does it bring you that subjective barometer of engagement, joy?
Preoccupations - Steps in the Search for Rewarding Work - NYTimes.com
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Reblog On Startups: Startup Salary Data from Private Company Compensation Survey
Dharmesh Shah is an entrepreneur in Boston with lots of helpful information to share among startups. Today he posted some tidbits from a survey on the always fascinating topic of founder compensation. How much do founders make at various stage of a company’s existence? How long do they typically remain CEO? How much equity does an incoming non-founder normally get? How much equity does a founder retain in a company’s later stages?
Startup Salary Data from Private Company Compensation Survey
The comments on Dharmesh’s post are full of interesting data as well.
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Frank Herbert, Douglas Adams and the Economy
Two of my favorite books as a teenager were Dune and the Hitchhiker’s Guide to the Galaxy. These quotes from those books have been bouncing around my brain lately:
Dune - Fear is the Mindkiller (the complete Litany Against Fear is here)
Image courtesy jamesbelieves.blogspot.com
Hitchhiker’s Guide - Don’t Panic
Image courtesy of Wikipedia
I have been repeating these phrases to myself a lot recently. Unstable economies are scary times, but energy spent being anxious and stressed is just wasted energy. Some days I can’t get on top of the stress and end up completely exhausted, but unless I managed to do something productive in spite of my stress I am no better off.
In that vein, here is an article about strategies for getting past the anxiety and focusing on things you can control.
In the Hunt - Recession Advice for Entrepreneurs - Stay Calm - NYTimes.com
Acknowledge the anxiety, then focus past it on steps you can take to make yourself feel like you are moving toward your goals every day. Good advice.
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What Happens to Preferred Stock When Your Company is Sold
The phrase in the title of this blog showed up recently in my Lijit search results and it is a great question. The way preferred stock clauses play out is not totally obvious, either, so here is my summary of the basic principles. For simplicity, let’s assume these basic facts:
*1M shares of common stock have been issued to founders; and
*A $1M investment at $1.00 per share, meaning 1M new shares are sold and investors own 50% of the company.
Liquidation Preference
Preferred stock has rights that stand ahead of common stock. The most basic of these (and the only one I will focus on) is the liquidation preference, meaning the amount of money each share of preferred stock will receive if a company is sold or liquidated. This amount is paid to the preferred stock holders before the common stock (founders and employees) gets any money.
The amount of the preference can be negotiated. At a minimum the preference will be the amount paid, $1 in our example, so that investors know they will get their money back before anything goes to holders of common stock. I.e. if the company is sold for only $1M the investors get their money back (ignoring any debt, attorney fees, etc.) and common stock holders get nothing.
If investors think the deal is risky they may demand more than a 1x preference. Liquidation multiples of 2x or more are more common when times are tough and money scarce. With a 2x liquidation preference our investors would get paid $2.00 for every $1.00 they invested before any money goes to the common stock. This means the company needs to sell for over $2M before the common stock gets anything out of it.
Participating Preferred
The next question is what happens after the preference amount is paid. In our 1x preference scenario with a $2M sale the preferred stock gets the first $1M. What happens to the other $1M?
It depends whether the preferred stock is “participating” or “non-participating”. Participating preferred splits the remaining $1M with the common stock and non-participating lets the common stock take the full amount. Clearly, common stock holders would rather see the preferred not participate, while participation is a better deal for the investors.
But What Happens if the Company Sells for a Lot of Money?
These scenarios all assume our company is sold for a relatively small amount of money and show how investors would get their money back when the total payout is small. What happens if a company hits a home run, e.g. if our company sells for $50M?
Following the rules above, here are some possible outcomes:
$1 preference, non-participating: $1M to investors, $49M to common
$2 preference, non-participating: $2M to investors, $48M to common
$1 preference, participating: $1M preference + 1/2 of remainder = $25.5M investors, $24.5M common
The participation right makes a big difference, as we can see. (and note that the amount of participation can be limited as well, e.g. so that preferred stock gets its preference, $10M based on participation, and then the rest goes to common)
Conversion to Common Stock
The last thing to keep in mind is that preferred stock holders can always convert to common. So for example, in the two non-participating examples just above the preferred stock would lose out if they only got paid their preference amounts. Instead, they could forgo the preference, convert to common and share in the sale proceeds based on their percentage ownership of the company. This would net the investors 50% of the sale proceeds in our example.
Which Leads to Percentage Ownership
The last (obvious) point is that percentage ownership matters. A 10% owner nets a much lower return than a 50% owner. This basic fact goes a long way toward explaining why valuations plummet in down markets- investors value the company lower so they can get a bigger percentage for the same amount of cash, and this lets them still make a decent return even if the company sells for a low price.
Wrapping Up
The bottom line is that in almost every situation there is a company sale amount below which the investors are better off staying as preferred stock (this is generally downside protection against low-sale price outcomes) and above which the investors are better off converting to common. The main variables are the total sale price, amount of the preference, participation/non-participation (and any caps on participation) and the percentage of the company investors would own after conversion. You can be sure your investors will be doing this math, so you should learn how to work through it as well.
And that’s what happens to preferred stock when a company is sold.
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Quote of the Day - On Bicycle-Sharing Systems
The New York Times has an article today about bicycle-sharing programs in major European cities. Here’s a gem of a quote about the civic benefit, earned on top of environmental improvements:
“The critical mass of bikes on the road has pacified traffic,” said Gilles Vesco, vice mayor in charge of the program in Lyon. “Now, the street belongs to everybody and needs to be better shared. It has become a more convivial public space.”
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Someone Actually Fired over Facebook Photos
I regularly hear people worry about the lack of privacy on social networks, that notes or photos posted for a group of friends are not private and that sooner or later someone was going to lose a job over it.
Until today I had never actually heard of it happening. Former New England Patriots cheerleader Caitlin Davis was fired this week for photos posted on her Facebook page.
The photos show her and a friend using markers to graffiti a passed-out-drunk person at a party. The graffiti apparently included the words “penis”, “I’m a Jew” and a pair of swastikas.
Davis’s conduct is obviously offensive and inappropriate. It is remarkable that she would compound that stupidity both by allowing photos of the activity to be taken, and then letting them be posted to her Facebook profile- or anywhere else.
The only positive element in this whole story is that I now have a very memorable example to offer people of how not to behave online. There is no privacy on social networks. End of story.
[N.B. I haven't spent a whole lot of time reviewing this story. From what I can tell no one has accused Davis of writing anti-Semitic graffiti, just of being dumb enough to associate herself with it. Either way, it was enough to get her fired. Lesson learned, I hope. ]
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How to Prevent iPod Technology Falling into the Wrong Hands
VentureBeat posted an article yesterday about the very lucrative “advisory” contract Apple is giving Tony Fadell following his departure as head of Apple’s iPod division. Here is a quick analysis of the legal landscape that may have led to this deal.
Noncompete Agreements Allowed in Many States, but Not California
In most US states companies are permitted to sign employment agreements that prevent a person from working for a competitor for up to a couple of years after the person ends his employment. California has a different take. It says that employees are always (with a couple of limited exceptions) free to work anywhere, but the the company can prevent the employee from using company-confidential information in the service of the new company.
California trained and practicing lawyer that I am, I had never focused much on this distinction until I started reading Bijan Sabet’s blog. Bijan is a Massachusetts VC with a minor quest to get MA and other states to follow California’s rule.
For the record, I think that California has it right (big surprise, I am sure). The Fadell situation makes an interesting case study.
Apple Pays Fadell to Protect its Competitive Advantage
If Fadell worked in Massachusetts, New York or most other US states, Apple could simply tell him he could not go to work for a competitor. Fadell’s expertise is in developing portable audio/video players, so this might make him choose between not working at all for a period of time and trying to break into an entirely new area. Since Fadell is in California, Apple can’t do that. Instead, Apple had to figure out how much it was worth to keep Fadell on the sidelines. VB reports that value is $300,000 per year through March, 2010 plus stock worth $7.6M at today’s prices.
The point here is that the burden fell on Apple as the employer to protect its competitive advantage without cutting off Fadell’s ability to make a living. Fadell could probably have survived even without the extra compensation, but others might not be so fortunate and this is why I believe California has the rule right. If a person is that valuable, the employer should pay to keep him/her on the bench.
Contrast With Fadell’s Replacement - Mark Papermaster
What makes this case even more interesting is that Fadell’s replacement, Mark Papermaster, is coming to Apple from IBM. Papermaster apparently agreed to a noncompete restriction in his IBM employment agreement and IBM has now sued him and Apple to enforce the noncompete terms. I am not certain whether Papermaster lived and worked in New York or whether his employment agreement was specifically governed by New York law. If it was, he and Apple could have a hard time overcoming the noncompete restriction.
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The SEC vs. the Body of Internet Law
The SEC spends a lot of time thinking about public statements- and misstatements. It looks at a company’s communications and holds the company liable for *everything* it says publicly, whether statements were made as part of a formal “announcement” or just in some marketing collateral. This is reasonable- to do otherwise would let companies cite one set of facts “on the record” for shareholders and paint a different picture elsewhere.
In August, the SEC published some proposed rules governing websites. It seems to be worried that companies could use third-party websites to get around the integrated-communications policy. E.g. a company could describe some negative results in a press release while simultaneously linking to a an analyst’s blog that offers mitigating opinions.
Most people can probably agree this would be a manipulative business practice. The SEC would like to hold companies liable for statements made on sites hyperlinked from a company website. On its face that seems like a reasonable proposition. Unfortunately, it flies straight into one of the bedrock rules for conduct and liability on the Internet: site owners are not liable for statements made by third parties.
The law that creates this rule is known as 47 USC Sec. 230, was enacted by Congress in 1996 and has been interpreted and upheld numerous times over the past twelve years. It is as fundamental as any rule gets in the still-young arena of Internet law.
Santa Clara University Professor Eric Goldman wrote a comment letter to the SEC about the conflict between Sec. 230 and the SEC’s proposed rules. In addition to explaining why the SEC’s rules are problematic, the letter does a fantastic job summarizing Sec. 230, major cases under it and its position today. Definitely a worthwhile read for operators of sites that solicit third-party content and the people who advise them.
I find this area fascinating. The SEC has a very long history of regulating corporate communications and its new rules flow directly from that tradition. At the same time, the civil liability it seeks to impose is clearly preempted by Sec. 230, creating a head-on collision between the SEC and existing law.
Criminal liabilities are a different matter- 230 does not address them at all. In the end this may be the way through, but it would be a tight, unhappy squeeze if third-party statements could lead to criminal liability, but not civil ones. Stay tuned to see how the SEC’s proposed rules evolve based on comments it receives.
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What Not to Do After a Merger
I like reading court decisions for two reasons. One is that they sometimes set new rules, which is vital information, of course. More often they serve as reminders of how to do things (or not to) and why agreements and transactions are structured in certain ways. Here is one that does both: Western Filter Corp. v. Argan, Inc.
The Facts
The very quick plot summary is that Western Filter bought its competitor Puroflow (a subsidiary of Argan) in October 2003 for $3.5M. The purchase agreement said that certain representations and warranties in the agreement would survive for a year after closing. 10.5 months after closing, Western Filter sent Argan a letter saying that Puroflow’s inventory was short of the representations by ~$2M, and Western Filter filed a claim six months after that (outside the 1 year period) alleging breach of the representations.
The Issue
The legal question for the court was whether the one-year survival language meant that (a) Argan agreed to maintain the reps & warranties as true for a year after closing without touching the 4 year statute of limitations on contract claims in California (Western’s argument), or (b) the one-year language meant that Western Filter could only file claims within a year after closing instead of the normal 4 years (Argan’s argument).
The Ruling
The court decided that Argan’s reasoning made sense, but Western’s reading was also possible and that existing law therefore required deference to Western’s interpretation. The court held that the intent was to hold the reps open for a year, and more importantly that agreements to shorten statutes of limitations must be clear and unambiguous. The important takeaway for lawyers, then, is that we need to be extremely specific if we intend to shorten statutes of limitations. Duly noted.
The Nonsense
This is an unfortunate outcome on the facts. It is impossible to require a seller to maintain representations and warranties correct for a year after closing a merger. By definition, the seller has lost control of the business after closing, so responsibility for maintaining inventory levels in the year after the deal is and should be entirely on the buyer. The court wiggles around this a little by saying “one year after closing” meant that the reps were true at closing and that Western had one year afterward to discover a breach- and then another three to file an action. This is slicing hairs much too thin. Argan’s argument is the better one here and the court acknowledges that while saying at the same time that precedent requires a clear, definite statement to shorten the statute of limitations. This is a great example of a clear, bright-line rule producing a bad result on the facts.
What Should Have Happened
This is the “why we do things certain ways” part. Every merger I have ever been part of has had a “truing-up” section where the buyer does a full review of the acquired business immediately after the acquisition and adjusts the purchase price as needed. In this case the parties had set aside a $350,000 reserve to do that, which was apparently not enough given the size of the inventory discrepancy. Still, if Western had done this review timely it would have been able to file a claim within the one-year period and everyone could have moved on instead of spending the next four years figuring out whether the claim could even be pursued.
And the Lessons
Legal: if you intend to shorten a statute of limitations, be clear about it.
Practical: when you close a deal, follow up immediately to be sure you got what you paid for. Don’t squander your rights.
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The NYTimes Backs Me Up on Multitasking
On the heels of my last post comes this article in the New York Times on how hard it is to effectively multitask.
Shortcuts - Multitasking Can Make You Lose … Um … Focus - NYTimes.com
My favorite line describes the infamous “email voice”, when it is clear that the person on the other end of the phone line is actually focusing on his/her email.
Based on my own experience, the article is also dead-on when it says multitasking actually adds low levels of panic and stress. I certainly feel much more in control when I slow down and try to do only one thing at a time.
Now what was I doing before that article caught my attention?
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On Personal Productivity
When I started practicing law 10 years ago, there were only three major tasks I needed to accomplish in my daily work. Staying abreast of the law, advising clients appropriately and preparing top-notch documents were the full scope of my legal world. It was relatively easy then to find solid blocks of time to devote to meaty projects.
Things got more complicated when I started my own business and had to go out and hunt for work, bring it home and do it. I have found it much harder to find those uninterrupted spans of time that are often needed to really think through projects- never mind putting the thoughts to paper.
I have made a study of my personal productivity lately. What I have realized is that multi-tasking works fine some of the time, but that I need to create “spaces” for mono-tasking (uni-tasking?) as well. Here is what works for me:
1) Check email in the morning, then shut it down until lunchtime. Do the same thing around noon, then close it again for a solid block of the afternoon. Email is the attention-killer. It just keeps coming and most of it does not require immediate response. (Note: if you need to get in touch with me urgently, call). The same thing goes for Twitter, my RSS feeds, etc. I check them at a couple of intervals through the day, then leave them alone in between.
2) Plan my day. This is hard because my routine is not fixed, but the basic idea is to make a list every day of what I need to accomplish and *when* to do it. That way at any given moment I know exactly what I need to do most.
3) Do one thing at a time. Brad Feld posted a quote from an old book that says “There is time enough for everything in the course of a day if we do but one thing at a time, but there is not time enough in a year if we try to do two things at a time“. It’s really true. I work through things much more quickly if I remember to start one task and see to completion rather than doing a little of one thing, jumping to another and then back to the first.
4) When it’s time to get out of the office, get out of the office. When I first started my business I felt compelled to stay in the office even during slow periods. It is unproductive and bad for my morale. Now I tell myself every day to do all the work I have for the day, make phone calls, meet the people I need to meet, and when it is done go do something else. Down time is for surprise visits to my kids’ schools or getting some extra exercise, not for stewing at my desk.
The corollary to this is that when there is only a half-day of work to do, do it! Don’t drag it out all day, but get it done so there is time left for something else.
As I re-read this I realize it can all be condensed to one simple rule: figure out what I need to be doing at that moment, do it and move on.
That’s the idea, at least. It’s hard to do every day, but it sure makes me feel better when I try.
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Quick Review of Social Benefit Business Structures
I have been fortunate to get involved lately with a couple of social benefit businesses. These are companies formed to bring on investment, have shareholders and turn a profit- and the larger the better- but also to explicitly serve a social purpose that goes beyond mere shareholder returns. Working with these companies has caused me to review a variety of business types that work for social benefit companies in various ways. Here is an ultra-quick summary of the several types I have found.
Non-profit. I don’t work with non-profits, but I am listing their characteristics here for comparison purposes. A non-profit has no owners/shareholders, is dedicated to social goals and can only use the money it makes for programmatic and charitable goals. State authorities can and do enforce these requirements.
Plain Old Corporation with Social Aims. This is the simplest type of for-profit social benefit entity. A corporation is created, does business and uses some of its time, capital or other resources to pursue social goals. Ben & Jerry’s (pre-sale to Unilever) is many people’s favorite example of this type of company. The advantage of the entity type is that it is simple for everyone to understand. One disadvantage is that in many states as well, the Board is constrained from considering non-shareholder interests in deciding on courses of action. It is important to note as well that the social purpose can be changed relatively easily if management decides to go in a different direction. This could be a positive or a negative depending on circumstances.
The B Corporation. The B corporation name distills years of work refining the principles above and packages them with a title. B corporations build specific provisions into their formative documents that give the Board discretion to consider a variety of interests beyond shareholder return. For maximum effect, corporations must form themselves in a state that allows such flexibility. In other respects, though, B corporations are just like plain-old C corporations: they can take investment, turn profit and have no state-mandated restrictions on how to operate. The social benefit goals are also purely voluntary. A B corp could turn into a regular C corp if it so chose.
The Low Profit LLC or L3C. This is a brand new entity type that exists only in Vermont so far as I know. Unlike a nonprofit it is permitted to have shareholders (technically Members since it is an LLC) and to distribute profits to them. The main goal seems to be to make it simple for foundations to put money into programmatic investments, generate returns and eventually trade in and out of different program vehicles.
The Community Interest Company. CICs are a mix of all of these. They combine the explicit social purpose of the B corporation with a regulatory layer similar to a non-profit or possibly an L3C. Companies choosing social benefit are not as closely regulated as non-profits, but are nevertheless required to maintain their devotion to the social purpose. They can take investment and issue shares, but an “asset lock” restricts the company’s ability to transfer assets to a purely for-profit entity. CICs are also an English form of entity, so American social entrepreneurs need not apply.
Which entity is best for a given situation? It depends on what the goals are, of course. Simple is good, but sometimes entrepreneurs want to make a stronger statement than the plain old C corp, so a B corp is the next step. The L3C looks to be a special-purpose entity and we will have to wait and see a bit how it evolves. CICs are an interesting model and it is possible that something like it could come into existence in the US. I worry a little that the asset lock commits a business irrevocably down a certain path and makes it hard to adapt if market conditions dictate a different path.
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Great Business Book on Creating a Business Plan
I just bought a terrific book from Harvard Business Review called How to Write a Great Business Plan. It has several things going for it:
1) The book itself is 4″ x 7″, 60 pages long and with large type. To my mind, all business books should be limited to that size and length.
2) At $6.95 it is a bargain (pdf downloadable version available).
3) It covers some really important material.
Author William Sahlman hits then nail on the head when he says (I am paraphrasing):
*Talk about the people. Good people can work a mediocre idea into a good one, and plenty of good ideas have failed to work for lack of the right people to manage them.
*Don’t get so caught up in the promise that you forget to describe the steps along the way. I have certainly seen plenty of business plans that promised fabulous technology, but couldn’t explain where the customers would come from.
Check it out. How to Write a Great Business Plan is a worthwhile reading for entrepreneurs everywhere.
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Air Traffic Worldwide 24HR on Vimeo
This is a neat map making the rounds on the Internet that shows air travel routes across the globe during the course of a day. I am calling it a companion to a post from about a year ago showing something similar for US air travel.
Air Traffic Worldwide 24HR on Vimeo
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Jay on Economics - Now for Something Completely Different
Robert Reich, Labor Secretary in the Clinton Administration and NPR pundit, has a terrific blog as well. He has a lot to say about the failure of banks, credit markets and the proposed “Wall Street Bailout”.
He posted a blog today about the terms of the bailout and why it is better than nothing, but still not good. The post inspired me so much I left a long comment, and I liked my comment enough that I am reblogging it here as well. Go read his post, then check out my comment, and thanks for reading.
Robert,
I am with you most of the way here, but I would say the most important need is not *only* to help homeowners avoid foreclosure, but to help *all* borrowers- individuals and businesses- do the same.
If I run a business I need both customers to buy products and employees to create/provide the products.
The customers may be hard to find in the next 6-24 months. If I can’t borrow to pay my employees and stay alive- going much deeper into debt than I ever wanted in the process- I may simply be dead before the customers come back.
There is a line here from employee -> employer -> lender -> Fed. Everyone along the way needs direct help from the Fed, but the answer to your question about keeping credit markets functioning is that lots of individuals and businesses need the credit *even though* they can’t afford it. The Fed needs to either lend money to people and businesses directly or convince lenders they can afford to do so.
So how do you convince lenders to extend more credit to businesses and individuals who could be high default risks in the short term? That is the $700B question, to be sure.
I believe Congress is heterogeneous enough that it is incapable of giving a single answer to a question like that- the pitfall of democracy, I suppose.
Still though, the bailout package sure does miss the boat on a lot of issues.
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When to Issue Stock Options
Lately I have run into the same issue several times with different clients. Small businesses looking to grow bring in non-founder staff and want to offer them an equity stake.
It used to be relatively simple and inexpensive to create an option plan for the company and issue options to the employees. The plan document itself is pretty close to “boilerplate” and depending on how organized the client is I could usually prepare the plan, related Board and shareholder consents, California securities filing and issue option grants to the employees for somewhere between $1,000 - $2,000.
No more. IRS Code Section 409A now gets involved and raises the cost by about 10x. 409A was enacted to put a stop to backdating and intentional option mispricing shenanigans. It imposes severe penalties on option holders who receive stock options granted below fair market value.
This is ok for public companies that can point to a clear stock price on a daily basis. For private companies, 409A says that stock price may be determined by a valuation done internally by someone with significant relevant experience or externally by a valuation expert. Most startups don’t have an internal person with the required experience, so this means an external valuation and that can cost $5,000 - $10,000.
I understand that fast-growing companies like Facebook do external 409A valuations quarterly to avoid problems. For them, it is an unfortunate expense.
What if a company raises only a tiny amount of money, or perhaps no money, and still wants to offer options? The cost of the valuation makes this prohibitively expensive and leaves three practical alternatives:
1) Grant the options when the company is brand new. If we grant options at the same time the founder stock is created, we can be confident that the value is quite low. Obviously, though, this only works in the early days of the company.
2) Get the valuation.
3) The third option is to grant options that aren’t exercisable at will. If an employee gets an option that is exercisable only on a change of control event or other external trigger, then the option is not covered under 409A.
There are downsides to this approach, including the fact that if the option can only be exercised on a merger or sale of the company the option holder loses any chance at capital gains treatment of the resulting gain. The difference in tax rates could be as bad as the 409A penalties (noting that California now tacks on its own 20% penalty to 409A violations, which would make the effect of violation much worse than mere ordinary-income treatment). Not an appealing option.
All of this makes me say that 409A needs a blanket exemption for non-public companies. 409A only went into effect this year. Let’s hope the IRS sees the light soon and fixes this problem so that companies can offer equity incentives to employees without breaking the bank.
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Robert Reich’s Blog: The Bailout of All Bailouts is a Bad Idea
I tuned into to Robert Reich’s blog recently, and it is currently one of my all-time favorite things on the Internet. I like his segments on NPR as well. As a Cabinet member under Bill Clinton, the man has the credentials to charge a bunch of money for his opinions. It’s fantastic to see him offering them up for free instead.
Robert Reich’s Blog: The Bailout of All Bailouts is a Bad Idea
The post linked above lobs out a fascinating idea for a kind of mass-bankruptcy proceeding for every ailing bank on Wall Street, or perhaps a financial Truth and Reconcilation Committee proceeding.
The idea is to bring out all the skeletons, wipe out the banks’ bad debt- and the equity of those who bought stock in the banks- and let them start fresh without putting US taxpayers on the hook for a super-massive bailout, BUT with improved disclosure and minimum capitalization rules.
Disclosure rules certainly need to evolve with the times, but for the record I’m not sure they are the main answer. As my friend Sam put it, almost no one actually understands what a credit default swap really is. As long as everyone was making money, understanding the mechanics didn’t seem that important.
All that said, Reich offers a lot of food for thought on a regular basis. Definitely worth reading.
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Open Source Angst
I started poking around in some open source software issues recently, and then a significant case came down on almost exactly the same point, making the whole thing highly blog-worthy. Here are my thoughts on the Ninth Circuit’s Jacobsen v. Katzer decision along with the clusterf*ck of conflict between developers and lawyers on how to manage open source code.
Jacobsen v. Katzer - Open Source Licensing Requires Compliance with Attribution and Version Terms
The Jacobsen case contains a valuable lesson. Jacobsen developed software and made it freely available under the under the Artistic License, which says that a licensee is free to use the software and incorporate it in free or for-pay products, but that the licensee must provide full attribution of the licensed material and if the licensee changes aspects of the source files he is required to make the original versions available as well along with a description of the changes.
Katzer picked up Jacobsen’s code, changed files names and other aspects and used the modified versions in his own for-pay software without giving attribution or providing original versions as well. Jacobsen brought suit for copyright infringement.
Katzer then attempted some legal sleight of hand by saying that the license to Jacobsen’s software allowed Katzer to use the software freely. The attribution and version terms were not actually part of the license, but were a separate contractual issue. In other words, if Katzer screwed up, the remedy was not to rescind the license but to pay economic damages. Since Jacobsen didn’t charge for his product, damages were $0.
The court’s response was “No way”. The attribution and version terms are part and parcel of the license. Fail to comply and you lose the right to use the software.
My View - Right on, Ninth Circuit
The court has this right. If it had somehow found for Katzer it would have ripped the heart right out of open source licenses by saying that there is no penalty for failing to comply with the attribution and version control provisions- frequently the only conditions in an open source license agreement. The license conditions would be completely unenforceable.
[Note, however, Prof. Eric Goldman wondering whether, if the act of downloading and using the code subject license terms is enough to create a defensible contract]
. . . And Yet the Devil Remains in the Details
At the same time, I have worked with companies that use open source code regularly. They don’t just use one component- they use dozens or hundreds of open source elements by different authors, made available under different license terms. Good faith, meaningful compliance becomes genuinely difficult in that situation and requires careful documentation, oversight and management. No problem there- good developers and good lawyers both create clear trails of documentation to support their work product and tracking the elements being used is doable.
What may not be doable is figuring out exactly what the license terms are. I searched for several open source elements on a recent project and found them available on two web sites. The first site listed the applicable license as GPL (a more restrictive open source license) and Artistic License (less restrictive). The latter said GPL or Artistic License. GPL and Artistic License are similar, but have some important differences. Which one did the publisher intend to apply? There is no way to know from the sites on which the code resides.
[Again, see Prof. Goldman with an example of a photo posted on Wikipedia under the mutually incompatible Creative Commons and GFPL licenses and wondering how one might comply with the license requirements.]
Open source licensing also borrows from the software community by attaching version numbers to its licenses. GPL v3 is signficantly different from GPL v2, but developers frequently don’t indicate which version they intended to apply. As a good faith user, do I need to comply with both versions of the license? That doesn’t seem to help the open source cause much- it is hard to upgrade to v3 if we need to remain backward-compliant with v2 indefinitely as well.
Where the Developers Miss the Lawyers
My own theory here, and I would love to hear other views, is that the license terms are an afterthought for developers. Someone creates some code, uploads it to sourceforge or elsewhere and checks a box for GPL, Artistic or some other license terms. I believe that in most cases developers would like attribution and to see their code further developed by the community, but don’t care much about the details beyond that such as which version of GPL should apply.
All of this makes good faith compliance really difficult. The Software Freedom Law Center has an excellent guide to compliance with GPL that provides very good advice on how to document and comply with GPL’s requirements. The document assumes, however, that a good faith user can readily tell which licenses to comply with. In my experience that is not the case at all, which is a shame. Open source software is useful and pervasive, and is being enforced with more and more assurance. It will be too bad to see well-meaning companies dinged because of this lack of clarity.
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Why Deferred Salaries Don’t Work for Startup Founders
One of the toughest conversations I have with many startup founders is about salaries. Founders may come from larger companies that pay them an annual salary and the idea of getting *no* cash for a significant period of time is really hard to wrap one’s mind around. The argument goes something like this:
“I make $X currently, I know I am worth that much and I really need to get the cash. I can defer collecting it for a little while, but I need to catch up at some point.”
My humble suggestion is always the same- don’t think about it that way. You are building equity in a new business. The equity is your return. You are unlikely to see your “deferred” salary repaid in that way, so make sure you have enough stock in the business to give the upside you need and work toward making that worth something.
There are really two alternatives to this, neither of which is feasible: accruing a hypothetical salary to be repaid when some large bundle of cash hits the company’s accounts through financing or sales efforts, and taking stock in lieu of cash.
The Extra Cash Theory
The repayment on filling the coffers approach is based on the false premise that at some point there will be “extra cash” available. This never happens. Investors put money into a business in order to build structures that will take the business down the road. Seeing their cash go straight through a company’s bank account is anathema- except when a founder has actually put in cash without getting stock for it.
The revenue argument is probably even worse. Revenue is hard to come by and most businesses don’t see enough of it to justify paying back salaries on top of current ones and other business expenses. The idea of generating enough revenue to cover accrued/deferred salaries is a fantasy in almost all cases.
Stock for Salaries
The stock-for-salary proposal is actually much worse than the extra cash idea. What many founders don’t realize is that the IRS treats stock in that case exactly the same as cash and taxes it at the same rate. If a founder accrues $100k in salary and collects it in stock she still has $100k in income to report.
The problem is that she has $100k worth of illiquid stock, a tax bill of $35k or so and no cash to pay the taxes. This is not a happy situation for anyone.
No Deferral, No Salary, Just Stock
The way out of the dilemma is to give up on the idea of taking much cash out of the business in the early going. Buy your founder stock (for cash!) at a very low price when you start the business. That is what you get instead of a salary, so be mindful of unnecessary dilution (no “advisory” options to friends and relatives) and work on making that stock as valuable as you possibly can. You may not see much cash for a couple of years or more, but if you are lucky the stock will more than compensate for the sacrifices made in the early days.
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Twitter’s First-Mover Advantage and Disadvantage
Fred Wilson’s tumblog pointed me this morning to a post about why Twitter has been so successful and is so well loved despite all its problems and downtime.
Why Twitter Still Wins | chrisbrogan.com
Chris makes the point that Twitter’s openness has saved it. He says:
One way to win in software is to make your application fertile for building upon. Open your API. Give people tools to build an ecosystem around it. And it becomes a lot harder to pull away and go elsewhere.
Unfortunately, in Twitter’s case the last sentence should be followed by the phrase “no matter how badly the service behaves”. Twitter has definitely become successful despite itself.
A commenter on Chris’s blog made an even better comment. Michael Durwin points out that Twitter created something completely new. This struck a chord with me. I attended a social web event put on by Niall Kennedy in late 2006 or early 2007 where Twitter presented. The company was still focused on Odeo, the product it launched around. Biz Stone talked about staffers inside the company thought it was funny when people posted clever notes in their IM status- “hung over” or “shouldn’t have eaten the whole burrito” instead of merely “busy” or “available”.
The point is that Twitter arrived on the scene when the idea of micro-messaging was embryonic at best. (On hearing Biz’s talk my own response was that Twitter sounded like the dumbest, most narcissistic thing imaginable, and I continued to feel that way for about 8 more months until I completely fell in love with the service)
The title of this post is about Twitter’s advantages and disadvantages as a first mover. As Michael Durwin points out, Twitter created a new genre of communication. its advantage is that it is the first and best known product in its category and has the most users.
On the other hand, Twitter’s problem is that its developers had no idea how micro-messaging would grow. Its architecture was apparently not designed to accomodate many of the things people would like to see, like threaded messaging, photos, video and comments. Newer entrants in the field such as Friendfeed can use all this knowledge to build more flexible platforms (taking note as well of why rivals such as Jaiku and Pownce have largely failed to captivate).
So to sum it up, Twitter’s situation today is basically this:
Advantages: best known, well developed community/social graph, lots of great third-party extensions
Disadvantages: needs to rebuild platform now that we know what people want from micro-messaging platforms
I’m rooting for Twitter. I sure hope they can rebuild fast enough, but people aren’t going to wait forever.
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Cleveland’s Take on Social-Charitable-Venture-Entrepreneurship
The New York Times has an article on a Cleveland organization called Jumpstart that helps match entrepreneurs from underserved communities attract financing.
Shifting Careers - Venture Financing With a Mission Beyond Profit - NYTimes.com
The twist in this case is that financing comes from private companies, foundations and government instead of venture investors.
Founder Ray Leach opines that Boston and Silicon Valley don’t need institutions like Jumpstart, but I disagree. Cause-based investing is challenging and requires special commitment from financial backers. The Bay Area has existing funds like this, such as the Omidyar Network and Pacific Community Ventures, but to my mind all communities can benefit from organizations and funds with explicitly double or triple-bottom line ideals.
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Charity-Owned Companies or For-Profit Companies Devoted to Social Good?
Attorney Gene Takagi has a really informative blog on legal issues for nonprofit businesses. He has a post today on LLCs owned by charities and raises some good questions about how to insulate the charity from liability (e.g. if the charity owns real estate) and whether donations from to the LLC would be deductible.
Nonprofit Law Blog: Charity-Owned Limited Liability Companies
In many ways, this structure is a complement to the B Corporation idea I have blogged about previously. A charity-owned LLC is essentially a for-profit subsidiary of the charity, while the B corporation is a for-profit company that may provide economic benefit to charitable organizations.
I am presently working on the latter concept- a B corporation set up specifically so that it can grow as a for-profit company, but which is very closely tied to a non-profit business and provides economic benefits back to the non-profit. As the project matures, I hope to share detailed information about the business and its structure. I would love to write a case study comparing the relative merits of the B corporation approach with the charity-owned LLC. It seems clear that the structures serve related but different purposes. A primer that helped figure out which to use when could be valuable.
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Startup Valuation, Preferred Stock and Common Stock Prices
This post may get a bit wonky. I’ll do my best to keep it straightforward.
I have talked to a lot of people in my career who get confused by the value of shares of stock in a startup company. A venture-oriented company has two or more different kinds of shares with different values attached. Here’s how to keep them separate.
Pre-Money, Post-Money and Per-Share Value
When a company does a financing, it sets a value for the entire company- the “pre money” valuation before the new money comes in. Let’s say the value is $10M. If the company has 5M shares outstanding, this means that each share is worth $10M/5M = $2.00. This is the price investors will pay to buy stock in the company.
If the investors are putting in $5M, they are buying $5M/$2 = 2,500,000 shares. The company now has 7.5M shares outstanding, and the total “post-money” valuation is $15M. We can see by the numbers that on a per-share basis (2.5M/7.5M) and a dollar-value basis ($5M/$15M) that the investors now own 1/3 of the company.
Common Stock vs. Preferred Stock Pricing
The part that gets tricky is that investors buy preferred stock, but the company also has common stock that it will issue to employees. Preferred stock has superior rights, especially including a right to get paid first when the company is sold. By convention and IRS rules, we are allowed to say that the preferred stock is worth more today than the common stock. Thus, when we sell preferred stock to investors at $2.00/share, we can give options to employees to buy common stock at a much lower price- $0.30 or so.
This works well for the most part. Investors want certain rights that employees don’t care about and pay extra for them. Employees would rather get low-priced options than the preferred rights. Everybody is happy.
But I Thought Each Share Was Worth $2.00?
The place people get tied up is comparing the enterprise valuation with the common/preferred stock differential. We valued the entire company at $10M, which meant that each share was worth $2. At the same time, we say that common stock is not worth $2 and is only worth $0.30. Which is true? Both. Here is how and when to use each number.
Enterprise Valuation is for the Big Picture and Financings Only
When we value the company for a financing, we put a value on the whole company as though it is about to be sold. We take into account all of the economic preferences and assume that all stock is converted to common. Every share is the same at that point. In other words, if the pre-money valuation is $10M and the company has only common stock outstanding, each share is worth $2. The valuation is really forward-looking to an eventual exit.
Common Stock Price is For Employees Today
Until that happens, though, we maintain different types of stock with different rights- common and preferred. The preferred is sold based on the as-converted valuation, but the common has fewer rights and we can issue options at a lower price. The company’s total valuation continues to be $10M and each share would be worth $2 on a sale of the company, but before that happens each share of common stock is actually worth $0.30.
The Simple Rule
The easiest way to think about this is that preferred stock is for investors and common stock is for employees. Be aware that pricing is set differently for each.
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The Tumbling-Around Space in My Head
Anyone who has talked to me for any length of time knows that I am nuts about bikes and cycling. Getting out regularly is incredibly important for my mental as well as my physical health and well-being.
It helps in my work too. I realized today that I have puzzled through a remarkable number of work problems out on my bike. Being in the office involves so many distractions that it can be hard to find time to think straight through one topic for very long. Once I get out on my bike I usually end up rolling around one idea for a while in my head, thinking it through from a lot of angles.
I’m not an especially fast thinker on the bike. Traffic, stop lights and navigation all take pieces of my attention. Somehow that helps too, perhaps because those distractions are transient compared to the 
demands of multiple long-attention-span projects I face while sitting at my desk. I let an idea bounce around a bit, set it down to focus on getting over a certain hill, then pick it back up.
Sometimes I get lucky and it seems like the idea has kept tumbling on its own and some new angle appears that I hadn’t considered before.
I find this all fascinating. Some problems can’t be muscled through. They just need time and quiet space in my head, and then the path to a solution start to lay itself out. Cycling is how I make that space. It sure beats lying awake at night stressing out about them.
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When Rights of First Refusal Are a Bad Deal — HBS Working Knowledge
HBS Working Knowledge newsletter has a Q&A with a Harvard professor who examined a specific kind of right of first refusal, where one party has the right to buy an asset at a fixed price, but can also swoop in if the asset is offered to a third party at a lower price.
The article explains that this works against the right holder, because it lets the seller tell the third party “buy at this (high) price or not at all.”
When Rights of First Refusal Are a Bad Deal — HBS Working Knowledge
The best part of the whole article is the answer to the question “why do people use these types of rights if they work out so badly for the right holder?” The answer:
Contracts are big, complicated things with lots of clauses, some of which get exercised rarely if at all.
Words to live by for sure.
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Wasted Paper, Inefficiency and the Infamous “Secretary’s Certificate”
I recently re-read attorney Ted Wang’s great proposal to simplify Series A financing documents in venture capital investment transactions. He is completely correct that there is a lot of inefficiency in the way those deals are structured. A bit of housecleaning would streamline the process a bunch.
The counterargument is that as attorney I don’t want to spend a huge amount of time renegotiating the form of the documents. Ted has a few suggestions that will take more effort to adopt widely, and others that are really no-brainers in almost every deal, venture financing or otherwise.
Number 1 for me on the no-brainer list is the Secretary’s certificate and incumbency certificates that go along with most transactions. These say that the Board has approved the transaction and that the people who sign the documents actually hold the offices they say they do.
This is a pet peeve of mine because the company already represents and warrants in the agreement that Board has approved the deal. Saying it again in a separate document serves no benefit. As well, the people who sign the incumbency certificate are, at least in most smaller companies, the same as the ones who signed the agreement. Getting them to verify their titles adds no material benefit.
There is an exception here- if the deal is signed on one day and closed on a different one, then I completely understand the value in “bringing down” all of the reps and warranties to the closing date and verifying that the information in the agreement remains up to date.
Where this leaves us: the Secretary’s certificate and incumbency certificate are unnecessary in 99% of deals and result in extra time spent drafting and wasted paper. However, they are valuable once in a while and I don’t want to bill my clients for time spent fretting with opposing counsel about whether this might be one such case.
So here’s my suggestion: leave the language requiring those certificates in the document, but add a short line saying that the certificates must only be delivered if the closing occurs on a different day from signing of the documents.
It’s a simple suggestion- 10 minutes to discuss and drop a phrase into the relevant part of agreements that could cut out an hour or two of attorney drafting and review time. We’ll see how it works in the real world.
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Startup Business Strategy For The Simple-Minded
Dharmesh Shah is an entrepreneur in Boston who writes a thoughtful blog on the challenges of launching a new business. This post rings true with me.
Startup Business Strategy For The Simple-Minded
The not-AP-approved short version is this:
Decide what to build, launch an imperfect version, sell unsuspecting customers, keep improving, sell more unsuspecting customers. Lather, rinse, repeat. SUCCESS!
I have had many clients over the years who spent a huge amount of energy working *around* the core aspects of the business rather than on them. The ones that managed to keep everything to a minimum other than the core goals of the company have been the most successful, without exception.
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Lawyers Catching Up with the Real World: You Mean People Really Use Email?
File this under pet peeves: I work through a lot of agreements of all different kinds. Every single one has a “Notices” provision. The purpose of this language is to avoid arguments about whether notice was properly given of certain events. It only becomes an issue when the relationship has broken down, and basically serves only to avoid arguments about the terms of the argument.
That said, 95% of the agreements I get say that notice may be delivered (i) in person, (ii) by Fedex or registered mail, or (iii) by fax with a confirmation copy by mail.
How often do you communicate by fax with people compared to email?
It’s not a huge point, but one of the items on my transaction-document checklist is to make sure that the communication methods reflect the way we actually communicate. I have a standard paragraph I drop in to agreements that says people can provide legal notices by email (with a confirmation copy). It takes about 30 seconds of extra time on my part and has saved a bunch of running around on the few occasions I have had to actually follow the notice procedures.
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The Selfish Side of 1% for the Planet
My last post was a wonky one on changes in California law that affect company management’s ability to consider social good as well as shareholder value. Here is a complementary piece to that, courtesy of Harvard Business School’s Working Knowledge newsletter.
Spending on Happiness — HBS Working Knowledge
The jist of the piece is that we spend our lives trying to accumulate money, but succeeding at that doesn’t make us any happier. Instead, the researchers found that spending money on other people does increase happiness.
The article talks specifically about personal spending, but I am willing to bet that it holds true for companies as well. Knowing that your company gives away money to help outside causes increases loyalty toward the business.
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Directors’ Duties to Shareholders and Society at Large
There is a long-standing debate about the obligations of a company’s management to consider the needs of society at large. Economist Milton Friedman is famous for opining (to paraphrase) that the only duty of a company’s Board of Directors is to make money for the company’s shareholders.
In my view, this opinion completely sidesteps the issue of what time scale to consider, but it is entirely possible that a company could make tremendous short-term profit at the expense of segments of society at large, the environment, etc.
The California State Legislature has an opinion on this issue, too. There is a bill pending there (A.B. 2944 for the research-inclined) that would change the statutory duties of a director to include not only the company’s welfare, but society as well. The current duties of a director are to deliberate:
in good faith, in a manner that such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a likeposition would use under similar circumstances.
As amended, a director would be permitted, but not required, to consider:
(i) The long-term and short-term interests of the corporation and its shareholders;
(ii) The effects that the corporation’s actions may have in the short term or long term upon any of the following:
(A) prospects for potential growth, development, productivity, and profitability of the corporation;
(B) The economy of the state and the nation;
(C) The corporation’s employees, suppliers, customers, and creditors;
(D) Community and societal considerations; and
(E) The environment.
Pros/Cons Analysis:
From the social welfare side, this bill would say clearly that directors need not hew to the Friedman viewpoint and may take a broad view of corporate duties. On the other hand, the list of factors a director may consider is long and not well-defined. Merely deciding on the company/shareholders’ best interests is difficult enough and it is not clear to me that this language adds anything that is not implicit in Board deliberations anyway. Would this language be useful in preventing a company from, say, strip-mining with knowledge that heavy metals will leach into groundwater?
The answer is “no, not by itself”. However, this language does open the door for the B Corporation I have written about previously. B Corporations say loudly and clearly that their duties are to consider shareholder value alongside social benefits. As noted at the top of this post, that is not a universally-held viewpoint. Shareholders, directors, executives and the courts that eventually ajudicate questions of shareholder duty need some encouragement- not to mention law- to let them know that there can be more than one bottom line.
I am told that although 31 US states have similar laws on the books, this bill has been opposed from several sides. Having passed the Assembly it is in the State Senate currently, but its odds of making it out and across the Governor’s desk are uncertain. These things can take time, I suppose. If it doesn’t happen this year, let’s hope for next.
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Sustainability as a Standard Business Term
My clients are doing more and more transactions with European customers these days. A few years ago I worked on a lot of agreements to have products developed for my clients in China and elsewhere. I still do those, but now European companies are finding great deals in the U.S. so I’ve been working through a lot of those as well. It’s fascinating to see the economic pendulum swing across the globe like that.
In any case, one European customer sent over a form document containing a set of standard purchase terms. I’m not fully up on the details, but it looks as though they are required to file these with an EU government office.
I find it extremely heartening to see that the standard terms include this language on sustainable practices.
This makes me wonder about two things:
1) If this is merely required language and is just window-dressing or if the company actually stands behind it; and
2) What it would take to get companies in the U.S. to think about and add terms like this to their contracts.
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Twitter is My FriendFeed
I don’t totally get the point of FriendFeed- or maybe I just don’t like it. I consider it a meta-social network because it doesn’t do a lot that is totally new. It aggregates my contributions across the web (and those of people I follow), but there isn’t very much to actually do on the service.
At the same time, I would love a social web “home base”- a place I where I could both aggregate and contribute. I use Twitter and Brightkite a lot, but one friend might post often to Flickr and another to Yelp. Home Base would be a single place from which I could both keep track of my friends’ activity, and also interact with their photos, tweets and reviews.
Friendfeed lets me post to Twitter, but still isn’t as dynamic as that platform and it ends up being just another place for me to check, but not to post from.
In the end, it comes down to where most of my friends are. I have the most contacts on Facebook currently, but interact with people less there than any other other social network I’m on. That’s just me, I know. Plenty of people have entirely fulfilling internet social lives on Facebook.
I’ve realized that the place I interact with friends the most is Twitter. In addition, many other services feed into Twitter easily, so I can add a new service and not have to rebuild my social graph there before it becomes useful.
I’m close to the point of putting my Twitter ID on my email signature because it’s such a good way to get in touch with me, but at the same time I’m afraid of getting any more attached to Twitter because of its reliability problems. It’s really a shame. The service is so easy and so valuable. I sure hope they can overcome their “we built the wrong platform at the outset” issues and become the powerhouse they deserve to be.
twitter.com/park3
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Website Terms of Use - You Mean People Actually Read Them?
Twitter and Adobe both got dinged this year for making statements in their Terms of Use that neither company exactly meant. Twitter’s said that it reserved the right to “to warn and/or ban people who use their service to “abuse, harass, threaten, impersonate or intimidate other Twitter users”. Adobe’s gave Adobe a license to use any photos anyone edited with Photoshop Express online service- for any purpose.
When faced with a request to warn and/or ban an alleged Twitter stalker, Twitter realized it didn’t want to take such an aggressive editorial stance at all and would rather let users be responsible for their own content. Adobe corrected itself to say it didn’t plan to use anyone’s photos for just anything, so both statements were really mistakes.
As others have pointed out, terms of use are not complicated. They do need to be correct for the situation, though. Twitter and Adobe probably just grabbed someone else’s terms without a lot of thought and got nailed on it. AOL got nailed much worse by the Ninth Circuit for changing terms mid-stream without properly notifying users of its newly-acquired Talk America service.
The mild irony is that any good lawyer would also grab other sites’ terms of use, but instead of finding one set, s/he would take a look at a few sites, pick and choose the best/most applicable provisions and create something tailored to the site’s actual business.
All of which goes to prove the old saw- haste makes waste. It frequently doubles the legal fees too.
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Licensing Basics Primer on Gigaom
Gigaom.com published a piece I wrote over the weekend on ten key terms to know in a license agreement. As the comments point out, these ten scratch the surface of everything there is to understand about licensing, but I hope it is helpful. Take a look at let me know what you think.
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Empathy With My Clients on My Second Anniversary
June 1 marks the two year anniversary of starting my solo law practice. Recently a friend asked if it was what I expected, and it has taken me until now to think about how to really answer the question.
The answer is yes and no (you expected something different from a lawyer?).
Yes, the work itself is what I expected. I do more or less the same thing I did when I worked in larger law firms- a mix of (i) brand-new startups focused on getting off the ground and raising money and (ii) later-stage companies concerned with negotiating and signing revenue-generating deals as efficiently as possible.
The no has to do with the structure of the business itself. Working for yourself means wearing lots of hats. The other day someone called and asked for the “billing department”, which interrupted the “maintenance department” in the process of changing a light bulb in my office, both of which stopped the lawyer from doing the actual work of my business- advising companies and negotiating transactions.
I knew that part intuitively, but experiencing it firsthand is totally different. I have advised startups and company founders for ten years now, and having been through the startup process myself I have a *far* deeper understanding of how hard it can be to juggle all the balls that need to stay in the air to keep a business running.
So to all my past and present founder clients- nice job keeping it all going, and keep up the good work!
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How Much Money Do I Need from Investors?
This is one of the hardest questions to answer. There is no “right” answer to be sure, but here are the considerations.
1) Raising money costs both time and money. It takes time away from other things (it is not uncommon to see revenue dip during a financing since attention is focused on the investment instead of sales), so you don’t want to do it often. Legal costs are also considerable.
2) On the other hand, raising money involves dilution. You don’t want to raise too little because you don’t want to have to do it all over again soon. You don’t want too much, either, lest you dilute your ownership more than necessary.
One rule of thumb is to seek enough cash to last 18-24 months. This allows a decent amount of time in between financings, both so that no one needs to think about the next round immediately- and so that everyone can get a sense of where the business is headed before diving into another set of negotiations.
All of this is really preamble to a fascinating hint of a different model I saw this morning. Sapphire Energy announced a $50M “open checkbook” financing that allows the company to draw as much money as it needs to commercialize its technology rapidly.
What does this mean and how is it different from a standard financing? At first blush it sounds more like “venture debt” where a company takes a line of credit from a bank and agrees to repay it in cash and/or equity, but Sapphire’s investors aren’t known for making those kinds of investments.
I am going to poke around a bit and see if I can come up with some more information on the terms of the financing. What was the valuation? How is management/founder dilution calculated? Is it less if the company doesn’t need all $50M over a set period of time? What if Sapphire needs more than $50M?
Truly new investment models are rare. It will be interesting to see what this one actually looks like.
P.S. Sapphire’s business sounds terrific as well. A highly scalable crude oil-like substance from algae. Neat.
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Preferred Stock and Risk Apportionment
I wrote a post on Gigaom over the weekend that covers the basics of a VC investment term sheet. A couple of the comments wondered whether preferred stock screws the founding team by definition. Another comment there answered the direct point pretty well (preferred stock is just part of the process). Fred Wilson’s post from this morning covers the philosophical angle as well and is worth reading as a complement to the mechanics I spelled out.
To paraphrase him- and dig under the surface of his comments a tiny bit- a VC’s job is to take risks, and so is a founder’s. The founder takes a chance with his idea and livelihood. The VCs risk someone else’s money- and in the process her own livelihood as well, because if none of her investments pan out she is going to be looking for a new line of work.
The VC may also be very active in a business, but not on a day-to-day basis. Ultimately, a VC’s job is to give an entrepreneur some tools to build a company, but the VC has only so much control over how (and how well) the tools get used.
Preferred stock helps line up the relative risks given all of these factors. As a friend of mine put it even more simply, preferred stock offers a mechanism to ensure that if things go poorly, morale runs low and everyone starts to wonder when to throw in the towel, the people actually running the company on a day-to-day basis will feel more pain than the investors.
Sometimes this is enough glue to keep the whole thing together and sometimes it isn’t. I have seen cases where a company has failed and investors have given up some of their liquidation preference so that founders can get *some* cash back. I have also seen preferred stock terms used to enrich investors at founders’ expense. There is no magic about any of it. Cheating and fairness are a function of the people involved; preferred stock is merely the framework on which the VC investment process is built.
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Same Issue, Different Worlds
There has been a dust-up in certain corners of the Internet recently over Twitter’s alleged failure to deal appropriately with interpersonal conduct on the site. The relevant tweets have been removed, so none of the facts are easily verifiable. To summarize the story quickly, though:
*social media consultant Ariel Walden complained to Twitter that she was being stalked and harassed on Twitter by a specific user.
*Twitter declined to take action several times over several months, citing a desire not to filter content appearing on the platform, and also saying that the alleged conduct did not, in Twitter’s mind, violate the site’s Terms of Use.
*Twitter recently made several public comments on the matter, including one to say that it is reviewing its Terms of Use to more clearly say that it will not actively monitor content.
I spent a little time looking at this and came away interested much more in the issue as a study of human behavior than anything else. Specifically, comments on Twitter’s official blog post contain nothing but glowing praise for Twitter’s approach. In contrast, the thread on Twitter’s support forum is filled with nothing but condemnation of the company. Literally in each case- the comments are 100% pro-Twitter in one venue, and 100% pro-Walden in the other.
Is there a point to this? Possibly not, except that even within Twitter, finding “community” depends on how you turn the coin- look to the official outlet and find Twitter diehard supporters; look to the support forums and find a completely different view. Fascinating.
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Two Great Videos from Someone Who Hates Video
This post may serve to show that I am both (i) late to the party and (ii) inconsistent. When asked I will not hesitate to say that internet video bores me, and yet here I am posting two that I found terrific.
I am late to the party because the first one comes of out SXSW, a whole two months back. Apparently there was a spoof business plan competition panel there where people competed for the coveted prize of “worst website ever”. (Side note: I would have nominated AOL at basically any time since about 1994 and will vigorously defend that position, while acknowledging that it also cost me the chance to make a bunch of money in the 1990s.) The video is great because the guy spends five minutes explaining a business without ever actually saying what it does, and I’ve seen people do the same thing in real life too.
Merlin Mann’s Worst Website Pitch (the embed code for this isn’t working. Sorry.)
The second video comes courtesy of Brad Feld’s blog and lists numerous people who either failed miserably several times or were doomed to failure by teachers and others, and then went on to be extremely successful. It’s a useful reminder that life goes up and down- there is no linear path to success.
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Social Entrepreneurship and Alphabet Soup Corporations
There’s the C corporation that most people are familiar with (what you get if you don’t specify anything else) and the S corporation that is tax free but doesn’t allow preferred stock. Both of these names come from the sections of the IRS tax code that describes them.
Add now the B corporation. The “B” stands for “beneficial”. It doesn’t have special tax rules- instead the intent is to tell people clearly that the company considers benefit to its employees, the general public, the environment etc. along with shareholder profits. The organizers have developed a community of B-corp adopters, and it includes a bunch of “green businesses” but also a couple of big law firms, a skateboard manufacturer and a handful of software companies.
The challenge of socially entrepreneurial companies is that they can do very well, get acquired or obtain outside capital and/or management, and the core principles can get diluted. The B corporation process doesn’t prevent this from happening, but it does make loud and clear that social good is a core element of the business.
So how does one become a B corporation? First, one must fill out a survey. A passing score means that one can take the next step of amending the corporation’s Bylaws and Articles of Incorporation to state the social purpose(s) clearly. I haven’t done it yet, but I am going to take the survey as it applies to my own business. I hope I score well!
There is nothing magical about any of this. It can all be changed or abandoned completely. It is, though, a way to tell the world what your company cares about strongly. That can be good for the company, good for business and- one hopes- good for the world.
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Near-Perfect Summary of Angel Financings
Todd Vernon is the CEO of Lijit and wrote a post this morning that covers all the bases in angel financings.
http://falseprecision.typepad.com/my_weblog/2008/05/angel-financing.html
I won’t rehash the whole thing, but will comment on a couple of points.
Todd’s analysis of the different types of angel investors is very insightful. In my ten years of experience advising startups, the family investor class is the most common type, but the companies that are unable to broaden their investor base beyond that seldom succeed in raising further money.
The analogy to burning cash is a good one, though I usually use winning the lottery to make the same point. Startup entrepreneurs should be aware that at least on some level investment in a brand-new company offers about as much hope of return as lighting cash on fire, or spending $25,000 on lottery tickets. No one makes that decision lightly.
I mostly agree with Todd about convertible note financings, with a couple of qualifiers. First, no company should offer convertible notes if it doesn’t intend to convert them. Todd seems to say that some people might undertake note financings intending to pay them off in cash rather than equity. That is a terrible strategy and borders on abusive.
Second is that I have done successful note financings. In almost every case the Note investor(s) are also participants in the equity round and are using the Notes as a genuine bridge so that the company can get some cash while completing the steps to a larger investment. Notes usually come with warrants or other discounts from the equity round so there can be tension between the Note investors and the equity investors. Having the same people on both sides of the deal helps immensely to smooth that out.
Good post Todd. I am going to send a lot of clients to read your summary.
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Chinese Family Carbon Footprint from NPR
There is a lot of talk, of course, about the facts that (i) the U.S. has the highest per-capita (and overall) rate of CO2 emission in the world, and (2) that China is catching up quickly. This podcast from NPR puts some facts to the story.
NPR previously profiled a family in North Carolina that worked hard to reduce its CO2 output and succeeded in getting itself well below the North Carolina average. For contrast, NPR then profiled an “upper middle class” family in Beijing with a 3 bedroom apartment, a car and a house in the country that makes no real effort to conserve.
The result? Excluding air travel, the North Carolina family trying hard to conserve and the Beijing family that doesn’t are basically even on CO2 emissions. The American family travels more and farther by plane, so factoring that in put the Chinese family in the lead (in the best sense) by a wide margin.
This kind of data, even though anecdotal, is really fascinating.
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A Legal Easter Egg from the Beginning of Time
Legal releases are strange beasts, and philosophically one of my least favorite legal documents. California law requires that specific language be in a release in order to make it completely binding- in other words, if you don’t use the right language to say that the releasing party expressly relinquishes claims based on both currently known and unknown facts, then the releasing party can still make a claim if new facts come to light later. There is a special paragraph that has to appear verbatim in release agreements under California law to ensure that the release is complete.
I really hate “magic words” like this. Courts should look to the intent of the parties in determining whether a release is complete, not whether certain words have been invoked.
That’s actually an aside, though. This post is about a related, but different point. I mentioned the magic words to illustrate how careful attorneys need to be when they prepare releases. If they don’t cover all the potential sources of claims, it is possible for something to sneak back in. A release, then, cites the origin of the dispute and specifically releases any and all claims relating to it.
This morning I read an agreement that takes the idea to a perfectly logical, completely sensible under the circumstances, and yet still amusing conclusion. The language is clipped below, and expressly releases all claims “from the beginning of time”.
Where parties have had a longstanding relationship it makes perfect sense that the release should cover the relationship since the very beginning. No question that this gets there, and it even works regardless of one’s scientific and religious viewpoints. This is like a legal easter egg to me- clever, unexpected and there just for the attentive reader.
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Come Check Out the California Clean Tech Open’s Entrepreneur-Research Matching Event
I am a volunteer with the California Clean Tech Open, a business plan competition for cleantech startups. We have an event coming up next Thursday, May 1 at SRI in Menlo Park to provide networking opportunities especially for entrepreneurs and research institutions.
The CCTO gets terrific participation from the entrepreneurial and investor communities and is a great place to network and meet people who share an interest in the cleantech space.
Details on next week’s event are here. Come check it out!
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Two Quick Links from a Week (Mostly) Offline
A family vacation and a few important pieces of work that couldn’t be postponed meant that this blog got short shrift last week. Here are a couple of great tidbits from the blogosphere that I was finally able to focus on since getting home.
HBS Working Knowledge - Who Owns Intellectual Property?
Harvard Business School’s Working Knowledge newsletter has a good read on intellectual property in the digital age. It should really be called “How Do You Adapt When You Know Your IP is Going to Be Co-opted?”. Among other points, it notes that the (RED) campaign was expressly designed to be picked up freely by companies. The implication seems to be that it is similar to the GPL concept in software, where the license is free, but users of the software are restricted in what they can do with it downstream. In GPL’s case, the end product must generally also be free. In (RED)’s case proceeds must go to The Global Fund. Whether this is true or not, it is a nice example of an effort to promote viral growth of a brand among businesses as well as consumers.
I note as well that the HBS newsletter has conflicted feeling about the ownership of its own content. Most articles do not allow comments; a few are expressly designed to invite them. This article, appropriately, is one. HBS gets good comments. It should allow them more frequently, even if it meets losing some control over the content it puts out.
E-Commerce Law: Federal Court Upholds YouTube’s Terms of Use
This one is a bit wonkier. The relevant facts are that someone sued YouTube in Washington State even though the Terms of Use on YouTube’s site (you’ve read them, right?) specifically say that actions must be brought in San Mateo County, California. The court said that by using the site, plaintiff Bowen had agreed to the terms, including the choice of law provision.
This is another data point in the ongoing “legal discussion” of the validity of shrinkwrap, clickwrap and web site terms of use provisions. There is no ability to negotiate terms in any of these situations, so there is always some question whether certain provisions over-reach. In this case, the court decided that Bowen had expressly agreed to the terms with knowledge of them, and the San Mateo provision was therefore valid.
I still haven’t actually read the case, so I will reserve judgment on the facts- esp. whether Bowen was *actually* aware of the terms of use, or whether he just clicked “yes” at the appropriate moment. If the former it’s caveat emptor (visitor?) unquestionably, but if the term was in there and he clicked yes without really reading then this case doesn’t move the line at all reasonableness of non-negotiated click-through terms.
I like that, I should say. Non-moving lines are extremely helpful to those of us that depend on clickwrap and clickthrough agreements to get products in the market.
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Reblog from carpeaqua - Your Twitter is not your blog is not your Tumblr is not your FriendFeed
This is a smart manifesto of sorts on how to use multiple social media platforms well. With multiple places to post content (blog, Twitter, Tumblog, etc.) it’s very easy to end up re-listing the same content in multiple spots, but that tends to dilute the individuality of each outlet.
When I started exploring social media in earnest I really wanted everything to tie together, but there is no need. The offline pieces of my life don’t naturally tie themeselves together offline, so I shouldn’t try to force them together online. Thanks carpeaqua.
carpeaqua - Your Twitter is not your blog is not your Tumblr is not your FriendFeed
My Tumblog imports all of this blog’s posts as links, so I am breaking one of the rules here. I should take out that reblog link. This blog works better for the work side of my life and the other one for personal interests: music, cycling and occasionally a dash of yoga, skiing or something else. I think I’ll keep it that way.
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Former President John Adams Blogs from the Grave on Recessions
I recently started following the blog of John Adams, the US’s second President. He has good things to say, nothwithstanding that he has been dead for 182 years. Some of his expressions seem a litle colloquial, leading me to suspect some conemporary help in getting his thoughts out (notice I didn’ say ghost writer).
Still this one on recessions is spot-on. Recessions are historical labels. Let’s not worry about whether we are entering the first of two consecutive quarters of negative growth (or in non-economist terms, "decline"). Let’s think about policies that will make the economy strong.
What would I say about a Recession? - JohnAdamsUncensored
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It Never Gets Easier, it Just ______
I heard this phrase twice recently in completely different contexts, and I have been rolling it around in my head ever since.
The first time was in a yoga class. Yoga, for those who don’t practice it, can be described as a kind of moving meditation. In the process of breathing through the poses, one can learn to clear one’s mind. It’s really hard to do, though. I usually manage it for about 15 seconds at a time. Maybe that’s why this phrase stuck with me:
It never gets easier. The spaces [between thoughts] just get longer.
I then saw almost the same phrase in the chapter heading of coach Joe Friel’s book The Cyclist’s Training Bible. The quote there was from Greg Lemond, and read:
It [training] never gets easier. You just get faster.
So what does this mean? To me it means not just that many worthwhile things take a lot of effort; they require constant effort. You can never get to cruising speed and then just coast- you have to keep putting in the work.
This definitely applies to business as well. I think businesses hit spots where they can glide a little- when a network effect kicks in for a web company it doesn’t have to worry so much that month about generating traffic (and can focus on serving it)- but the smart ones know they need to start pedaling again pretty quick or they’ll end up getting dropped.
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The Peter Principle of Time Management
The Peter Principle is the HR maxim that any person will be promoted to the level of his incompetence- s/he will keep moving up the ladder until s/he no longer has the ability to get the job done. It is rather cynical, especially the corollary that “work is accomplished by those employees who have not yet reached their level of incompetence”.
I work for myself, so the rule doesn’t apply directly to me since there is no ladder for me to move up (or down). Still, I feel like I struggle with a kind of Peter Principle in life all the time. Bijan Sabet posted a note recently about hitting his personal peak of concurrent demands on his attention. I lamented in a comment that there is no great name for this phenomenon of “everything happens all at once”.
The Peter Principle of Time Management is not the whole concurrent-peak-time demand problem, but it is a part of it. My theory here is that we fill our time with obligations until we are no longer able to meet them all effectively. We tend to become aware of the fact that we are overcommitted when all of the people we have promised things to come looking for them all at once.
I run my own business, which demands a huge amount of time and energy. I am also a husband, parent, son and friend. I volunteer time to my kids’ schools and one or two other nonprofit resources. When not completely engaged by any of those items, I practice yoga, ride bicycles and occasionally race them. And I write a bunch of it down here and on my Tumblog. That’s a lot of stuff and I have realized that if I want to be even nominally competent at each of them I need to avoid the temptation to take on more.
I have been reading up on peak energy issues lately, and an analogy to the electrical power grid seems apt. With electricity, power plant construction is driven by peak power demands. I can’t add more capacity, so all I can do is calculate the likely peak load from each activity/relationship I commit to and realize that it is probably going to take capacity away from something else.
Or in Peter terms, commit to only the number of obligations that will permit me to accomplish each of them competently.
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A Business Applications Company With No “Enterprise” in its DNA (in the Best Way)
Exactly when people started saying “enterprise” instead of “large business” is pretty good material for light banter. I don’t know the answer, though I have discovered an almost perfect inverse correlation between a company’s use of the word enterprise to describe itself and my ability to understand what the company does: if they say “enterprise” I am basically guaranteed to have no idea what the company’s product does.
The conversations that start joking about enterprises usually segue directly into wondering why the same businesses talk about “solutions”. Their websites have sections entitled “Products” and “Solutions”. One might think that these could be the same section- aren’t the products supposed to be the solutions? It doesn’t work that way, though.
I think the reason I never understand what the companies do is that they never state the “Problem”. They assume that visitors hit their site already knowing what they are looking for. If most visitors are not like me, then they are probably right. I always find myself wishing for a frame of reference, though.
That’s why I was so happy when someone pointed me to Timebridge. It makes a product that connects calendars across application platforms. I don’t use Outlook or Google Calendar, the two products it work with currently, so I haven’t tried it out. When I saw the site, though, I found something really great:
No Solutions. There is the product and there is “The Mess”. Thanks, Timebridge, for telling me why I might be interested in your product.
Bonus points for having live demos of the product in place of management headshots on the Management Team page. That’s a smart way to make the product real.
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Parkhill Venture Counsel Branches Out, Opens New Fund
I like the name of my business a lot. Always have. Others have disagreed, though. Most of the objections, and a certain amount of ongoing confusion, relates to the fact that it sounds a lot like Parkhill Venture Capital.
I’ve thought long and hard about how to address this problem and I have at long last come up with a solution- go with the flow and start a fund. You can imagine what an exciting decision this is for me. I have worked with entrepreneurs and investors for my entire career, I love the energy and excitement of the whole process and I feel very much ready to take this new step.
What, you may ask, will my fund focus on? This, again, is something I have considered carefully. I strongly believe, and empirical evidence from the venture community seems to support, the idea that one should invest in what one knows. I have witnessed several cycles in the business world during my career and nothing is more clear to me than that when investors get outside their “zones” they get in trouble quickly and end up holding the bag when markets turn sour.
Those who know me well, then, will be not at all surprised to learn that my nascent fund will be devoted to the following areas. Some may see my focus as overly broad, but I believe that I can manage this diversity to avoid conflicts within the portfolio while sticking to my core competences. Without further ado, then, these are the core areas on which I will focus:
*Grilled meats served with assorted Mexican and Mexican-derived accompaniments, occasionally wrapped in tortillas. Without even leaving San Francisco I find the possibilities in this arena near-overwhelming.
*Quality malted libations. In addition to the exploding diversity in US opportunities within this sector I have been actively searching out underappreciated assets from across the globe. This will provide valuable balance with the strongly local focus in the first item.
*Derivatives of the coffee plant. Many view this sector as “over” based on the existence of a single behemoth in the space, but I believe that there is room for many smaller, more nimble businesses to develop high-quality products and to capitalize on dissatisfaction with the major player in the arena.
*Products to enhance the efficiency and enjoyment of two-wheeled, human-powered transportation. No question that this is an important growth area and I look forward to significant efforts in the space.
Thanks to everyone who has made this possible. I hope you will keep me in mind and refer promising opportunities in each of these areas to my attention.
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Three’s a Charm for the Social Graph
Clearly it is “social networks on the brain” day. Here’s my third and final post of the day on the topic.
I just read Brad Feld’s post about Loic LeMeur’s post (whew!) about his distributed social graph.
Loic penciled out a kind of map of his online life and concluded that he would rather have it all run through his blog than live in 10-15 different silos devoted to specific types of communication (video, short-form blogging, long-form blogging, etc.). Brad tied this to his firm’s principle of investing in companies that form the “glue” among internet presences.
I realized that there is an idea in here that is a component of why so many of my friends are on Facebook but I find it unsatisfying. I posted my thought as a comment on Brad’s post, and I am re-blogging it below.
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I just listened to an interview with Clay Shirky (http://tinyurl.com/3y72d5) where he identified a big gap between “famous” and not famous people- the difference being (online and off) the ability to respond symmetrically to every conversation directed to a person.
Loic wants everything on his blog because he produces a lot of content, gets a lot of attention and can’t respond equally to all of it- i.e. he’d rather respond in comments on his own blog than click through to other platforms, log in, comment, etc. He wants a magnet more than he wants glue.
People with more symmetrical graphs may be happier using something else (eg Facebook)- or lots of places- as the hub(s) of their social graphs depending on how they respond to others as well as what they produce. A layer of glue would work better here.
The glue metaphor is breaking down for me. I wonder if “synapses” is more accurate- not sticking things together permanently, but constantly forming and re-forming connections, getting stronger and smarter as it goes.
. . . mmm, glue still has a better ring.
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I am not a “famous” person on the Internet. I can respond in kind to everyone who reaches out to me. I do produce a lot more long-form content than most of my friends, though. This puts me in the middle. I don’t need to run everything through a single point like Loic, but I do find a limit at around 5 social network outlets to check in with regularly.
The glue that works best for me links networks, but doesn’t replace them. I like Disqus because it sits on top of my blog and Tumblog, but doesn’t replace them. I can’t get excited about Friendfeed or Plaxo because they just create more places for me to visit.
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Just When I’d Concluded that Twitter is Utterly Banal (Not that there is anything wrong with that)
Moira Gunn’s Tech Nation podcast covers a lot of ground and has some great interviews. One of the most interesting I have heard in a long time was with NYU professor Clay Shirky, who wrote a recent book on social media.
The best part of the interview was where he talked about the use of social web tools for political purposes. Starting with a reminder that Chinese students used fax machines in 1989 to obtain Western reports on the Tiananmen Square protests and crackdown, he went on to discuss several examples of social media being used to record things that matter to the world- as opposed to everyday events that matter to specific individuals. My favorites:
* A flash mob convened in October Square, Minsk, Belarus in May 2006 (in Belarussian(?) with lots of pictures) to eat ice cream. Mass gatherings in October Square are illegal and security forces monitor the same social networks as the activists, so plainclothes police were ready and arrested a number of participants. Photos document the entire episode, including the arrests.
*Twitter used by Egyptian activists to let the community know their whereabouts, esp. whether they have been arrested. Shirky pointed out that when the fact of a person’s arrest is widely known, the likelihood that the person will be seen again increases dramatically. In this case, Alaa was able to Twitter the circumstances of his detention from his mobile phone.
Shirky opines that tools like Twitter and SMS mean that connectivity is an all-or-nothing proposition for repressive governments. I don’t think he has it quite right- China and other countries manage to screen web sites effectively. The point is well taken, though- lightweight communication tools can find ways through the walls. This is really inspirational stuff.
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Why is Facebook the Place I Have the Most Friends, but Get the Least Value?
I write this blog, I have a tumblog/lifestream at www.park3.org, a Twitter account and a Facebook page. These are my principal forums for self-expression on the web. I’ll come right out and say that I don’t like Facebook very much. I’ve tried to find value in it, but I have mostly failed.
I like to write, which is my I like to blog. Facebook isn’t about that at all. Fair enough. I like music a lot and FB lets me pull content from Last.fm, Pandora, Sonic Living and the Hype Machine, but I can do less in the applications on my FB page than I can on the original sites themselves, so there’s no draw there either.
I tried using Facebook to aggregate content from my other online outlets, but it does that poorly because each aggregation source is siloed in an application box on my profile and the whole thing gets cluttered pretty quickly.
Photos are one of Facebook’s strongest suits. I continually tell myself to take more photos. Maybe if I can do that I will start using FB photos more.
Groups and fan pages are useless- nothing ever happens on them that I can tell.
That leaves the other Facebook-native features: Wall, Poke, Zombies, etc. I know a lot of people who have fun poking one another and leaving wall messages. That’s great, but I find it unfulfilling. Messaging is good and I use Wall, but chest bumping, fish-slapping etc. don’t appeal to me at all.
All that said, I have connected with more real-life friends online through Facebook than anywhere else. What this means, practically speaking, is that I get the most value on Facebook from status updates.
Why is this the case, though- why are more friends on FB than anywhere else? I think it’s because it is so easy. Twitter and Flickr do a much better job at status updates and photos, respectively, but Facebook brings them together and does them both just well enough to be a single point of focus, and throws in the quick-touch poke stuff to help people feel close even when they aren’t in real life.
I didn’t mean to end this post so cynically- saying that Facebook is really a lowest common denominator that does enough things just well enough to be appealing to the broadest segment of the population- that’s what it seems like to me, though.
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Finding Success in the Middle of the Market — HBS Working Knowledge
Harvard Business School’s Working Knowledge newsletter is one of my favorite regular reads. This recent article teases apart market segments in a smart way.
Finding Success in the Middle of the Market — HBS Working Knowledge
Per the article, most people tend to think of markets as a trade-off between the high-margin, low-volume top end and the low-cost high-volume structure at the other end.
Author/professor John Quelch says that this ignores the substantial middle section of the market. In the automotive world, he points out that this is where the Ford Taurus and Toyota Camry live- mainstays of each company’s product lines.
My question is- what is the best way to fill this market? Ford is too old a company to be a meaningful example. Toyota has moved upmarket from the high-volume end over the past 30 years but still has such a "value" imprimatur that it had to introduce Lexus as a new brand to capture the premium market.
If I have an idea for a company and would like to play in Prof. Quelch’s "midfield", am I better of starting with a premium product and gradually moving the price point down, or starting at the low end and working up?
Is controlling the midfield a reasonable goal at all, or does it require too much luck and carry to much risk of losing focus?
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ESPN: The worldwide leader in selling ads solo? » VentureBeat
Ads are the backbone of the Internet. Without them the “content is free” ethos would be entirely a lost cause. The ins and outs of who sells ads on the internet and who benefits from them is as important, therefore, as just about anything else out there.
VentureBeat discusses ESPN’s decision to stop using third-party ad networks, hire its own salespeople and bring in the advertising directly. As the world’s largest sports website, VB believes ESPN has the clout to pull it off.
ESPN: The worldwide leader in selling ads solo? » VentureBeat
I’m sure ESPN has its own salespeople for the cable portion of its business, so this is probably not breaking completely new ground.
However, here’s a thought about how it might get different. What if ESPN builds out its web-ad sales network really well? What if it then says to itself “hey, the content is free to consume but expensive to produce. Can we generate some extra revenue by placing ads on other sports networks as well? Maybe we’ll compete with ourselves a little for the pageviews, but if we get the right commission structure in place we’ll be just as well off.”
And then what if the New York Times has the same thought? They still have the cash to fund that kind of shift and they desperately need a new revenue model to replace paper subscription sales.
Is it too big a stretch to see the major news content producers turning into major ad networks? Maybe, but then again the 10% of my Sunday (paper) newspaper devoted to advertisements tells me maybe not. TV and print media have always been about wrapping ads around content in the best possible way. The Internet just makes it easier to sell ads around other people’s content as well.
Fun thought either way.
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What Happens Online When a Person Dies in Real Life
This post is a little macabre. It is also personal and I am having trouble sorting through my feelings in a coherent way, but need to get a few thoughts out of my head regardless. Apologies in advance.
A friend died suddenly and tragically two weeks ago. His friends and family organized (and continue to organize) a number of real-world events to celebrate his life and to say goodbye. This is about what happens in the virtual world.
Matt had a Linkedin and a Facebook account. The accounts are free, of course, so presumably they will stay up unless/until someone figures out how to get his passwords, log in and remove the accounts.
I don’t know why anyone would want to do this any time soon. Friends have left messages on Matt’s Facebook wall and turned the page into a memorial of sorts. His Linkedin page is more sterile, predictably, and stands as a record of his work life. People could leave messages of some sort (post-mortem recommendations, perhaps?), but no one does.
I find it comforting to visit his Facebook page once in a while and see a reminder of Matt the way he recorded his life unfolding. There is a memorial blog as well where people can leave comments for/about him and that is also a really nice thing, but it is about him. His own pages are him.
Writing this has produced a lot more tears than I expected. Facebook is “a social utility that connects you with the people around you”. It is also designed to be transient and ever-changing as the page owner’s life unfolds. When the person isn’t around any more his life-record freezes, but the connection continues as friends stop by, leave messages, tag him in their photos, etc. It is extremely poignant.
Maybe someday someone will decide that the Facebook page has served its purpose and remove it. For now, though, it is a way for Matt’s friends to reach out to him any time and remember him the way he wanted to be remembered. It helps.
So long Matt.
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What Needs to Go in My Business Plan?
I have read many business plans from clients and friends over the years, and helped write more than a few. I have strong opinions about what works and what doesn’t and I have been mulling a post on the subject for a while.
As I started writing though, I found that lots of other bright people have also written extensively on this topic. More to the point, many of these people are VCs in the business of funding companies. Here, then, is a whole lotta link-love on the subject of business plans, with my own editorial comments.
* Purpose. Guy Kawasaki says that writing the plan is a really valuable exercise to “to solidify the objectives (what), strategies (how), and tactics (when, where, who)“. He also says (two lines prior) that it is a “mechanical step in due diligence”. Translation- no one is going to read the whole thing, so figure out how to make the important points stand out without being ostentatious about it. Use descriptive headings.
* Length. Around 10 pages is all you need. Guy says 11 and even allows an extra 9 for good measure. The best ones I have seen have all been concise. If you have trouble reducing the essence of your business to that amount of space you are too close to it. Get a friend who knows nothing about the idea to review it and tell her/him to cut out everything the tiniest bit extraneous.
* Executive Summary. The Woodside Fund allows 3-5 pages for this. Brad Burnham says 1-2. Guy says 1 and I agree with him. Remember that your audience may look at 10 of these every day. Hitting the major points so a reader can take them all in a single scan is a big help.
* Management Team. This is the hardest for most people, because new businesses are usually in new areas for the founders so their prior experience isn’t necessarily relevant. This is also the least-discussed area of the business plan by all of the VC blogs I researched for this post. Ask the VC cites the ability to build the product and ability to sell it as key attributes in founders. I’m willing to bet there are more exceptions to this rule than any other, though. I can name a half-dozen clients whose founders had vision and managerial/organizational skills, but no technical or sales experience per se. What is the secret then? I’d say it is to instill confidence in the audience that you can do what you say you will do. I hate to be so vague, but I really believe if you can convey that everything else will follow.
* The Business. Dick Costolo nails it- for web companies at least: “You do need to intimately understand where you sit in the proverbial value chain and what your position there means for your company, but you don’t need to know precisely how you will extract value.” You’ll be lucky to garner a $250M valuation while “starting to focus on making money” like Meebo, but a good idea can go a lot farther on the web than in many other places without a clear revenue stream.
This is really three sections in one: the problem (why people have been clamoring for your product without knowing it), the solution (why your product will satisfy the unrequited, unvoiced longing) and the business model (where you fit in the value chain, if not how to monetize). Give adequate attention to each part.
* Financials. Everyone wants to see them and everyone knows they are always dead wrong, so what to do? Ask the VC says that the user adoption piece of the projections is the most interesting, but it is the part most likely to be wrong and over which you have the least control. The answer is that the ideas that matter more than the actual numbers on the page. The financial projections convert the concepts in the business model through into cash terms. Don’t get hung up on whether growth will hit in month 19 or 27 because you will have very little control over that. Instead show that you understand your place in the value chain.
Other key points: one page of projections for a new business, shown monthly for 2-3 years, then quarterly through year 5. And don’t provide best/average/worst case projections. Work out a growth plan and be able to justify it.
* Flexibility and Adaptability. Or as Josh Kopelman says “your business plan is wrong”. You know everything is subject to change, as do your readers. State your plan confidently, but don’t get tied to it.
I realize I could continue almost endlessly on this topic. That’s enough for now, though. More later.
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On Raising an Angel Round for Your Startup
Here is a thoughtful post on raising money from angel investors. Author Charlie O’Donnell points out that it is really the same process as any other kind of networking- get out and meet people in your space and over time you will develop the kinds of trust relationships that faciliate investment.
This is going to be BIG! - The Secret Life of Angels: Raising an Angel Round for Your Startup
The problem I have seen many people run into is finding a great idea for a business and then trying to find the capital. Occasionally it works. So does looking for relationships in bars, but the odds are better if you aren’t going at it randomly.
The companion to this is the advice from Jeff Clavier and Brad Feld about making sure your investors are accredited. Everyone says they are accredited and as long as the company does well everyone is happy. In the worst case burnout, though, unaccredited investors put the burden on the company to say that risks were properly disclosed.
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tartley.com » The Long Overdue LinkedIn Backlash
This is a great read. The author penned a scathing Linkedin “recommendation” of another user, pointing out in the process that Linkedin is built only to allow positive reviews, which makes the system less than valuable.
tartley.com » The Long Overdue LinkedIn Backlash
What to do then, when one thinks that a person should not be trusted with a pencil, never mind a job? Be honest or let the matter drop? It would be nice if our “trust networks” let us trust the collected wisdom, but it is a hard nut to crack. Ebay has worked hard at it, but it still requires egregious conduct to merit a negative review.
The problem, in my opinion, is endemic to virtual communities. Written text (email or site-based) is tone-deaf. Nuance is lost completely and context is nearly so. Compare this with a private conversation in which negative points can be explained and put into accurate context, and couple it with the adage that negative feedback outweighs positive by a factor of 10:1 or so, and the problem becomes apparent- no one wants to be dissed, and few are willing to risk the fallout from posting a negative opinion of someone else. VentureBeat has extensively chronicled thefunded.com’s efforts to create a fair and honest feedback system. It’s not easy.
This is not to say that the nut can’t be split, but capturing the real meaning
and reasons behind someone’s negative comments and framing them accurately may require extreme fact- and situation-analysis. Thefunded has it easier than most in this regard, since the VC-entrepreneur relationship is well-defined.
When all is said and done, though, Linkedin is among the worst at producing meaningful feedback. They should take comments like these as the must-fix issues they are. Get after it, Linkedin. You are too useful to be sidelined by a lack of trust in your recommendations.
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Meebo raising round, valued up to $250 million. Bear Stearns sold for $236 million » VentureBeat
The headline from VentureBeat captures the spirit of the times just about perfectly. Meebo, the IM-in-a-browser company that is "starting to focus on making money" is looking to raise a chunk of change at 4x the valuation of its last round and pegs itself as worth a quarter-billion dollars before that happens.
Meanwhile, Bear Stearns earned $233M last year according to its 10-K filing(and $2.3B in 2005 and 2006- oops) and was scooped up by JP Morgan for 1x last year’s earnings.
It’s going to be a strange year.
Meebo raising round, valued up to $250 million. Bear Stearns sold for $236 million » VentureBeat
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News media needs to have consumers pay
The headline here is direct from the SFGate.com article linked below. It isn’t exactly a revelation, but the article has some interesting tidbits- such as that print journalists are figuring out how to create audio and video news items, but the advertising departments haven’t caught up as quickly.
News media needs to have consumers pay
It is possible that I am part of the problem here. I ignore the ads on all the sites I visit as a matter of habit- i probably click on 1 in 1,000 or less.
I suspect most people are similar, which leads to the conclusion that new ad/revenue models are needed. But what should they look like? Hmm, I guess there’s a reason the advertising departments haven’t moved as quickly as the newspeople.
Or to paraphrase something my friend Chris said recently "content is pretty easy to develop, but revenue is fricking hard to come by".
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The “New Environmentalism”, the Next Set of Problems and the Darn 2.0 Meme Again
Time Magazine online has a piece on "environmentalism 2.0" and the promise of technology to lead the planet out of the climate mess technology has created.
I love technology and I am really fired up about the level of attention climate issues have gotten in the past year or so. Still, every time I see one of these pieces I remember a line from Jared Diamond’s book Collapse. I don’t have the book in front of me, so to paraphrase: technology has never solved any problems without creating a whole set of new ones (if you don’t believe this I have some Yucca Mountain real estate to sell you).
Fossil fuels have enabled many things (like this blog post). We desperately need a non-greenhouse gas-emitting replacement for them, of course, and the sooner the better.
At the same time, let’s not forget to keep an eye out for the unintended consequences. Maybe in the next go-round (assuming we squeak through this one) we can figure out how to address the problems before they become crises.
P.S. Dear Time editors: please stop referring to things as "___ 2.0". Do you have any idea how 2007 that sounds?
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Automatic Contract Renewals: Get Out Your Colored Pens
When your business enters an open-ended relationship with another company, there are two ways to manage the term. First is to provide that the agreement will terminate automatically unless renewed, and second is the opposite- the contract renews automatically unless is it specifically canceled. Each method has its pros and cons. Here are some ideas to consider:
Automatic Termination
All contracts should be periodically reviewed for value to the company. One way to make sure this happens is to provide that the contract must be actively renewed or it is deemed to lapse. The problem here is that it requires memory and attention to manage. I would not recommend this to any but the most detail-oriented of clients who have a great calendar system to track review/renewal dates and a person capable of staying on top of them all.
However, for certain special transactions such as limited-term trials, this can make sense. The risk, of course, is that one forgets to renew, realizes several months later that the company has incorporated someone else’s technology into a product and is then in a poor negotiating position when the time comes to set the general availability pricing.
Automatic Renewal
This is far easier to manage, for obvious reasons, and I recommend it as the default. The trick here is that most automatic renewal contracts allow termination (without cause) only within a set period, such as 60 days prior to the renewal date. Miss the window and you could be stuck with the deal for another year. A calendar of these dates- at least for big-ticket contracts- is still highly recommended.
With automatic renewals, it is also crucial to check the “emergency exits”. What are the grounds for “for cause” termination? Once invoked, can the other side cure the breach? Is that desirable or would it be better just to let everyone walk away?
Good Practices in the Real World
In both cases, the challenge is not get caught by surprise. As a company grows the volume of contracts and renewal dates gets larger as well. Again, I suggest a calendar (or a spreadsheet) of key dates and a person charged with keeping it updated. In most cases, renewal is a non-issue unless there are problems with the relationship. An ounce of planning here can avoid a pound of headaches.
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Mini Case-Study on the Emperors’ VIP Club
Bloomberg has a min-study gleaned from FBI transcipts on what made the Emperors’ VIP club successful. It’s an entertaining read. Highlights include:
*Strict payment policies and careful training on credit card imprints
*Clever marketing of its clients as wealthy/powerful men
*Market analysis of different regions (the Miami and LA high-end prostitute markets are apparently flooded)
*”Buy out" option to cut out the broker in the case of long-term relationships
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Marketing Your Way Through a Recession — HBS Working Knowledge
From Harvard Business School’s Working Knowledge newsletter- eight (!) tips for keeping one’s business intact through a recession.
For the most part, these are things any business needs to review periodically in any case. For me, the one-line summary is "avoid the temptation to withdraw into product-engineering mode. You still need to sell too". I recall many stories from the last recession about companies that laid of all their sales and marketing staff and kept all the engineers- only to end up with a product no one was buying.
Marketing Your Way Through a Recession — HBS Working Knowledge
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Why Do Stock Options Expire 90 Days after Termination of My Employees’ Service?
I get this question a lot from clients. It used to be a very simple situation- companies hired employees and granted them stock options as incentive for expected work. If the employees quit, it stood to reason that they were no longer providing valuable services.
Therefore, essential stock option terms included (i) vesting of the option based on time spent as an employee, and (ii) outright cancellation of the option 90 This post is about part (ii) of that formulation.
IRS rules codify both of these rules. Incentive stock options (the tax-advantaged kind) are only available to W-2 employees and can not be exercised more than 90 days after termination. The other kind, non-statutory options, are not subject to that restriction, but many or most stock option plans say that *all* options expire 90 days after termination of service regardless.
Most companies I work with hire a core group of personnel, but outsource substantial amounts of work (and value creation) to non-employee contractors. The model above has substantial flaws in that case, because it is hard to tell when a contractor “terminates” service.
So are the stock option plan terms wrong? ISOs are locked up by IRS statute, but should NSOs be more flexible to allow termination for more than 90 days after termination?
My answer is generally no, but occasionally yes. Stock options take a lot of attention to administer. They can easily end up “leaking” equity out to people who no longer provide value to a company. For this reason, I encourage my clients to adopt a policy of expiring options after termination. The 90 day period makes it easier to manage ISOs and NSOs without excessive brainpower.
At the same time, there are occasions when a company may wish to allow contributors to exercise options after termination. A private company with a number of long-term contributors (employee or contractor) and a relatively high stock price might choose to let these people retain their options after termination as a way of saying “Thanks for your efforts. We’d prefer that you exercise and get the stock itself, but the exercise price makes that prohibitive, so we’ll let you hold the options until we have a liquidity event”. These situations are few and far between.
The remaining question is how to handle contractors who may make valuable contributions, but work irregularly for the business. An investment banker in this situation might get warrants, which are identical to stock options except that they expire at a prescribed date rather than based on service.
My advice in this situation is to keep warrants for the bankers (the finance types are happier seeing that) and use stock options for contributors to the business itself. This is where an NSO that is exercisable regardless of the holder’s term of service to the business can make sense. Cases like this in which people provide *really* valuable services that merit long-term options are few and far between, but they do come up.
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The Value of Software Patents
I am at conference today at UC Berkeley’s Center for Law and Technology. I just sat through a terrific panel discussion on the usefulness of software patents.
Brad Feld is a noted opponent of software patents. He held his own well against several others on the panel. If I understood his position correctly, it was (a) that the effort to prosecute patents is lengthy and time-consuming, (b) that software is such a dynamic field that patents can’t keep up with evolution of a business (especially a startup business), and (c) that IP portfolios result in extensive IP reps & warranties and significant potential liabilities when the startup eventually sells to a larger business.
On the other side, the argument is that patents represent a stake in the ground for any business. Weak patents exist, but when a company develops unique technology and protects it with a patent(s), it helps that company to establish its own value and possibly sell services around the technology.
In addition, because patents are public records, the knowledge goes into the public realm to serve as the basis (with due attribution/license fees) for future innovation.
The pro-patent camp’s arguments are relevant in all fields- not just software- so the question is really whether software is so different from, say, biotech, that the patent system doesn’t work.
My gut tells me that software is a more nimble field than many others, with much shorter product lifecycles. A 20 year term on a software patent probably won’t generate much value after the first 5 years or so (though the MSFT Windows group may disagree).
Still, abolishing software patents outright sounds like flushing the baby with the bathwater. This is certainly not my area of expertise, but I will venture my opinion that software companies need to think a little harder than companies in other industries about whether a patent will generate more value than risk, but that patents can still provide significant value.
I’d love to hear other opinions, though. As noted, I am no expert here and trying to understand the scope of the debate as much as I can.
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Tidal Energy, Plug-in Hybrids and *Turning* *Off* the *Lights*
Climate change begins at home for sure. Putting a stop to it also requires lots of local effort. Still, where’s the line between encouragement and pie-in-the-sky-ism (I just made up that term)?
San Francisco mayor Gavin Newsom is reportedly bullish on tidal energy, despite the fact that it is economically unfeasible for the near future, and would produce very little energy.
Newsom Waves On SF Tidal Energy « Earth2Tech
Someone last night also told me that San Francisco has an open purchase requisition out for a fleet of city plug-in hybrid vehicles. The problem is that no one is making them as OEM and there have been only 150 or so plug-in conversions of hybrid vehicles nationwide (maybe worldwide) ever.
I applaud San Francisco for moving to the vanguard in pursuing alternative energy. Without taking away from that at all, I would also like to see practical initiatives such as getting commercial buildings to turn the lights out at night. Imagine how much coal it takes to light all those offices when no one is in them at night.
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IP Protection - “Take No Chances” Department
I recently received a standard form of license agreement from a prominent technology company that featured the following paragraph:
I can’t remember when I have seen IP rights applicable throughout the entire universe. Let’s just hope they can read PDFs around Alpha Centauri. And that the Alpha Centaurians will sign on to the Paris Convention governing reciprocal trademark rights- that is, after the laser-coded version of the agreement beamed their way has actually reached them.
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Trademark Law as a Weapon to Stop Online Forum Discussions
Prof. Eric Goldman of Santa Clara University is a reliable source of updates on "Internet law". This is a good summary of a tough situation:
LifeStyle finds itself being maligned in RealSelf’s online forums. Established law says that RealSelf can not be held liable for statements made by third parties, so what’s an aggrieved business to do?
Lifestyle Lift goes after the forum owner for misuse of its trademarks. The argument is mostly a dog- one can use another’s trademark to identify the business it relates to, but not profit from the mark. The expense of litigation, however, usually makes people decide that removing the allegedly-infringing content is a better course of action.
RealSelf doesn’t do that though. It gets made and countersues for . . . violating its terms of use. The claim is that Lifestyle Lift posted "shill" reviews of its own product (the horror) in violation of RealSelf’s terms.
RealSelf may well win on the merits of the infringement claim, but it’ll still be out a bunch of cash on the defense, and the breach-of-terms-of-use counterclaim isn’t going to bring a whole lot of that back.
I don’t know any of the underlying facts of this case (were the critiques accurate?) so I won’t take sides. As a UGC junkie, I am strongly in the camp that people should be free to post their opinions of products, including negative ones. There are limits, though. Businesses also need ways to protect their reputations against untruthfulness and outright slander.
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Do I Really Need a Metadata Scrubber?
The California Bar Journal, a monthly newspaper for attorneys, had a recent update on laws regarding metadata, how to avoid disclosing it inadvertently to opposing sides in litigation, and what to do if someone sends you a document containing inadvertent disclosures.
There are a couple of items in it that might be surprising. Among these is that the California Supreme Court recently opined that if a lawyer receives a document from the opposite side and realizes that the document contains information in the metadata that could be detrimental, the lawyer has a duty to notify the other side of the disclosure.
The trick is that metadata is so pernicious that it’s almost impossible to get rid of without third-party tools. I once had a client that was the victim of “business plan theft”- someone else literally took the company’s business plan, changed the names and used it as its own. This was made crystal clear by the fact that the bottom of the plan had a Mail To hyperlink field. The thieves had typed a new address over my client’s text, but the hyperlink itself was unchanged. If one hovered over the link my client’s email address was still visible.
The more prosaic “forgot to removed tracked changes history” is an even easier way to reveal one’s intra-company discussions as well.
So the question is “who needs to scrub metadata”?
State and local Bar association opinions offer a pretty good answer. Lawyer conduct in litigation settings is highly regulated, and yet the bar associations are profoundly split on how to handle metadata. Some say that a lawyer needs to stop reading as soon as s/he finds confidential information (metadata) inadvertently disclosed, some say the lawyer need only notify the sender of the disclosure, and some say that the burden lies on the sender- leaving the recipient free to view, use and even actively mine metadata.
Taking this as a starting point, the clear answer is that once information has been disclosed it is in the open- at least in the vast majority of cases. So yes, if there is information to protect metadata scrubbers are valuable.
Microsoft has a tool called “Document Inspector” in Word, Excel and Power Point 2007 (not available in Mac Office 2008) that will make sure tracked changes are all removed from a document. Saving a document to pdf will have the same effect. I am told that third party tools such as Metadata Assistant and Workshare Protect do a more thorough job of identifying and removing undesired metadata, though I have not tried either of these products.
Most companies have good storage and backup policies to make sure data isn’t stolen lost in case of a catastrophic event. Metadata disclosure is probably more likely on a week-to-week basis (how many redlined documents do you work with regularly?) but gets less attention. As with most security measures, it probaby isn’t necessary in 99.99% of cases, but the 0.01% can be a killer.
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Roll-my-own Tumblr Digest
I use this blog mostly for business oriented posts, and Tumblr and Twitter for “lifestreaming”. What I have discovered, though, is that the line gets frequently blurred and there are things I would like to post in two or more places.
On my Tumblr page, I have added feed digests from Twitter and Last.fm. The former sends one daily update of my tweets, and the latter shows my weekly top artists.
I would like to drop a daily Tumblr digest into this blog, both so that content that wants to be in both places can get there, and so that the feed from this blog doesn’t get overwhelming.
So, dear readers, this is both a notice and a request. I intend to keep using this blog for longer pieces, which seem to happen twice a week or so. At the same time, “short form” notes on interesting things I find from across the web and MP3 blogs may start showing up here.
The request is that if anyone has found a good way to do this, kindly let me know in the comments or by email.
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The First Rule of Holes
I’m sure I am the last person to hear this term, but it’s a gem.
The First Rule of Holes is that if you find yourself in one, stop digging. It sounds so simple- I think the hard part may be understanding that you are actually in one, or maybe the urge to tunnel away from problems is just irresistible.
Either way, the term is going into my lexicon.
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Slow Steps Into the Digital Age at the IRS
For those who have never filed form 1099 before, one copy (red) goes to the IRS and another (black) goes to the independent contractor who provided services to a business. Apparently the reason for this is that the IRS’s computers scan the filings, and they can only read forms printed with red ink.
One can’t download the fileable form, because the shade of red must be very specific and a normal color printer can’t be trusted to get it right. One must have the forms mailed out or buy them from an office supply store.
About.com tells me that the Social Security Administration updated its systems to accept black copies of form W-2, but the IRS has changed its systems twice without adding this magical ability.
The IRS does allow 1099s to be filed electronically. This is a great step forward- it fairly leapfrogs the whole download/print/mail correct-color routine.
*However*, while thousands of businesses everywhere have figured out how to create online forms viewable and editable in any web browser, AND have worked out a way to let consumers create accounts online in minutes (if not seconds), the IRS is not quite there.
So in order to conveniently file my 1099s online, I must first mail in a form to the IRS, receive a Transmitter Control Code back by mail, and then download and install the IRS’s special form-creation software.
Identity theft and fraud are certainly big concerns so I can understand the need to verify identity before setting up accounts. Putting documents in the mail is not a remedy here though (the IRS should ask Network Solutions about Stephen Michael Cohen and Sex.com on this point).
The IRS has a huge job managing millions of accounts. They are certainly correct to be careful, and kudos to them for getting on the e-filing program. My wish, though, is that after Microsoft takes over Yahoo and drives away key employees, that the IRS will see an opportunity to pick up some Internet expertise. Yahoo has great e-commerce software. Get some of the engineers behind it working on IRS e-file programs for all kinds of filing.
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Oh, Those Darn Fiduciary Duties
It must be really tough to be Jerry Yang these days. First his no-sacred-cows 100 days campaign fizzled, now his Board is (if one believes the New York Post) seriously considering Microsoft’s tender offer.
Yang is a director as well, of course. That means that despite the obvious pride of ownership he has in the company, and his clear hope to turn things around rather than see the business picked up by anyone else, he needs to consider what is best for the shareholders.
But what is best? There is no way to answer this question, which is why directors and officers rely on the “business judgment rule” to shield them from Monday-morning quarterbacks everywhere. In short, so long as the Board acts conscientiously, considers all information that may be relevant to a decision and reaches a decision based on its analysis of all the facts at its disposal, the law provides significant protection- even if the Board’s decision works out badly.
In practice, emotions are hard to separate from facts. Yang and his fellow Board members need to put aside their personal feelings and decide whether the sale to Microsoft, sale to a third party, or going the course alone will bring the best outcome for shareholders. This is no mean feat, especially when you started the company and it has been part of your identity for a dozen years.
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A Letter of Intent Can be a Dangerous Thing
I’ve been reading DC Toedt’s notes on “350 Things I Wish I Knew as a First-Year General Counsel”. He has a number of very good, practical observations about how to be an effective attorney- and not a “Sales Prevention Department”.
One that made me laugh was to remember that “the most useful function of a letter of intent—arguably its only proper function—is to establish that the parties do not intend to enter into a contract at that time.”
In other words, it’s a contract to say that there is no formal contract. The comment is hyperbole, of course- the parties do intend to enter a contract at a future time or they wouldn’t bother with the LOI to begin with, but there is a lot of truth to it at the same time.
I ‘ve definitely seen deals go bad between the LOI and the final agreement. Most LOIs say explicitly that they are non-binding, but having the signed piece of paper can have some kind of placebo effect that gives people undue confidence in the strength of a relationship.
I actually had one client that got a signed LOI, proceeded to hype it for all it was worth and told a bunch of investors that the final agreement was a mere formality. The investors chose to wait for the final agreement before committing, and when the other side backed out it was very embarrassing for everyone. I don’t think the company ever recovered.
So yes, letters of intent are great to have. Just don’t bet the company on one.
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Dilbert and the Corporate Lawyers on Protecting Secrets
I love it when legal advice and common sense overlap. Here’s Dilbert presenting the entirely reasonable proposition that marking something “top secret”, then putting it in public view is likely to give it wider distribution (some might call it an “attractive nuisance”).
Next up, a reasonably typical paragraph from a non-disclosure agreement. It says confidential information needs to be so marked. That makes sense, too- especially when the sensitive information belongs to another company.
It’s paragraph 7 that pulls it together. It’s not good enough to get someone’s business plans and leave them lying around- even if they are marked confidential. Keep them secure.
And for those who find lawyers overly wordy, it took Dilbert three pictures to say what the agreement does in 111 words. So much for the old adage.
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I’ll Take My Metadata to Go, Please
OpenSocial, OpenID and the rest of the shared-social graph ideas are promising, but they are starting to make me channel Rodney King and ask “can’t we all just get along?” Everyone seems to love the idea, but no one knows how to manage the details.
Meanwhile, I use Zimbra on my Mac. My wife uses Yahoo and Outlook. I want to share my calendar with her, but can’t figure out how to do it. If there is a cross-platform calendar sharing utility I definitely have not found it.
In a similar vein, I use Last.fm, Pandora and occasionally Hype Machine and Seeqpod (whose days seem sadly numbered) to stream music, and Sonic Living for event updates. They should all talk the same language so I don’t have to enter my favorites over and over- or at least work from the same starting point using my iTunes listening habits. I understand that each site’s “secret sauce” is its music-recommendation algorithm, so by all means wow me with great picks. Just don’t make me tell you again and again what I like. Is that really so difficult? Apparently.
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Tumblr, Grr - But Hey There’s a Nice Bit of Code
I started playing with Tumblr a little while ago. My page is here. It is a short-form blogging platform that is great for posting music, photos, videos, etc. It is decidedly techy, though.
The site offers a variety of “themes” to choose from, and also give users total freedom to edit the HTML. This is nice if you actually know HTML because it lets you add all kinds of features like search boxes, comment systems, feedburner integration, etc. Changing default themes, however, wipes out any custom code.
I know- as the proverbial saying goes- just enough HTML to get myself in trouble, and no CSS or javascripting whatsoever. I have tried out most of the themes I have found, which means that when I factor in all the theme changes and the back-to-defaults after I break the page with faulty code, I have now re-added comments, a Lijit search box and a Feedburner feed to my tumblog approximately 9,472 times.
I’m pretty good at it by now- or at least if I can find good directions I can follow them easily. I’m lost as soon as I get off the map, though.
Fortunately, I am now reasonably happy with my page and I am resolved to stop messing with it. Then again, I like the way Bijan Sabet does his comments integration. Wish I could figure out how to copy that . . .
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Small Mysteries Solved - Why Lawyers Write in ALL CAPS
Why is it that certain parts of most commercial-type business agreements have sections written in ALL CAPITAL LETTERS? Don’t the lawyers who wrote it know they are shouting?
The answer is mundane, a little unsatisfactory and pleasantly simple all at the same time. Commercial arrangements in the U.S. are governed by and large by the Uniform Commercial Code, a set of model laws prepared by a national conference of experts and adopted- more or less verbatim- by each state.
Article 2 of the UCC covers sales agreements. Among other things, it says that when goods are sold, there is an implied warranty that the goods are “merchantable”, or of decent quality.
Further, the article says that any limitations on this warranty must be CONSPICUOUS.
All caps is the practical way of satisfying this requirement. While the SEC and others in the Plain English camp might argue that putting complete paragraphs in capital letters actually lessens readability, we can be thankful that this not the accepted view. The alternative might be to put the language at the top of the agreement, or under separate signature, or otherwise turning the conspicuousness requirement into a nuisance.
Happily, the conference of delegates, courts and wise heads everywhere reached the sensible conclusion that capitals got the job done so that we could all move on to more important matters such as making the documents actually facilitate the transactions to which they relate.
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The Elusive Triple Bottom Line Again
Harvard Business School’s Working Knowledge newsletter has an insightful post this morning asking whether sustainability and triple-bottom-line principles are growth opportunities or zero-sum propositions for most companies. There is great discussion in the comments as well.
I’ve mused on the same ideas previously. The idea of “service”- of adding value to society and the world that goes beyond shareholder returns- is captivating. Is it feasible?
The article speculates that there is some “low hanging fruit” that companies have already grabbed and that further integration of economic, social and environmental bottom lines is likely to be more difficult. Several commenters also point out that stock markets tend to reward the economic gains and gloss over less visible results.
True enough. Just getting any one line consistently “in the black” is hard- keeping them all there is probably more than most companies can do all the time. It helps when banks and regulators push issues like climate change onto the economic balance sheet, but the effort is still largely its own reward, which explains why even the companies really excited about the ideas consider 1% of profits to be an acceptable amount to expend on social/environmental goals.
Back to the original question- I believe there is a “balance point” for most businesses- where triple bottom line results may swing back and forth a bit over time, but stay basically stable. If each line is a pendulum, a few companies may be able to get them all swinging together most of the time, but most have to live with a certain amount of lurching when the pendulums get out of sync and then work to smooth the disharmonies. That’s what i strive for in my own business, at least.
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Dear Mr. Facebook: Less Application-Spam and More Group News in My Feed, Please
Facebook’s news feed is, in my opinion, the best thing about the platform. I understand that lots of users happily bounce around among friends’ profile pages, but that isn’t something that interests me at all. Let’s say I’m too busy for that- though in truth I bounce around to various web pages elsewhere a bunch. I guess I just don’t use my “down time” that way.
This is why I am frustrated that the news feed has been taken over by application-spam. I really don’t care that someone scored __ on a Flixter quiz, or that so-and-so challenged someone to something or other.
On the other hand, there are loads of FB groups and fan pages that do nothing for me because I don’t use the site that way. I belong to a handful of groups, but I’m not even sure why since I never visit the group pages.
Putting these two observations together, then, here is my request to Mr. Facebook:
1) Let me opt out of application spam. I don’t even have the Movies application and I still get spammed by it in my feed.
2) Publish updates from my Groups pages. I joined the darn Paris-Roubaix group so I’m interested in it. Tell me when people post messages or upload new photos. If you show me there is activity happening I’ll be more likely to visit the page.
Feel free to show me ads based on my group interests too. I’ve already self-selected my interest in certain topics, so I’m more likely to click through on ads reflecting those interests.
I’m not sure if this goes against the current on how Facebook monetizes traffic. Everyone seems focused on applications (probably because this is the only- and weak- hope for third parties to make money on FB), but I find them really superficial and transient. Groups (and possibly fan pages) represents lasting interests. Let’s see them get some more love from Facebook.
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Unusual Forced Merger Decision by Tennessee Court - Now THIS is Why Companies Elect Delaware Law
Clients ask me all the time whether they should form their businesses as Delaware corporations, and what the benefits of Delaware are generally. My advice is that for early-stage businesses Delaware is an added, unnecessary expense, but as companies mature, spread out nation-wide and go public, Delaware has a volume of law and litigation history- and a degree of consistency in its decision-making- such that the outcome of a variety of disputes can be predicted with a decent amount of accuracy.
I don’t get to cite many great examples of this, though. Here is one where litigation in a Tennessee court seems likely to end badly. I can’t imagine a Delaware Chancery Court reaching a similar decision.
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Clothing retailer Finish Line, Inc., backed by UBS financing, made an offer to buy Genesco, Inc. in a deal valued at $1.5B. Finish Line and UBS then tried to back out of the deal, saying that Genesco had failed to disclose material information that would have made the deal less attractive had it been provided up front.
The Tennessee Chancery Court held that although the merger agreement allowed for termination based on “material adverse events”, the reasons for Genesco’s declining performance were general economic conditions that fell within an exception to the termination right.
The Chancellor went on to hold that the appropriate resolution of the case is to require Finish Line to complete the merger.
This can’t end well for Finish Line, whose market capitalization, at $110M, is about 10% of what it was when the deal was announced in June 2007. That means the purchase price is close to 15x Finish Line’s current value. Ouch.
I can’t say for sure that Delaware would have reached a different decision, but I would be amazed to see it force a merger to go through under circumstances like this.
The other point worth mentioning here is that choice of law provisions are hard to negotiate in contracts. Each party usually wants its home state law to govern, the business principals never want to get involved in that level of detail and the lawyers seldom have enough specific data to make a convincing argument that ___ state will work out badly. In probably 99% of cases *not* arguing the point is probably the right result as well, since so few disputes actually go to litigation.
Sometimes, though, it matters. When I negotiate deals there is a handful of states whose laws I am comfortable with and I try not to let choice of law slow done completion of a transaction. The Finish Line case is a good piece of ammunition for compromising on Delaware when asked to provide for choice of law of a state with which I am not familiar.
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The Annual Corporate Minutes Scam
At least once a year since I started practicing law I have gotten a question about and copy of an official-looking letter entitled “Annual Corporate Minutes Compliance” or something similar. It’s a total scam and it has been a pet peeve of mine for years.
There are a number of companies that bilk unsuspecting corporations in this way. These companies ask for $100-$200 and in most cases will send a rote form of “shareholder meeting minutes” that won’t be valid because they will refer to an annual meeting that likely never happened on a date arbitrarily picked by the scammer.
I was pleased to learn recently that the California Attorney General has sued some of the more egregious participants in this obnoxious practice.
For the sake of getting the facts out, here are the legal requirements in California:
1) California corporations are required to submit a list of officers and directors along with the address of the company and agent for service of process every year. The fee for this is $25, and the California Secretary of State sends a form that looks like this to do it:
Corporations can also e-file here: https://businessfilings.sos.ca.gov/. Bottom line- if it doesn’t say it is from the California Secretary of State, suspect a scam.
2) Corporations in California are required to maintain minutes of Board and shareholder actions. Corporations are also required to hold annual shareholder meetings, but no agency will suspend a corporation’s right to do business for failure to hold the meeting or adequately document it so don’t fall for that scare tactic (NB: shareholders and potentially even third parties might have claims against a corporation if it fails to keep good records and respect the rights of its constituents, but that is a completely different kettle of fish).
3) If a corporation fails to file the statement described in #1 its right to do business will be suspended. I strongly recommend staying current with filings, but if the corporation is suspended, it can be reinstated in almost all cases merely by filing the delinquent report and paying the $25 fee (for each overdue year).
This is the kind of thing no one should have to remember or think about, and it drives me crazy. So to all the business owners out there- next time you get a letter asking for money to prepare your annual minutes, check it carefully to be sure it comes from- and the check is payable to- the California Secretary of State, or ask your lawyer to take a quick look.
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The Yamas and Niyamas of Renewable Energy
Journalist, journalism professor and media consultant Jeff Jarvis posted a couple of blog entries from the Davos Economic Forum comparing the approaches of Al Gore on one hand with Google founders Larry Page and Sergei Brin on the other.
Gore, says Jarvis, favors raising carbon taxes, while Google is pressing for investment in alternative energy to reduce its cost. “Tax versus investment” is how Jarvis describes it. This appears to be a common theme these days, but I think it is a false choice.
At the VLAB event I attended this week, I was amazed to hear Kleiner Perkins’ John Denniston saying in extremely strong terms that government policy is needed to get alternative energy businesses moving as quickly as they need to. It surprised me that a prominent VC would feel this need so strongly.
He’s right, though. Private capital is a drop in the bucket compared to what government incentives can do for industries. But for favorable privacy, publicity, tax and other regulations I bet the Internet would not have become the essential fabric of life that it currently is. Denniston’s argument was that government has the power to increase the attractiveness of renewable energy sources, and to decrease that of coal and oil energy.
The yogis figured out the need for this kind of balancing thousands of years ago and laid out a set of five “dos” and five “don’ts” for a healthy life- the yamas and niyamas. Balance is critical to keep us on the right path in life and business.
I’ll give credit to Jarvis for not having his thoughts completely together since he was liveblogging. If his point is that “the discussion is too much about what we should not do rather than what we can do” then ok. More yamas, fewer niyamas. If by “tax versus investment”, though, he means that we need to choose then he’s dead wrong. We need both. Investment (yama) by the Googles (and Wal-Marts) that have serious industry leverage, and tax policies (both yama and niyama) from government to run that lever as far out as it will go.
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On Getting Paid to Recycle
I wrote a piece for VentureBeat some time ago on the idea of “productizing good”, a great phrase I picked up from Terrapass’s Tom Arnold. The idea is to use capitalist/consumerist impulses to drive socially and environmentally beneficial goals. I cited Terrapass, Ethos water and Kiva.org as good examples of the trend.
Lately I have seen a number of businesses with a slightly different spin- they pay *us* to do good. I mentioned 
EnerNOC the other day as one company that pays its customers to reduce their electrical consumption, and a commenter was kind enough to point out several other companies in the space as well.
On the consumer-facing end of things, I attended a VLAB panel the other night that featured RecycleBank, whose business model is to pay consumers to fill their recycling bins. RecycleBank signs contracts with municipalities, taking a cut of the amount the city saves on landfill costs as recycling increases, and passes on a portion of that to consumers as credits to be used at designated merchants. The goal is to divert recyclables out of landfill, potentially generate income for the cities by making material available to the recyclables market, and reward consumers every month for sorting their trash. I would have been really skeptical of the whole idea but for (i) learning that most people in the US don’t recycle much, and (ii) the company has a bunch of cities under contract already.
Even closer to my heart is Terracycle’s Brigade project. Terracycle’s main business is selling organic fertilizer and pesticides. They package their products in straight-from-the-recycling-center plastic bottles. More recently, they have started projects to collect used yogurt containers, drink pouches and energy bar wrappers. I go through a lot of energy bars, so I’m pleased to have a place to send the wrappers. For each container, $0.02- $0.05 is donated to the charity of the collectors choice. I’m still working through the details, especially what will be done with all the material collected, but I love the idea.
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Scrabulous’s Triple Word Score to Electronic Arts for “Dexterous”
Scrabulous is, I am told, the 9th most popular application on Facebook. It was created by two student brothers in Calcutta, launched on FB in June 2007, and as of this writing is used by approximately 600,000 people per day and generates “over $25k” in monthly revenue for its creators.
The rights to the Scrabble board game are co-owned by the world’s #1 toymaker Hasbro (US market), #2 toymaker Mattel (rest of the world) and #1 electronic game maker Electronic Arts. Hasbro sent the Agarwalla brothers and Facebook a notice of copyright infringment and takedown demand shortly before the start of 2008, and Mattel apparently joined the demand shortly after.
So if I understand the story so far: somehow these three giants let slip Scrabulous’s meteoric rise on Facebook for six months, and nearly a month after the takedown notice the application remains live on Facebook with nary a reference to the controversy.
Some opine that the toy makers are losing a great marketing opportunity and accruing negative publicity. I doubt it. I am inclined to agree with Josh Quittner that the toy barons are simply letting Scrabulous take the line and run with it, building a fan community and working out bugs in the online implementation. They’ll reel it in when they’re ready and land the fish for themselves.
EA’s position is ideal here. A friend in the game industry told me that EA has more attorneys on staff than any other type of professional (including developers!). My guess is that they are pushing Hasbro and Mattel behind the scenes and quietly locking up their online rights without risking negative press.
I’m still rooting for the little guys- the Agarwalla brothers- and hopeful they can work out a deal that nets them something for their effort to build the platform. Time is not on their side, though. The bigger Scrabulous gets the tighter the vise is likely to squeeze them.
As Quittner’s article says, they started the game “without thinking through the legal aspects”. Here’s hoping they pull through with enough cash to try again, and give those legal details a few moments’ thought.
Full disclosure: I played Scrabulous once and lost badly.
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California Discovers the Wrong Approach to Demand Response
The California Energy Commission withdrew a proposal this week to include “programmable communicating thermostats” in California’s 2008 building code. The thermostats would have been a form of demand response technology that would allow utilities to adjust electrical consumption in buildings and homes from a central facility.
The idea there is that by turning down everyone’s air conditioners a little, electricity use can be reduced when the grid becomes strained. Peak-period electricity is expensive both because it has to be bought at “emergency” rates and because it potentially requires more power plants to create the supply.
It is not a huge surprise that the public freaked out about the proposal. It sounds awfully big-brotherish as presented, especially when the technology is reported as “remote-controlled thermostats“.
Still, companies like EnerNOC have done very well offering this kind of technology to major energy consuming businesses. The difference- assuming I understand EnerNOC’s business model correctly- is that EnerNOC pays its customers when the electricity gets cranked down. The utilities spend less on peak-load power, EnerNOC takes a fee for managing the system, and EnerNOC passes on some of that fee to its customers.
The net result: less power consumed, customers save because they are using less, and they get a rebate from EnerNOC on top of that. PG&E rolled out a test program in Stockton offering homeowners a similar deal- I wrote about it here.
California should take a lesson from the private companies using this technology already- or at least spin the idea better. Try again next year.
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Shortening the 800-mile Trip Between Hydrogen Filling Stations
I stumbled across an article recently about Jonathan Goodwin (thanks Asher). A little more digging and I realized he is something like a cult hero in the “green car” field (fortunately he seems to spend more time in the shop than on his website).
Goodwin is a self-taught tinkerer, big-car loving environmentalist and alternative fuel afficionado. It’s a cool combination. The Fast Company article talks about a 600 horsepower, 60 mpg biodiesel-hybrid Hummer he is working on, which sounds interesting but expensive.
What is more interesting is his idea of “dual fuel” systems. I think the article refers to one of these as a $5000 bolt-on system that injects hydrogen into a diesel motor, doubling fuel efficiency and producing 80% fewer emissions.
Tinkerers abound in any field, of course. The question is whether their ideas can scale to the mass-production requirements of a major auto manufacturer. Goodwin’s $28,000+ conversions probably won’t make it onto any production lines any time soon.
The dual-fuel idea, though, is awfully interesting. The jury is still out on whether hydrogen has a future (wikipedia covers all the problems), and one of the sticking points is the chicken-and-egg issue of needing ubiquitous fuel stations to fill up before hydrogen cars become appealing, and needing a certain number of hydrogen cars on the road to justify investment in the hydrogen delivery infrastructure.
Enter the dual-fuel vehicle. Goodwin’s engines run cleaner and longer on hydrogen, but can run nicely on plain old diesel as well. Dual-fuel would allow a gradual transition to hydrogen (still assuming that is a desirable objective). Makes sense to me.
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You Got Your Plaxo in my Facebook!
VentureBeat reported that Facebook is set to buy Plaxo and speculates that the latter company’s huge database of email addresses and its technology for syncing contacts across platforms could be driving factors. That sounds like a reasonable idea, and it might be just as likely that any acquisition is a preemptive one to keep Plaxo’s technology from being snapped up by another social network.
Whatever the reasons, and assuming there is any truth to the rumor it sounds like a great idea. I have accounts on Plaxo and Facebook and check them both almost daily. I’ve realized they are nearly complete opposites: Facebook has a wealth of “stuff” happening with all the various applications my friends use, but it’s a roach motel- data goes in but has a hard time getting out.
Plaxo, on the other hand, is a completely open list of many more of my contacts, but with nothing much happening. I get news feed updates showing my friends’ Twitter and blog posts, updated contact information and birthdays, but that’s about it. Nothing original.
A merger that combined Plaxo’s openness with Facebook’s usefulness could be interesting somewhere down the line. I (along with probably just about everyone else) would love to check out new social websites from time to time without having to re-invent my social graph on every one just to make it useful. If Facebook could Plaxo-sync-invite my friends into applications that live outside of Facebook (I gave up on Tumblr after about 15 minutes because I didn’t know anyone else on it)- now that would be neat.
P.S. I’d be pleased if Plaxo’s current or future management made it a little more difficult to send “connect with me” invitations. I realized recently that I accidentally spammed every single person in my address book- including all the people I met once and don’t really know- with an invitation. Sorry about that.
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Internal Combustion “Not a Great Product”
I just stumbled across this great quote from VC Matt Trevithick at Venrock. It is part of an interesting interview on Earth2Tech in which (in part) Trevithick wonders aloud whether the VC model is going to work well in the alternative energy sector.
The quote about the internal combustion engine is brilliant, though. He must mean that in the same way that people talk about Microsoft products not being very good- it hasn’t stopped Microsoft from massive success, and internal combustion’s flaws haven’t stopped it from being about the most successful single product ever (not counting sliced bread).
For the record, I think Trevithick’s point was to compare the relative efficiencies of gasoline and electric motors with their fuel sources. Gasoline packs a huge amount of energy into its volume, but the engine doesn’t extract it very well and creates lots of waste. Electric motors are very efficient by comparison, but batteries are lousy.
The real gem in the interview, though, is where Trevithick starts to break down the alt-energy field into IT-based businesses like demand-response company EnerNOC that make easy VC investments and “pure energy” ideas like solar and biofuels that may not be good places for venture capitalists to play. I’ve wondered about this too. The latter category requires so much infrastructure development that it seems like a tough job for all but governments and corporate giants.
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“Yes, the Man with No Legs has an Unfair Advantage”
The flap over Oscar Pistorius is fascinating on several levels. It seems totally absurd on first blush that a double below-the-knee 
amputee who runs on carbon fiber “blades” is likely to hear a ruling from the international governing body of track & field (the IAAF) that he can’t compete in the Olympics because his prosthetics give him an “unfair advantage”. As a lawyer I can imagine being the guy who has to present the argument with a straight face in front of an IAAF panel- the quote in the heading is me imagining how that would go.
A gut reaction to the case says “if the man is fast enough to qualify then let him run”. A moment’s more thought leads me to wonder why the IAAF really cares that much. How many amputees are there who can compete at an international level with able-bodied athletes? I have to think there is a fear in the back of someone’s head that if Pistorius is allowed to run using his blades, then someone else is going to use some other kind of device and it’s a slippery slope straight downhill to full-cyborg competitions. Someday.
Especially in a week when Marion Jones was sentenced to six months in prison for lying about taking steriods, it is understandable that governing bodies want to draw deep, dark lines in the sand wherever they can on performance-enhancers.
At the same time, it sounds like the IAAF is relying on a mechanical analysis of the blades compared to human legs to reach its conclusion. Does this suggest that the blades might be redesigned not to offer any (alleged) performance advantages? Oops, where’d that line just go?
Final note: the NY Times article says that Pistorius was born without femurs and his lower legs were amputated when he was 11 months old. As a parent I can scarcely imagine what a tough decision that was for his parents. Yikes.
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Hello China, I have Timbuk2 on the Line
The government of China just announced a ban on the “production, sale and use” of plastic shopping bags- the “standard” kind that get used once and then pile up in landfills and kitchen drawers everywhere. Shops are permitted to sell them, but not allowed to fold the price into the cost of goods- i.e. mark everything up slightly in order to give the bags away free. This sounds like a tricky piece to enforce and it is noted that implementing regulations are being worked out.
Even more interesting is the prohibition on “use”. The government’s statement says the bags are not allowed in “passenger trains, vessels, buses, planes, stations, airports and scenic spots”. Does this mean that citizens aren’t allowed to carry them at all or just that vendors aren’t allowed to hand them out? It’s unclear.
Either way, there’s a great business proposition for messenger/urban professional bag maker Timbuk2. That company developed a process for partially melting thin plastic bags to make thick messenger style ones, only to get slapped with a cease-and-desist letter from Target for using its logo without authorization.
It isn’t like there’s any lack of plastic bag stock, but if Timbuk2 ever needed to find a ready source of trademark-worry-free bags, I’m pretty sure China’s new rules will give them more raw material than they could ever figure out what to do with.
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Beware the Yoga Wars
I like yoga a lot. I’ve been practicing (more off than on, admittedly) for something like 12 years now and I have been amazed to see how much interest has grown in that time. The concepts of mindfulness, santosha (contentment with things as they are) and simplicity are great reminders and mental breaks from the rest of my life.
That’s why I am endlessly amused to read that Equinox gym in New York City is “expand[ing] and pursu[ing] an aggressive yoga strategy” that includes partnering with Hong Kong’s Pure Yoga, whose web site describes its retail interiors as “ergonomically designed for the ultimate shopping experience”.
Seeing the words “aggressive”, “ultimate shopping” and yoga used together is a little jarring and also great for a laugh. The “yoga market” has apparently matured. But is it a bubble? Will fortunes be made and lost between sessions of virabhadrasana? Only time will tell. 
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Vale Think Secret
Apple announced that it has settled two-year old litigation over Apple rumor blog Think Secret’s publication of information about the then-pending release of the Mac Mini computer. Some pundits have expressed concern that the settlement involves closing down Think Secret’s site, and that this may set an unhappy precedent for other blogs.
That worry seems a bit overblown to me- being put out of business by a big-guy litigant is an ever-present risk for little guys everywhere. Just because it happened once doesn’t make it any more or less likely to keep happening.
What I found interesting in the case, in light of my earlier post about trade secrets, is that Apple initially brought suit claiming trade secret infringement. I.e. that the existence of and Apple’s plans for the Mac Mini were not-generally-known information with economic value that Apple had taken steps to keep secret. The court disagreed and held that the information did not constitute a trade secret.
Here’s another difference between trade secrets and other types of IP, then- a party has to prove to the court first that it owns a trade secret, and then that the secret has been improperly disclosed. Patents and trademarks are registered through processes in front of Patent and Trademark Office attorneys, not by a judge or jury.
It isn’t immediately clear to me if this is a positive or negative attribute of trade secrets. It may be as simple as pay now (for patent or trademark registration) or pay later (when trade secret litigation comes up). Depending on how complex the topic is, I can see a USPTO examining attorney reaching a different conclusion from a judicial factfinder (judge or jury) about whether certain information is proprietary. At the least USPTO precedents and procedures are a bit better mapped so the outcome may be a little more predictable. Banking on a court to uphold a trade secret requires an extra roll of the dice.
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I Can Understand a Patent and a Trademark, but How the Heck do Trade Secrets Work?
Trade secrets are a deceptively simple idea: like the fabled Coca-Cola formula, they are proprietary ideas that have never been shared. Because they are “secret” they are entitled to intellectual property protection.
But what does that really mean, and how does one keep something “secret”? Clients ask me this with some frequency (hm- $30k to obtain a patent that I then need to spend more money to enforce, or $0 to keep a secret?) and I’d like to share some of the basic concepts. There are some excellent “deep” resources out there, so I will focus on the common questions I get from clients.
What is a Trade Secret?
Under California law, a trade secret is (i) information that (ii) has economic value, (iii) is not generally known, and (iv) is subject to reasonable efforts to keep secret. It can be an idea, a process, software, knowledge of ideas that don’t work, and many other things. Essentially it needs to provide an economic advantage to the holder, and steps need to be taken to protect the secrecy. Since efforts to protect secrecy can easily lead down a slippery slope, it is worth noting that extreme, expensive measures to prevent industrial sabotage are not required.
How Can I Lose My Trade Secret?
The one word answer is “disclosure”. Inadvertent or intentional disclosure will both blow the protection. In the latter case damages may be available for breach of secrecy obligations, but accidental disclosure will do the job as well. Workers should be told the information they are handling is confidential, steps should be taken to recover records from departed workers and reasonable measures should be taken to make sure that information is maintained on a “need to know” basis if the secret is a critical one.
It is also worth noting that independent development of the information will terminate trade secret rights. Reverse engineering does not violate trade secret protection laws, and a “hot” idea that is not generally known when developed can become known later and lose protection as a secret.
How Do I Know I am Not Infringing Someone Else’s Secret?
This is tricky. Patents and (registered) trademarks require public filings, so a company can find it if there is existing protected IP in a given area. Trade secrets are secret by nature, so it is entirely possible that one could develop technology that inadvertently duplicates someone else’s trade secret right.
The answer is, again, that independent development by itself does not infringe a trade secret. The key here is to have enough notes, research records and other facts to back up the argument that one developed one’s information independently and without reference to the competitor’s secret information. In a small field where the players know one another well this may be easier said than done.
Talk to Your Lawyer
These ideas scratch the surface of trade secret law and probably beg more questions than they answer, like “what do I do if someone discloses my secret”, “how can I make sure my employees protect my secrets” and “what are the remedies for theft of a trade secret?” Anyone asking these questions should definitely talk to a lawyer- the answers are too complex and likely depend on specific facts. Still, I hope this gets some people pointed in the right direction with regard to what trade secrets can and can’t do, or at least helps figure out what further questions need to be asked.
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The Social Network Dance
I’ve recently started to receive a surge of invitations to yet another professional social network (which shall remain nameless). I still haven’t figured out how Open Social or anything like it will actually affect life in the real world. Will I suddenly be on people’s networks in lots of places after making one uber-connection? That seems desirable and undesirable at the same time.
Still, I know this. I checked out the social network for which I am currently receiving invitations. I can’t figure out if it is useful or not. However, I do know that building my “social graph” on any network is time-consuming. As a result I am accepting these invitations on the off chance that the network turns out to be valuable someday. Is the alternative to Open Social just to be “easy”?
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How to Make a Splash and Ruin Your Career at the Same Time
Being at the top of any field is incredibly difficult- impossible, really, for all but a select few. The people who do work at the top generally spend years toiling away in the trenches building their credentials before they get recognized for their efforts.
That’s why it’s even more amazing when a complete outsider is able to step in and make a significant contribution to any field. Albert Einstein may be the best example anyone will ever come up with for this- he famously worked as a patent clerk while developing his special theory of relativity.
A backlash against upstart outsiders is also to be expected. When everyone else has to put in time and years deep in the field, how is it possible for an outsider to step in and contribute at the highest levels?
All of this, plus an interest in cosmology undeterred by (or because of) my poor math skills, explains why I find the story of Garrett Lisi so interesting. Lisi holds a doctorate in physics, but divides his time between surfing on Maui and snowboarding in Tahoe. Along the way, he claims to have developed a simple “theory of everything” to unite classical physics with quantum mechanics (it is based on the “E8” mathematical concept represented in the picture). It’s a bold claim- scientists have chipped away at the idea for decades with few testable theories to show for it. The person who eventually does crack the code will probably end up on a pedestal together with Isaac Newton and Einstein himself.
Lisi’s paper received both praise and criticism, as befits an audacious claim by an unknown scholar. I certainly can’t say if he is right or wrong. The business lesson I take from it, though, is that grand claims may be easy to make, but require extraordinary proof. If Lisi turns out to be wrong his career as a physicist will probably be over before it ever really started.
I prefer a simpler mantra I picked up from an old mentor: “underpromise and overdeliver“.
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New Cycle Capital Having a Go at Multiple-Bottom-Line Investing
New Cycle Capital is a new venture firm with a mandate to make money while investing in the “green economy” and underserved domestic markets. This is an area I find fascinating because it is such an intricate dance; some of my earlier thoughts on it are here.
Companies focused on a single, economic bottom line really have one big thing to think about- making money. Companies that adopt a triple bottom line approach or some variation on it are juggling almost by definition to find a profitable business that supports the non-economic goals.
I think most companies can’t really put that off very well, which is why they settle for making money in one arena and using it to do good in others. Investment funds run much the same way. The Omidyar Network, for example, cites a commitment to “creating opportunity for individuals to improve the quality of their lives”, but a quick look at its Portfolio page shows a split between for-profit and non-profit investments.
Pacific Community Ventures is a $60M family of funds trying to do things differently. Part of their mandate is that portfolio companies employ a portion of their workforces in low/moderate income communities. They invested in Timbuk2, whose bags are made by just such people in San Francisco.
The fact that PCV is not a household name may suggest that this area is a hard-to-serve niche. I’ll be watching New Cycle Capital as another entrant in the field, and hoping to see more funds taking similar approaches.
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Important Perks of a New Job
It has been an established principle since the U.S. Constitution was adopted in 1789 that the U.S. government can’t be sued. It’s an old rule called sovereign immunity that predates the U.S. by a long shot. It means, though, that if you don’t like something the government does and believe it is violating your rights, you have no legal recourse.
In many countries that would be the end of the story (and historically was). Fortunately some intrepid lawyers figured out how to get around that. Instead of suing the U.S. government itself, people decided to sue the person holding the job. The government indemnifies the person against claims, so there is no actual personal responsibility, but seeing one’s name frequently in the court docket is part and parcel of top-level federal government jobs.
Michael Mukasey was sworn in as U.S. Attorney General on November 8 of this year. I get a summary of significant court decisions every day, and in the last week or two I have started to see a bunch of cases reported under the headings “____ v. Mukasey”.
That didn’t take long, and I suppose points out what an elaborate fiction the whole thing is. The cases probably started years ago as “___ v. Ashcroft” or “_____ v. Gonzalez”, but got changed as the Attorney General position changed hands.
I am sure Mukasey was ready for it, and that kind of attention probably seemed ok compared to the scrutiny around his confirmation hearings. Still, it doesn’t seem like much fun to be sued 200 times a year.
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Not Ready for Sharing
I was pleased to see Facebook do the right thing by letting users opt completely out of Beacon. From the uproar it seemed clear that the world just wasn’t ready for that level of sharing.
Social networks make it really easy to share, but sometimes users want to keep things private, and making sure that certain information doesn’t get out can be easier said than done. Case in point for me was an experience I had last week. A couple I know, both avid Facebook users, separated. I found this out when I logged in one morning to find that both had updated their relationship status.
I sent them a note and one responded that she had tried to keep things quiet by removing relationship status from her profile entirely, but forgot that the change itself would go into her news feed.
I think there is no way out of this. From what I can see, I can change my relationship status or I can remove the status from my profile entirely, but either way the action goes into my news feed. In other words, there is no way to choose not to share that information without telling my network that I’ve stopped sharing.
The lesson here for me is that once I have opted in I may not be able to opt out without bringing more attention. Trying to close the barn door may itself let the horses out. This is good to keep in mind.
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The Bubble Song and Why it is Going to Drive me Crazy
VentureBeat linked to a really clever video parody of the current web scene, linked below. I watched the whole thing, which is rare for me. The thing that is driving me crazy, though, is that I can almost, but not quite, place the tune to which the lyrics are set. If anyone can help me out please put a note in the comments.
Update: about 20 second after posting this I figured it out. The tune is Billy Joel’s We Didn’t Start the Fire. I feel much better now.
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The Merits of Non-Compete Agreements
Yesterday morning I tuned into a blog conversation principally between Bijan Sabet and Fred Wilson on the merits of non-compete restrictions- mandating that employees not compete with their employer in outside ventures.
Bijan says that companies should hew closer to California’s rule, which is that an employer can’t prevent someone from working, but can stop the person from using confidential or proprietary information of the first employer in the service of the second. Fred takes the position that non-competes should be allowed, but the employer should be required to pay the employee for sitting on the bench.
It is a fascinating topic. For the record I agree with Bijan (no surprise from a California lawyer). Focusing on the mere fact of employment is a red herring. The focus should be on what the employee does, not where s/he works.
Fred offers an example where brandishing a non-compete helped prevent the VP of Sales in one of his portfolio companies from jumping to a competitor. With all due respect, this example doesn’t prove that an NDA restriction would not have gotten the preferred result, just that the non-compete agreement did so.
What really puts me in Bijan’s camp on this is that I have worked with a number of entrepreneurs coming from large companies. Almost without exception their short list of important questions in the inital meeting includes “can I do this without [prior employer] suing me for breach of NDA obligations?” The California system seems to work. I have yet to see a reason that more restrictive requirements are needed.
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Thoughts on Electricity
I installed the TED Model 1000 in my house last week and the results have been interesting, if not revelatory. The device 
hooks into my circuit breaker panel and has a separate display that plugs into any outlet in the house. When set up, it shows exactly how much electricity we consume, updated every second. I can add the rates I pay and see how much I am spending on a per-second basis as well. It is fascinating to see the difference when we turn on/off a single light.
I have a couple of observations from a week of using the thing:
1) We have a usage “baseline”, or several actually. In the middle of the night (grr, insomnia) with all the lights out and everything closed down, we have an ambient drain of about 0.15 kwh. During the day, even with all the lights off, it is higher- more like 0.6 kwh. I haven’t figured out why this is exactly. I’m starting to suspect that the refrigerator works harder in daytime when it gets opened and closed regularly.
2) Savings will come from a few big changes like trying to use the dishwasher less (or maybe not at all), and a lot of small ones. I tend to leave lights (or music) on in a room if I leave, but know I’ll reenter in a couple of minutes. I can now quantify exactly how much that costs me and I’m inclined to do it less.
I also have a wish: the device has a USB port, but apparently it isn’t functional. I’d really love to work through the data in greater detail on my computer, so I wish the TED’s makers would turn on the port and build some software to let me analyze consumption patterns.
I’d also like more granularity, but that isn’t realistic. I’d like to see the data measured on a per-outlet basis so I could figure out *exactly* how much energy each electrical device I own draws. That’s beyond the scope of the TED, though.
The TED cost $150, plus a few dollars to have an electrician hook it up. It was a pretty nominal cost for some very interesting data. People say they made up the cost pretty quickly with the money saved on electrical bills. We’ll see how long that takes.
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Air Travel on the Brain
On the evening of the Thanksgiving holiday, here is a gorgeous visualization of air travel across the US, compiled by a graphic artist named Aaron Koblin. I’m a sucker for stuff like this. The static views are beautiful, but the time lapse version is mesmerizing.
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When is a Secret not a Secret?
This isn’t really my area, but I find the idea of “secrets” fascinating.
The Ninth Circuit Court of Appeals issued a ruling last Friday in an interesting case. An Oregon Islamic charity named Al-Haramain Islamic Foundation came to believe that it had been the object of warrantless wiretapping surveillance in the aftermath of September 11, and brought a civil action against President Bush and other US government officials.
During the proceedings, government lawyers inadvertently delivered to Al-Haramain a National Security Administration call log marked “Top Secret” together with other unclassified information. The log (which the court’s opinion doesn’t actually describe) was given to Al-Haramain’s attorneys and directors and seen by a Washington Post journalist. The FBI then collected all copies of the log from Al-Haramain’s counsel (though perhaps not from its directors).
The Ninth Circuit ultimately held that the log, though it had been disclosed, still counted as a “state secret” and could not be used by Al-Haramain to support its warrantless wiretapping claims. It sounds like that was their only piece of solid evidence, so the pundits say the organization’s chances of success are now close to nil.
What intrigues me about this is what “secret” means here. Apparently it means “still secret even though it has been disclosed”. Had this been a trade secrets case in which, say, the mythic Coca-Cola formula had been inadvertently disclosed to Pepsi Co it is hard to believe that the court would have still called it a “secret”- once disclosed there is no more secret.
To my eye (admittedly inexperienced in these matters), the court punts on this. It says, offering some rather thin reasoning and assurances that it reviewed the materials and found them to be very sensitive indeed, that even though the secret was disclosed to Al-Haramain, the government had not waived the state secrets privilege.
It sounds like the court was concerned that in a different set of circumstances the secret information could have been made completely public, destroying any shred of actual secrecy. Worried about pointing toward such a course of action in future inadvertent disclosure cases, the court allowed the government to maintain the fiction that the information was still secret.
So to answer the initial question, a trade secret ceases to exist once disclosed. A state secret can apparently be much more open and retain its secret identity. Interesting indeed.
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Pathclearer- a Blank Slate Approach to Commercial Contracts, and not having to define “Beer”
Attorney/entrepreneur D C Toedt posted a thought-provoking piece on his blog called the “Pathclearer” approach to commercial contracts. The premise, as articulated by an attorney at English brewer Scottish & Newcastle, is that commercial agreements and one-time transactions are different beasts, but lawyers erroneously tend to treat them the same.
An M&A transaction, for example, is a one-time occurrence. Details are tremendously important because if something goes wrong the only practical recourse may be litigation.
A commercial agreement, on the other hand, is the start of a relationship. For the most part, both sides will perform happily so long as it benefits them, and poorly or not at all if it doesn’t- i.e. there is no way in the real world to force a relationship to work if one side doesn’t want to be in it.
That being the case, Pathclearer asks if simpler and shorter agreements might work better in many cases. Start with a bare agreement to work together and add in only what is necessary to make the parameters clear.
I love this approach, and for many reasons. The Pathclearer article points to a great example of a relationship bound up with such a complex set of documents that even after both sides agreed the relationship wasn’t working they couldn’t change it because they couldn’t figure out with certainty what the terms of the deal actually were.
Even more to the point, this sort of “blank slate” approach might (we hope) let people think about the issues that are actually important rather than wordsmithing the fine points (such as the example of hours spent by the lawyers trying to define “beer” precisely).
At the same time, would a company (or a lawyer- such as me, perhaps) look hopelessly naive trying to put this idea into practice? I can see the Pathfinder idea working very well in certain situations and causing enormous consternation in others where the experiences of the opposite side lead it to feel that every detail matters (as I have found to be the case with many large organizations).
Rather than a specific plan of action, then, I take the Pathclearer approach to heart as a philosophy. I believed in the idea before I saw the article, or I probably wouldn’t have paid much attention. Still, it is useful to think about the purposes of the Pathclearer concept, and approach commercial agreements with those thoughts in mind:
*Identify the business concerns before reviewing the agreement
*Focus on the key issues. Remove or ignore stuff that doesn’t matter
*Avoid tinkering with the language that isn’t critical
*Reduce and simplify as much as possible
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My Ongoing Experiment with Digital Signatures
A few weeks ago Dave Winer posted a screed about the complexity of the VC financing process. One of his points was that legal transactions rely on the fax machine- that unglamorous item of 1980s technology- to an inordinate degree.
He’s right. It is a cumbersome process: email documents, open attachment, print, fax, (sometimes mail originals) repeat.
There has been a law on the books in the U.S. since 1999 called E-SIGN that says electronic signatures are just as valid as manual ones, provided a few simple requirements are met. So why are people still using fax? Are lawyers simply luddites?
Perhaps, but I decided to try out some digital signature services- if nothing else to see why few people ever talk about them. Since I really don’t like reviewing products I am not going to name the services I tried, but instead to make some general observations based on the handful of transactions I have used them for.
People aren’t Ready for “Pure Digital” Signatures
Under E-SIGN a “signature” can consist of a digital stamp in the footer of a document with the date and some identifying information (such as an email address). A sample is below.
In practice this does not work for humans. I used this format in one transaction and the exact words of the opposing counsel were “I’m sure it is legally binding but I don’t have time to look it up”. This format isn’t required by E-SIGN, of course- one of the other services uses a font style that looks like a signature and puts it in the “right” spot in the signature block on the document (see below).
This is a seemingly small thing that makes a world of difference.
Fax “Just Works”
One of the services let me add nifty “stickies” to the signature blocks in my documents and when it worked scrolled signatories through the documents to just the right spots and collected all of the needed information beautifully. The problem was that it didn’t work reliably. One signatory couldn’t open the “digital envelope” containing the file at all and I had to resort to paper and fax. The whole thing also only works in Windows and requires a desktop download, so I could only use it from one computer (and that with Parallels installed).
Fax, on the other hand, uses tried-and-true technology and only needs to be compatible with the phone line. Low tech and the darn headers are ugly, but the process is effective and doesn’t require much thought. I like to think, but not about how to send my signature pages out.
I Still Want a Digital Signature Facility
I said previously that I would very much like a digital signature facility that I can route documents through as an adjunct to- and probably eventually as a replacement for- the manual pen/paper/fax. I still do. The systems need some tuning, but they will get there. The founder of one of the services in particular has been endlessly helpful to me in my experimentation and I hope he keeps at it until he gets the system down. It will work eventually, it’s just going to take some time and iteration to get it to “just work” as smoothly as fax does at its best.
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Tivo Finally Sells its Viewer Data
I probably watch about one hour of TV per week, but I still love Tivo since it means I can watch that one hour’s worth any time I want.
They just announced their own Nielsen-style viewer statistics package for advertisers. I suppose this shows how much I don’t know about broadcast media, but for the life of me I can’t figure out why they didn’t do this years ago. I know they have all the data on what Tivo users watch, so it seems like a no-brainer to put that data to work bringing in revenue for the company.
Side note to Mr. Tivo: please use the incremental revenue from this program to bring back the lifetime subscription. If you do that, even if it is only for a short-time promotion, I promise to buy a second box.
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How Greg Lemond Might Respond to Dick Costolo and Marc Andreesen
In Founders at Work, Joshua Schachter advises new entrepreneurs to keep the product simple- do one thing and do it well, in essence. This strategy worked well for del.icio.us, which is a simple (in a good way) web tool. He built it largely on his own in his spare time while working for Morgan Stanley and that setup worked very well for him.
Mike Ramsay from Tivo, on the other hand, developed an extremely complex product (I found great humor in the section of the book where he describes the enormous back-end efforts to manage programming information for every TV service in the US, and then explains why he feels compelled to throttle anyone who describes Tivo as “like a digital VCR”) that required enormous engineering, marketing and other resources. Tivo raised significant money from VCs and went public to raise even more. Again, this has worked well for Tivo.
This pattern also reminds me of the Dick Costolo/ Marc Andreesen online debate about raising outside capital that I continue to see discussed from time to time. Dick built Feedburner with a relatively small amount of outside cash, developed an excellent product with it and sold the company to Google for a solid return. Consequently, his advice to entrepreneurs is to raise enough capital to allow for a good return for founders and investors even if the business is not a home run.
Marc, on the other hand, has built two large businesses and sold each of them for over $1B- two grand slams. Both companies were heavily VC funded and Marc believes that the cash gave both businesses the wherewithal to survive difficult times, revise their business plans and ultimately become very successful. Based on his experience, then, the advice is to raise as much money as possible whenever it is available on acceptable terms.
All of these companies and people were successful, which means all of them are correct. Del.icio.us and Feedburner needed only modest capital to acheive their objectives. Tivo, Netscape and Opsware needed far more.
This brings me back to a piece of advice I picked up years ago in an entirely different context. Professional cyclist Greg Lemond wrote a book on cycling training in which he talked about one of the great fallacies of training- emulating someone else’s habits just because the person was famous or successful. As he put it “what works for ___ is good because it works for ____. That fact that it worked for ___ doesn’t mean it is right for anyone else.”
In other words, the paths to success of others are valuable for the ideas they can provide, but they are not the “right” path for everyone. Past experiences are data points to analyze, not prescriptions to swallow whole.
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California Clean Tech Open, TED 1000 and the Refrigerator-Unit Electricity Measure
I attended the California Clean Tech Open Finals this week, a business plan competition for emerging companies in the clean technology area. The companies were impressive and the event sold out at 900 tickets- both great signs for the sector.
Having reflected on it, two thoughts stick in my head about the event:
1) The tradeshow format (someone I know likes to refer to it as a “science fair”) is brutal, and perhaps hardest on new businesses. With no context (esp name recognition) other than the information the companies present it is very hard to tell which companies have real prospects.
2) One of the evening’s speakers was Noah Horowitz from the NRDC. He gave a fascinating talk about the power drain of consumer electronic devices. Per my recollection, a 2 or 3 tuner digital video recorder such as Tivo uses as much energy per year as a refrigerator. An Xbox360 or PS3 uses huge amounts of peak power, and if inadvertently left on will drain as much electricity as two refrigerators per year.
I had no idea I had so many refrigerators in my house. If nothing else, the event prompted me to buy a TED 1000 to display real-time electricity usage in my house. I’ll be interested to see how many more refrigerators I have hiding in my house.
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The SoCal Fires are Going to Drive Twitter Mainstream (a Little)
I was in college when the first Gulf War happened, and I remember the school setting up a TV to show the round-the-clock (a new concept then) coverage on the upstart CNN network. People more media-savvy than I credit CNN’s rise in esteem and viewership to that coverage.
The fires tearing through Southern California are relevant to a much smaller population, to be sure, and I doubt Twitter will benefit to even 1% the same degree in absolute terms. However, many people- and media outlets- that previously dismissed it as a toy or a distraction are going to start paying attention because it is actually a convenient vehicle for distributing news in disaster environments. It is:
*Lightweight. It works nicely even on a mobile browser. No TV or computer required from the sending or receiving ends.
*Easy to update. It’s type-and-go. No setting up cameras or preparing to broadcast.
*Easy to aggregate. Tracking makes it possible to pull in tweets from lots of sources on the same subject.
*And perhaps most important, short (or “pithy” if you prefer). The problem with reporting disasters is that there usually isn’t much to report from minute-to-minute. Twitter lets networks broadcast tidbits as they become available.
Imagine if the news crawl at the bottom of a network broadcast was actually a Twitter feed. They serve basically the same purpose, and then there would be a place to find the crawl text one missed because one was watching the top part of the TV screen.
I’m not saying Twitter is suddenly going to be on everyone’s lips everywhere, just that people are going to realize it can be a really useful adjunct to other media distribution systems.
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Jumpstart Automotive Media Case Study on Startup-Review.com
I wrote a case study on Jumpstart Automotive Media for Startup Review that published last night. Jumpstart is a vertical ad network focused on the automotive segment. It was founded in 2000 and sold this year, so it’s a timely piece given the proliferation of vertical ad networks over the past couple of years.
Mitch is also an extremely savvy and articulate guy. He knows well why his business worked and has some good thoughts for entrepreneurs, especially in regard to finding one’s niche, staying true to a goal and the importance of hiring top-nothc people.
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The Art of the Introduction
For a number of years, and especially since launching my own business a year and a half ago, I have made a study of how to introduce people in a way that is meaningful, appreciated and effective. It’s a challenging thing, to be sure, and subject to a number of variables. Still, I’ve been on all sides of the intro equation and I have drawn a few conclusions. Apologies they seem obvious- things often seem that way to me too once I’ve articulated them.
1 ) Both parties need to be receptive. This doesn’t mean that both people need to be actively looking for one another, but you need to be able to define a need that each introducee fills for the other. The risk here is that the intro may seem “spammy” to one side if the need hasn’t been defined.
2) Flowing directly from #1, define the value to each party. It may be specific and immediate (e.g. “here’s my friend. He is starting a company and needs a lawyer”) or it may be longer term (”so-and-so is an accountant and I think there may be a lot of overlap between your businesses”). Whatever it is, you need to be clear about that.
3) Once points 1 and 2 have been addressed the introducer needs to determine a proper form for the introduction. Quick email intros can be effective and quite valuable, but usually only where there is a short-term defined need. It takes a little more commitment to actually bring people together- to suggest that the three of you all grab coffee or lunch, for example- but lacking a short-term reason for the people to contact one another anything less may end in awkwardness.
Articulating these factors helps me think about how to make useful introductions among my contacts, and how to get the most out of introductions people make for me as well. I hope this provides some valuable to others as well.
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Zero is a Pretty Small Number
Blog Action Day has put out a call to post about the environment today, and this is partially in response to that.
The cities of San Francisco, Oakland and San Jose have pledged to reduce landfill waste to zero by the year 2020. That is an ambitious goal- zero doesn’t leave much margin for error (or any, actually). I wondered how they planned to accomplish that. Recycling and composting go a long way, but those last few percentage points are going to be hard-fought.
On similar lines, I read about a study yesterday from the University of Victoria, Canada finding that according to the computer models used in the study, the European Union’s stated plan to reduce industrial carbon emissions by 50% by 2050 (even if adopted worldwide) will fail to meet the goal of limiting a global average temperature increase to 2°C. Even 90% reductions would eventually push temperatures over the 2°C and something very close to 100% reductions are necessary to limit the increase.
My first reaction to this is that 100% industrial emissions reduction is impossible. That means no carbon emissions at all- how can this be done?
My next thought is that distinguishing between “industrial emissions” and everything else is a nice way of saying “basically all emissions everywhere”. I guess that allows people to burn wood to heat their homes, but for all practical purposes if infrastructure needs to be created to eliminate carbon emissions from industry it won’t make much sense to maintain a carbon infrastructure for consumer uses.
This leads me to thought three, which is that if the data are accurate, they certainly clarify a lot of things. Peak oil/coal/gas issues become secondary if we have forty-three years to stop using all of them almost entirely. Alternative energy sources need to become not just mainstream but the default.
And thought four is that I sure hope the study was wrong somewhere, because zero is an awfully small number and we’re going to be right up against the wire if that’s the target we need to hit.
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Forget Open Social Graphs. Let’s Just do Something Useful Together Online
Update: Linkedin apparently agrees with me. They just announced a developer-API program to create widgets that allow “business functions like conference organization or travel planning”. But no superpokes.
There’s been lots of talk about walled gardens in social networks. Plenty of people seem to be asking for “network portability”- the ability to move one’s social graph of contacts and connections across platforms. Given that the revenue stream for most social networks depends almost entirely on advertising, which depends on page views, I am starting wonder if that puts the cart before the horse.
Also like many people recently, I have been thinking about how I and my friends really use social networks. My conclusion is that they are a nice adjunct to offline communications- they can help me deepen connections with people I don’t see regularly- but they don’t actually *do* much.
For example, my Facebook news feed is almost entirely full of “___ became friends with ___” and “___ added the ___ application” updates. Do people actually do anything meaningful other than friending, adding applications, joining groups and updating status?
What about “___ beat __ in scrabblicious”, or even “Brad Fitzpatrick nailed his 95 theses on the opening of the social graph on Facebook’s door”?
Facebook seems to be mostly a tool for casual, superficial interactions and ways to show off one’s interests and affiliations- joining groups, marking favorite movies/music/books, showing where one has been, etc.
I’d love to see the platform and the feed represent real activity, not just connection-forming. Maybe the “next Facebook” (which may or may not be Facebook itself) will be the one that lets us really collaborate and not merely connect.
The next question, though, is on what we want to collaborate. I suspect it is probably different for different people and groups. That thought leads me back to the open social graph issue- maybe the open social graph is the horse after all and useful (as opposed to entertaining) applications are the cart. Oh dear, thinking in circles again. Time to quit.
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“Cleantech” is to 2007 as “Internet” was to 1997
The term “cleantech” has always bothered me. It’s so broad that its meaninglessness becomes quickly apparent as soon as one starts to look at all the different sectors it covers. At a mini-conference I attended yesterday, though, panelist James Horn from VC firm Noventi made a useful point about the term.
He said that people use the word “cleantech” in much the same way that they used “internet” in the 1990s- it is a term of convenience that exists in large part because the space is still new enough that the general public doesn’t recognize many of the sub-categories. Just as general “internet” business has given way to “content delivery networks”, “social networks”, “Software as a Service”, etc., so will “cleantech” be used less as people become familiar with the different flavors of energy, waste remediation, materials, etc.
I like that idea, not least because it reminds me what a huge mindshift occurred in the 90’s when the Internet was new, before it got woven so tightly into the fabric of society. I’m sure hoping the cleantech principles get adopted so quickly.
Bonus neologism: I got an email from Lyndon Rive, CEO of SolarCity, in which he talked about the growth of “green collar jobs”. I love that term.
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Online Meets Reality at the Elementary School
I had a bit of an “aha!” moment today. I read Kara Swisher’s “is this it, then?” posts about Facebook this morning, then attended a meeting of the parents’ association at my kids’ school and found a breadcrumb trail connecting the two.
One of Kara’s points was that Facebook has an amazing ability to draw together people, induce them to create “groups” around issues of mutual interest- and then do absolutely nothing of interest together. She has a good point. Facebook groups seem to exist only so that people can self-identify with various areas of interest; they certainly allow for only the most minimal forms of interaction.
With this in the back of my head, I went to the school meeting. My kids’ elementary school is fairly young and still very much growing in population and in the forms and richness of “community systems”. We have evolved several modes of intra-school communication, but the foresighted among us (I do not include myself on this list) are looking forward to how we can use communication tools to develop closer bonds as a community.
Email is the unnamed villain here. No one likes being bombarded by messages and if a certain group of people develops an informal email list around a certain activity then there are always a few people who would have loved to be included if only they had known about it. These aren’t new problems, to be sure. The school has the chance to do things differently, though.
All of which made me think: what if the school could take the good parts of Facebook groups- that anyone can create a group and all the interactions are there for the public to see- and use it to augment *offline* community-building? Now that sounds interesting- because frankly I’d rather go for a hike with fellow school parents than superpoke them.
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Nate Westheimer and the Challenge of Open Platforms
(this post started as a comment on Nate Westheimer’s blog, but got too long so I decided to put it here instead)
Nate says that Facebook could disappear tomorrow and it would be replaced in about a week with other web services. Likely true enough, but it begs the question what would make FB disappear. It doesn’t happen on its own- people need to stop using it.
Nate’s implicit answer, I think, and that of a number of other people, is that internet users crave openness- they want their content to be distributed, mixed and mashed up as they see fit, not as the platform decides. One-way openness isn’t good enough either. Content should flow freely both ways, and when someone offers that up Facebook could start to suffer.
It sounds as though the nascent FriendFeed does this. Plaxo also does it to a certain degree. I don’t think mere openness is enough, though, and I say that for two reasons:
1) There needs to be a “there” there. Plaxo is free-flowing, but also empty. Maybe I just haven’t connected with enough people, or they haven’t “turned on” enough feeds (or maybe that’s the point- it takes too much effort).
A variant of this point was made by Adam Elend from Wallstrip. He said that just putting content out isn’t enough- it needs to fit the platform on which it is being distributed. As applied to the open/closed platform discussion, the argument is that mere aggregation easily leads to clutter and randomness.
2) There needs to be an ad strategy. Most content on the social web is ad-supported. Totally open platforms make it hard to monetize the traffic.
Maybe these two points offer an answer” provide a compelling place for people to aggregate and they’ll congregate. Becoming and then remaining the “coolest” platform seems like it would be an increasingly difficult task, though.
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Something Completely Different - A MacArthur Fellow Award for my College Roommate
This is certainly not related to law or technology, but is definitely worth noting and celebrating. 
Corey Harris is a “roots blues” musician and was my college roommate. He writes and performs contemporary blues music that freely incorporates elements of traditional blues, reggae, hip hop, folk, Mali’s griot tradition and many other styles.
He was just awarded a MacArthur fellowship that includes a grant to help him keep doing what he has been doing- innovating his own style of music.
I know Corey has worked incredibly hard for what he has accomplished and I feel privileged to have gotten to know him. Congratulations Corey!
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Startup Talk from the Outdoor Industry
I like nothing better than when my worlds come together. I just finished listening to a very insightful podcast conversation between Jim Holland, CEO of Backcountry.com, and Chris Grover, Director of Sales and Marketing at Black Diamond. Startups, web services and outdoor gear are three of my favorite things.
The former company is an outdoor gear e-tailer and poster child for success by bootstrapping. It was founded in the 1990s, but unlike many of its crash-and-burn contemporaries it never raised outside money. I believe this let them chip away at the online marketing puzzle. Had they raised money, hired lots of people and jumped into lots of things before the revenue path became clear, they might never have made it.
Black Diamond is an interesting example of lemons-from-lemonade. Patagonia used to make rock climbing hardware until someone fell out of a harness, died and his family sued the company. Patagonia decided to get out of the hardware business and divested it- creating Black Diamond. The company has risen from that tricky start to become the major US brand in the Euro-dominated climbing/technical backcountry equipment market.
The podcast has a lot of interesting tidbits about marketing, leadership (esp. the difference between leading and managing), compensation (don’t trust the public statistics) and other important business questions. I wanted to to interview Backcountry.com co-founder John Bresee for a Startup Review interview a few months back, but we both got busy and never quite connected. The interview covers a lot of the same ground and it’s well worth the 40 minutes spent listening.
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On Lawyers Getting with the Technology Program
Dave McClure posted a rant the other day about how VCs and technology lawyers spend a lot of time around startups, but rely on antiquated communication systems (fax!) to do deals.
He’s right, but what’s interesting to me is *why* “[we] guys are still in the 80’s”. Digital signatures are perfectly legal, but no one uses them.
I think the reason is that everyone spends so much time thinking about the deal itself, that no one puts much effort into the mechanics of completing it. Fax mostly works because most people have fax machines.
On the flip side of the coin, in just about every deal I’ve ever done I have ended up chasing someone for a signature. Someone is inevitably travelling or not near a fax machine. Internet access is so ubiquitous- I would love to have a “virtual closing room” on my website where people could log in and digitally sign documents. This would save a huge amount of time and energy on my part and presumably everyone else’s.
It takes two sides to close a deal, though, which is probably the other big reason things like this haven’t taken off. To do it right, I would have to (a) provide each party to the deal with login information and a way to authenticate individual identities, or (b) somehow coordinate my digital signatures with the other side’s, or some combination thereof.
It’s worth a try, though. Can anyone tell me how to build such a facility?
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Twitter is a Tease
Maybe this goes without saying. Twitter is fascinating beause it is such a proto-social network. It does almost nothing, but I probably use it more than any other network I am on.
Still tring to figure out what twitter is “about”, I’ve been thinking about the posts that grab my attention. I follow basically three kinds of twitterers: friends, news outlets and tech experts/celebrities. I like getting little vignettes of my friends ‘ lives that tell me what’s going on with them. This is less true from strangers, though the occasional trenchant comment can be fun.
What gets me to follow people I don’t know is really the same as what I get out of news tweets- teasers that make we want to learn more. I don’t think I am alone in this. Loic le Meur has twittered repeatedly about certain aspects of the new product his company is developing, but without explaining what the product is at all. In the same vein, Evan Williams posted a couple of tweets this morning about “namestorming”- for a new product? Inquiring minds want to know.
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New York Times Online and the Odds Against it
The New York Times seems to have its head screwed on right as far online marketing goes. Witness its Facebook application: it’s a simple thing that shows off what the NYT does best (news coverage) and lets friends compete against one 
another for “News IQ” ratings. To do well, one needs to read the news and the NYT provides ample opportunity to link through to articles on the paper’s site.
Add this to the company’s announcement that it is dumping the Times Select pay wall and one could almost forget what they are up against. I saw the graphic to the right and was blown away by the difference between on- and off-line ad revenue.
Something sure needs to change, or publishing (i.e. reading what’s actually happening in the world) as we know it is going to be completely screwed. Yikes.
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Twittervision Nails the Visualization
I wrote recently about different visualization techniques used by Digg, Lijit and Twitter. I wrote that I didn’t think the Twitter Blocks developer, Stamen Labs, got it quite right. They did a brilliant job with Digg’s visualizations so I’m sure they’ll work out Twitter as well.
The challenge in creating visual representations of text data, it seems to me, is to capture the essence of what the site does. 
Digg Stack beautifully captures both the flow of news across the Digg site and the voting element that (partially) distinguishes Digg from traditional news outlets.
Twitter is captivating for a couple of reasons. The “random discovery” element is fun- seeing what’s on people’s minds around the world. The more engaging element is following one’s friends.
Twitter Blocks goes after the latter, which is probably the harder nut to crack. Meanwhile, Twittervision hits the discovery nail right on the head. Watching the posts flow across the globe is mesmerizing.
A couple of requests, though- I’d like to see the tweets persist a little longer instead of fading out immediately when a new one comes up. I’d also like to see the history- it doesn’t seem to follow the Twitter timeline precisely and I can’t necessarily find interesting tweets easily.
If Stamen Labs can figure out how to combine Twittervision’s hypnotic visual timeline with the social relationship aspect that makes Twitter so engaging they will capture the full scope of the site perfectly. It’ll be fun to see.
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Online New York Times vs. Wall Street Journal
I’m really glad I’m not a print publisher. The Silicon Alley Insider posted an article the other day showing the New York Times Company’s 50% stock-price drop over the past five years. I understand this is largely due to the ad revenue they have lost to Craigslist and others.
The thing is that the NYT is doing everything right, or just about. They’re trying hard to play by new media rules, but the economics just aren’t there for the business. The Times produces great podcasts, seemingly dozens of blogs and has a Twitter feed that is one of the best things on that platform- news comes straight to my desktop throughout the day and the posts frequently get me to click through to the articles. The tweet format seems tailor-made for headline link-baiting.
Compare this with the Wall Street Journal. The WSJ has 3-times-daily updates over AIM, but they completely botch things. First, the updates comes three times every day, but it’s almost always the same stories in each update. Can’t they find more articles to showcase? They have a Twitter feed as well, but haven’t updated in months (ironically, they stopped with a headline about Google’s DoubleClick acquisition).
Worse, though, is that the content is stuck behind the paywall. I have given up linking through at this point because I don’t have a WSJ online subscription. If all I can get by clicking through is a couple of introductory sentences then it isn’t worth it- I’ll use the AIM headlines to let me know to read the details elsewhere. This comparison graph of NYT and WSJ pageviews (courtesy of Fred Wilson) seems to show that I’m not the only one.
Getting back to the original point, the NYT seems to do a great job driving traffic to the site, but online ad revenue just doesn’t compare to the old-fashioned offline kind. What’s going to happen? Will media-companies-formerly-known-as-print-publishers have to shrink to be competitive in the online world? Is that a workable model for companies that depend on far-flung networks of reporters, editors and staff? Or will some new revenue stream emerge to save them? Like I said, I’m glad I’m not in the business and these are not my problems to solve.
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Cumulative Voting in 340 Words, with Math
Cumulative voting is one of those theoretical legal concepts I’ve generally tried to avoid- it involves math, the archnemesis of attorneys everywhere.
Math matters, though, and so does cumulative voting. It can give small shareholders a voice on a company’s Board of Directors, or 
even swing the balance of power in certain situations.
In as few words as possible, then, here is what you need to know about cumulative voting:
What it means. Cumulative voting means that instead of voting shares for each director on a slate, shareholders can throw all of their potential votes behind one candidate. In other words, if there are 3 directors and I own 1 share, instead of voting my one share for each director, I can put all 3 behind a single candidate.
Not all states have it. Delaware allows it, but corporations must specifically provide the right in Certificate of Incorporation. In California, cumulative voting is an “inalienable” right of shareholders of private companies- it can’t be written out of the Articles of Incorporation or bylaws. Public California companies listed on NASDAQ, the NYSE or ASE are allowed to eliminate it. Other states vary.
It must be actively exercised. In California a shareholder must notify the corporation before voting of his/her intent to vote cumulatively, and then the entire election runs cumulatively.
How it is calculated. This is the math part. The formula for calculating how many votes are needed to elect a director is:
where
X = the number of shares needed to elect a given number of directors S = the total number of shares represented at the meeting D = the total number of directors to be elected
Even simpler is this online calculator.
Cumulative voting can be an important right for minority shareholders. Even if it doesn’t allow a shareholder group to control the Board, it can provide visibility into Board discussions and that can sometimes make all the difference. Wikipedia has a longer explanation with history, for those interested in reading further.
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Form D Proposed Changes Offer a Ray of Hope for an Open EDGAR
The SEC has proposed to mandate electronic filing of Form D (among other changes), used to document securities offerings. These filings have been a major pain in the neck through my career, so I am definitely in favor of anything that makes the process simpler.
I am even more excited by the apparent recognition on the part of the SEC that people actually want to see the data that gets reported. It gives me hope that EDGAR will one day open up to search bots as well. Public companies file all of their required reports on the EDGAR system so there is an enormous wealth of information. EDGAR has only the most rudimentary of search features, though. Moreover, EDGAR turns away search bots from all the major search engines.
Private companies have stepped in and (presumably) pay the SEC for acess to the data. They then charge users to perform sophisticated searches.
This is bad practice. The SEC requires filings in order to inform the public. It should be free and easily accessible. I am hopeful that the Form D database will give the SEC the feedback it needs to realize that EDGAR should be open and searchable.
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Reading List: Joe Kraus Nails the Startup Angst
I am reading a great book called Founders at Work: Stories of Startups’ Early Days- it is a compilation of interviews with tech company founders, prepared by one of the Y Combinator founders. The whole book makes for terrific reading, very much like Startup Review on a larger scale.
Excite co-founder Joe Kraus makes some phenomenal observations that go straight to the heart of the startup experience. When asked “Did it seem like you were onto something huge?” he responded by saying:
The hardest part in a startup is that you wake up one morning, and you feel great about the day and you think “We’re kicking ass.” And then you wake up the next morning and you think “we’re dead.” And literally nothing’s changed.
I’ve certainly ridden that rollercoaster many times since starting my own business, and I’ve learned that it is part of the process. Everyone wishes there was a linear path to success, but there isn’t. You just keep plugging along, trying everything you can think of, and when success happens you still can’t point to a single thing that caused it- it just happened.
Good book. It should be required reading at “startup school”- wherever that is.
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I Made BusinessWeek Online!
My friend Steve Poland roped me into an advisory role with Ringside Startup- he had the neat idea to extend the idea of crowdsourcing 
content into crowdsourcing a business itself. We and the commenters on the site talked a lot about securities laws and ways we might be able to get some equity to people contributing ideas.
Business Week Online has just written an article about Steve and the crowdsourcing concept. It does a nice job comparing efforts in the music, sports and tech spaces, and does a compare/contrast between Cambrian House (which I have covered before) and me.
It’s the first time I’ve been quoted in a major press outlet, so I am very pleased. They didn’t even misquote me!
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Vosnap: Because Creative Development Deserves Creative Lawyering
Vosnap is a project/company that emerged from Startup Weekend in Boulder, Colorado last July. A whole bunch of people locked themselves in an office for a weekend with a goal to launch a product by the end of it.
They still haven’t launched, but that doesn’t mean it’s not a great idea. Talented people working together are fun to behold.
One trick, though, is how to properly reward everyone’s efforts. This is really a question with two parts:
1) How to value each person’s contributions relative to the others; and
2) How to issue equity to each person under US securities laws.
The Sand-Dollar-Hour System
I once heard about an alternative economic system developed in west Marin County, Calif. It involved sand dollars as units of currency, and was completely egalitarian in that each person earned a certain number of sand dollars per hour worked, whether as neurosurgeon or streetsweeper. The idea never caught on much, but it stuck with me, and the Vosnap group seems to have done something similar.
As their blog explains, they have 60 contributors, each offering different sets of skills. Rather than try to make judgments of relative importance among them (a sure recipe for collapse of the project) each person got one “share” for each day at the weekend, up to 3.
Simple enough, though it would have been better if they had been sand dollars or cowrie shells. Nobody gets it perfect, I suppose.
Crowdsourcing Cleverness
I have written previously about crowdsourcing and securities law issues. The bottom line is that securities laws aren’t conducive to doling out shares to lots of people.
However, some clever soul must have considered that if each participant is “active in the business”, then the contributors can jointly form a limited liability company in which no securities “sale” is involved. That is to say, if the equity earned is all of the “sweat” variety, then there is no securities offering, and no securities compliance issues to worry about. Note that this only applies to LLCs, not corporations.
A Little Ugliness at Tax Season, but it Gets the Job Done
So Vosnap itself is a corporation, which works well for venture funding purposes. The LLC owns 1/2 of Vosnap, Inc., and the Startup Weekend participants own their relative shares of the LLC.
Clever. The tax issues are going to be a little messy when income tax season rolls around (there will be two entities to prepare tax returns/statements for, and each LLC owner will get a K-1 partnership statement to include in their personal returns), but it gets a piece of the business to all participants and gives them some incentive to keep plugging away at it. Nice thinking.
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Buy that Annoying Starbucks Song and a Latte?
I can’t resist jumping on the Wi-Pod bandwagon here. I do a decent amount of work from Starbucks and the repetitive, too-loud music they play is hands-down my least favorite part of the entire store “experience”.
Still, I wonder what it means if consumers will be able to buy Starbucks now-playing songs direct from their touch iPods. How big a leap is it from there to being able to buy everything else in the store from the iPod?
As soon as I ask the question I wonder if that is remotely desirable. Handing over cash or my check card to the cashier is pretty simple- seems a lot easier than standing at the counter staring at my iPod rather than the cashier, waiting for it to connect to the network, bring up the transaction, authenticate identity, debit my iTunes account, which debits my bank account, etc.
The more I think about it, the more this seems like a Rube Goldberg-ian way to buy a cup of coffee. Think I’ll stick with cash.
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A Really Simple Visualization of Copyright Law
Sometimes napkins make good visualization tools too. No animation in this one, but patent lawyer Erik J. Heels did a bang-up job simplifying a complex topic to a single sheet of paper (it might not have actually been a napkin). 
Erik explains it all here.
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Data Visualization Methods: Lijit, Twitter and Digg Edged Out by Lee Byron
Creating ways to visually represent the social map seems very much in vogue. It makes sense in a certain way; there is a lot of dispersed content on the web and good business to be had aggregating it. Visually presenting the relationships among pieces of content- and the users that put it there- can help people sort through it all.
Lijit and Twitter both just launched visualization tools that are interesting and have neat animation, but also point to how hard it is figuring out what kinds of data are can be visualized well.
Lijit’s visualizer shows linking relationships between a user and the rest of the Internet. Lijit’s focus is on bringing out content that might be hard to aggregate otherwise, so I can understand the value in trying to bring together inbound, outbound and mutual linking relationships on one page.
The resulting animation isn’t hugely meaningful, though. For example, this blog isn’t really linked from anywhere, so there is no benefit to the animation- it just shows what is in the blogroll on the page. The other blog I write, Startup Review for doesn’t link to anything else, so it only shows a handful of inbound links. And a very popular blog like Brad Feld’s has three different clusters of lollipops, but they’re still just lollipops. They don’t offer any information that you couldn’t get from a simple list and they are a bit cluttered to boot.
Twitter’s blocks are similar, though not quite as intuitive. There is a nice animation that 
creates a stair-step effect and I get that the center line is my recent timeline and the paths branching away are the timelines of other users in my timeline, but I’m not sure this is actually a better way of discovering other users. The bricks themselves don’t say anything until I zoom in on them, so they don’t save me time or present more/better data than linking through user pages directly. I.e. I can “explore” just as easily on the main pages.
For me Digg has set the gold standard here. Its swarm, stack, bigspy and arc all show what is happening on the site in a way that shows off Digg’s core competence- aggregating and ranking news- while letting users easily scan the news items flowing through the site without having to do anything.
Guy Kawasaki blogged an interesting article about data visualization methods. It’s an interesting read and some techniques definitely seem to do the job better than others, or maybe some data is just much harder to present visually.
My personal favorite is a time-sequence graph of Last.fm listening habits, If it was actually a dynamic graph it would nose out Digg for “best in class”. It isn’t though; it is a “snapshot” of a particular moment in time for the developer.
Still it is gorgeous and presents the information in a way that would take many more words to explain, and be far less interesting, and that is the point. The web is still mostly about words because words work pretty darn well. If the picture isn’t worth a heck of a lot of them, it doesn’t really add enough value.
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The “Terms of Use” Trap for Web Businesses
Every web site of any substance has a “Terms of Use” policy, if for no other reason than to make sure that the site operator can restrict 
illegal, offensive or otherwise undesirable activity. I doubt many people would have trouble with this.
But what happens when the operator needs to change the terms?
Boring Legal Stuff- the Abridged Version
The Ninth Circuit held last month that simply telling users the terms can be changed at any time may not be good enough. In Douglas v. Talk America, AOL sold its long distance phone business to Talk America. Talk America posted revised contract terms unilaterally, Douglas sued and the Ninth Circuit drily noted that “Parties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side”.
It’s the Notice, Stupid
Talk America charged a fee for its services, it changed the contract after AOL and Douglas had formed it and it declined to offer notice of the changes- putting the burden on users to check back (how often?) for changes (visible how?). It’s the last point that seemed to seal the deal for the Ninth Circuit. It is patently unreasonable to expect consumers to re-check every site where they hold accounts, and to compare use terms line-by-line for changes (assuming they retained a copy of the old terms against which to compare).
So Where Does that Leave Us?
Prof. Eric Goldman points to several alternatives, none particularly attractive, that businesses can use to avoid this problem. Of the three (”starting over”, notice of the change with implied right to terminate, and don’t change the terms at all except for new users), sending notice of changes seems like the most practical. I know I have gotten notices like this from eBay and other businesses.
More than likely most users won’t even read the notice, but the process is bound to produce a certain amount of anxiety, especially for companies that aren’t yet established. Spam filters make it harder to ensure that the notice gets full distribution as well, but 100% receipt is not mandatory either (no difference here from paper mailings from your bank). Still, there’s a certain circularity to it- once the contract has been formed there is no sure-fire, legally watertight way of changing it short of terminating every account on the site and starting fresh.
As a practitioner, my response to this is to draft terms of use extremely broadly, hoping that will help my clients to iterate without turning business and user-communications issues into legal ones. It’s no brilliant legal reasoning, but at least it lets companies focus on the bottom line- keeping users happy and the platform running smoothly.
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What’s a Lawyer Doing with an HP Financial Calculator?
My father gave me an HP 12c calculator several years ago when I talked to him about how I need to understand financial statements 
better. He also gave me a whole bunch of stuff to read that has definitely helped me to understand how to look at a balance sheet. I’m still a better lawyer than a finance guy, but the calculator is brilliant.
In truth, I never use any of the advanced features. Fortunately, my clients rely on actual financial experts for serious data-crunching, but once I got used to the way the HP works there was no way I was going to go back to a “regular” calculator.
The best feature is that the calculator “remembers” things better than most others. You don’t need to hit “M”; it just automatically stores the last number in memory.
Along with this goes the “reverse polish” input method. Someday I’ll understand how this name came about (though it’s probably a story not worth telling), but the essence of it is that you enter a number, hit “Enter” to put it in memory, then enter the next number and then hit the function you want: add, subtract, etc. I constantly screw up when I go back to a regular calculator now and do things in the wrong order. It’s worth the trade-off, though, because if you mistype on the HP you can hit “clear” and re-start right before you messed up. No starting all over with a long string of addition. My fumblefingers appreciate this immensely.
The last really fun thing about the calculator is the manual. The 12c was first introduced in 1982 (I’m told it was incredibly revolutionary at the time). The manual hasn’t been updated since. It uses examples like “I bought a computer for $2000 and a disk drive to accompany it also for $2000″. I’m sure someone decided that these archaisms (?) made the examples much more interesting and fun, and deliberately decided not to update them.
Now you can get the 25th anniversary “platinum edition”. I’m almost tempted since I spilled a drink on mine and some of the keys still stick occasionally, but it works so darn well apart from that I think I’ll hang onto it. It’s also constructed like a tank. I bet I’ll still have mine when the 50th anniversary edition comes out. Ooh, diamond. I might have to upgrade for that one.
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I’m Waiting for the “Keith Benjamin” Effect
I’m a little late jumping on the bandwagon about Keith’s post, now two weeks old. The logic certainly makes sense- as one type of investment loses some luster another becomes more attractive (again). I didn’t post on it earlier largely because it was so well covered elsewhere I didn’t see a whole lot to add.
But then I realized I was wrong. I have two clients raising money right now, and both have had conversations with prospective investors who are really excited about the company, but loath to give up short-term gains they see markets delivering in the next few months.
As short as the timelines can be for tech-companies to start-up, build-out and exit, it’s still hard to convince an investor he should let his money sit idle in a company’s bank account rather than generate real cash in a six-month timeframe. Startups are risky, for sure, and even in the best cases the return is 1-2-3 years out or more. It ends up something like trying to convince the investor that two birds in the bush really are better.
I’m looking forward to seeing Keith’s prediction to come true and for “hedge fund fever” to abate a bit. The calculus is still skewed toward the short-term gains savvy investors can make; when a little more of the shine comes off the apple I am hoping that investors will be more comfortable balancing “longer term” tech company bets with shorter market-based approaches.
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Found|Read Post on Getting the Most out of Your Lawyer
I wrote a post for Found|Read on some common complaints I have heard about working with lawyers, and how to avoid them. The title was supposed to be “How to Work with your Lawyer”, but the “with” got dropped so now it reads “how to work your lawyer”. I guess that is ok, too.
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It’s Not a Social Network “Dashboard”, it’s a “Social Graph”
Suddenly this week I’ve started hearing the term “social graph” all over. Brad Feld has been talking about it and so has Fred Wilson, though it looks like they both read the same piece published last week by Brad Fitzpatrick, developer of the LiveJournal blogging platform. As I understand it, the social graph is the glue that ties people together over the web- whether it be a set of Outlook contacts or MySpace friends.
I hadn’t heard the term before so I googled it and got a bunch of hits going back at least a few months, though it seems to have gained more currency in the last month or so. It’s a decent phrase, though a little wonky and hard to pin down (compared to say, “web 2.0″, ha!). Wikipedia doesn’t seem to recognize it officially and refers readers to the entry on “social network” instead.
Substantively, social graph is a much broader idea than the social network dashboard I have blogged about previously . Fitzpatrick’s article is essentially a manifesto for an open source framework that all networks could use as a backdrop for contacts and organization, among other things. It’s a cool idea for sure and I’d love to see it happen.
As I think about it, though, the work required for a user to flesh out a set of contacts on any social network is part of what keeps the user loyal to the platform. Loyalty means, largely, pageviews and advertising click-throughs, i.e. the main source of revenue for most networks. If my contact set becomes a “commodity” I can drop in to any network, will I jump around among networks more readily?
Maybe, or maybe not. Lots of people belong to six zillion networks already so it isn’t like we would suddenly all switch off Linkedin and turn on Facebook- maybe we just gravitate more toward one or another as featuresets evolve. More to the point, I read Fitzpatrick as saying in part that developing the social graph-building tools is hard work that essentially reinvents the wheel every time. An open-source social graph “standard wheel” would free up companies to focus more on the content. Actually, commoditizing the contacts would require networks to focus on differentiation of their content/platform/benefits rather than just locking in users.
As I write this, I realize that idea sounds a lot like Facebook’s F8 platform, but without the “inbound only” traffic flow that so many people have expressed frustration with. No wonder Fitzpatrick’s idea hit a nerve with Feld and Wilson.
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Cathedral Thinking and Magic Ponies
I became a lawyer in part because I love words and writing and analyzing how people use language. That’s why I am inaugurating a new occasional series on this blog devoted to “neologisms”- clever turns of phrase that capture an idea especially well. Here are the first two entries:
Duke Energy’s Chairman and CEO James Rogers talks about energy issues as in need of “cathedral thinking“- just like Europe’s great cathedrals took centuries to build, weaning the world off carbon-based fuels is likely to take a similar amount of time. It is a 
brilliant phrase- though I don’t know if Rogers coined it- because it evokes grandeur, an epic scale, enduring structures and also a long time frame for planning, development and construction. As head of a company built on carbon-based fuels that probably sees the end of its lifeblood somewhere in the distant, but foreseeable future, it works perfectly to capture the pace at which Duke is comfortable working on the issues as well.
Meanwhile, on Terrapass’s blog Adam Stein talks about “magic pony thinking“- where some environmentalists 
reject certain proposed solutions because they aren’t sweeping enough and put forward an idea like “dismantling the suburbs and trading cars for light rail and bicycles”, in Adam’s words. Adam gives full credit for the term to the John and Belle blog, and ultimately a Calvin and Hobbes strip.
“Magic pony” is a powerful turn of phrase. It is an incredibly derisive way to lambast another viewpoint as failing to address (perceived) real world facts. It’s a gem of a phrase, but also a double-edged weapon that seems as likely to lead to a flame war as a thoughtful comparison of viewpoints. Maybe sensing this, Adam offers up “distraction theory” as well, a slightly less perjorative way of saying the same thing. Fighting words, all the same.
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Athleague - a new business launches
Update: athleague.com is the official site being rolled out to schools. beta.athleague.com is for the general public to check out.
I met Ravi Mishra last summer and it has been an enormous pleasure to help him get his new business off the ground. He is a terrific guy and I am thrilled to see that the new site, athleague.com, has launched in beta. I told him that his business plan was the among the very best I have ever read- and I’ve read many.
Athleague plans to bring a new level of organization to “informal” sports- intramural at schools and adult sports leagues/teams in the larger world. It is a niche that is close to my heart. I’m looking forward to seeing how it will work for my bike racing team.
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Matt Mullenweg Wants a Social Network Dashboard Too
I have posted before about my wish for a centralized place to manage profiles, invitations and other aspects of online accounts, but started to think it was unrealistic given the privacy and walled-garden issues involved in allowing one service control to the account information for a user at another service.
It may still be a pipedream, but at least I am not the only one having it. I just watched an interview on Wallstrip with Matt Mullenweg from Wordpress/Automattic where he talks about the same thing. This pleases me to no end. If people like Matt are worried about the balkanization of online identity, I have to think a solution will emerge sooner or later.
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“Study Before Action” and Other False Choices in the Climate Debate
Brad Feld quotes an article by Freeman Dyson that talks about how little we really understand about how the climate works, and how we need to study things more before we can diagnose the problems accurately. Dyson also says that exaggerated concern about the environment takes attention and resources away from other pressing concerns, like poverty and disease. These two arguments set up false choices that drive me crazy.
Dyson is completely correct that no one understands climate perfectly. No one understand cancer perfectly, either, but that has never stopped doctors from trying to treat it. Research and action have gone hand-in-hand in medicine and just about every other discipline humans have ever studied, and every problem humans have tried to solve. To say that we need to study the climate more before can hope to act just sounds like inertia to me- we have so much momentum in one direction currently that it’s just too hard to stop.
Study or act is a false choice. We’ve never done that before, There’s no reason to act differently now.
The “we need to solve other problems first” is another one. There have always been more pressing problems that we can deal with at once, but still we chip away at all of them to the best of our ability. Saying we shouldn’t think about climate change until we have solved poverty and disease is absurd. Taken to the extreme, this argument means we would have to focus every dollar on eradicating AIDS before we touch malaria, or cancer or any other disease.
Brad’s point is that contrarian viewpoints are valuable because they can lead us to think in new ways. I agree with that heartily. If Dyson’s arguments challenge anyone to think through their beliefs, then great. They did that to me, and what I come up with is that he has his head in the sand.
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Down the Rabbit Hole Trying to Barbeque “Green”
Update: Terrapass’s blog talks about a UK study that found lamb grown in New Zealand and flown to the UK produces less carbon than the domestically-raised variety. More to my point that even the “food miles” analysis is incredibly fine-grained. It seems almost impossible to make any assumptions without digging back to the source of every physical and energy component of everything society produces. Yikes.
I read several interesting pieces recently that made me think about how hard it is to tease apart the interwoven strands of modern life- at least from an environmental perspective. Barbeque is a good example.
A cursory glance at the thick smoke coming out of a charcoal grill tells me that gas is greener and cleaner. The conventional wisdom seemed to agree: charcoal is made in a messy, chemical-filled process that produces lots of emissions itself. Burning the briquettes then sends out more particulates and CO2, not to mention deforestation and transport of the wood starting product (though charcoal in the developed world is mostly made from waste wood- no trees were cut just for charcoal production).
The flip side is that propane comes from fossil fuels- i.e. long dead, long-”sequestered” carbon. The CO2 emitted by burning charcoal was in the atmosphere more recently, so perhaps the net addition to the atmosphere is less. Not all CO2 molecules are equal in this analysis.
Finally, the article above notes that grilling in total results in about 0.003% of US carbon emissions annually. Brad Feld points to this article positing that the real issue is meat production. A gas grill may produce 5.6 pounds of CO2 per hour and a charcoal grill 11, but 2.2 pounds of beef on it likely resulted in nearly 80 pounds emitted before the meat hit the grill at all. Vegetables, unless very locally grown, may not be much better.
So where does this leave me? Still grilling meat on gas, and a bit worried about digging deeper. Cereals and pulses (beans and peas) may be the best environmental choice, but where do they come from and how can I cook them “green”?
I’m afraid that if I keep digging any deeper I’ll end up convinced the only foods I can eat with enviromental conscience will be grown in my San Francisco back yard and eaten raw- and that won’t leave many options!
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My Rant on “By Way of Example”, a Legal Drafting Pet Peeve
Someone pointed me to this interesting column on the inner thought process of developers- the tension between building an application to fail fast or fail slowly. Here’s an analogue from the legal world.
One type of language I have seen a bunch of that drives me crazy is “by way of example”. Sometimes certain ideas are hard to capture precisely and people fall back on “by way of example” to help add clarity, such as “by way of example, during a leap year Februay 29 will not be considered in accounting for . . .”I don’t like this. My goal in drafting any document is to capture the meaning simply and clearly. That’s not to say I succeed all the time and occasionally ideas are so complex that a good example can paint the picture that replaces 1,000 words. It’s a tool to use sparingly, though- not a shortcut or a substitute for clear drafting. If I find myself reaching for the “example” too often, I must not be putting enough effort into capturing the ideas properly.
Leaving out the example with inexact language may be like failing quickly- though the consequences may be litigation rather than restarting the program. Undesirable either way. Adding the example may let the agreement fail slowly- getting the language right and using examples sparingly where really necessary let the agreement be flexible enough to accommodate changes in user circumstances.
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Ford Supporting a US Gas Tax or Creating a Smoke Screen to Dump CAFE Standards?
Ford Motor Company CEO Alan Mullaly has opined that US CAFE standards are preventing car companies from addressing global warming and energy security concerns. Mullaly apparently hedged when asked straight-on if he supported a European-style gas tax that could cause gasoline prices to rise dramatically, but it sounds like that’s what he meant.
“I’ve never seen a market distorting policy like CAFE,” Mulally said.
Mullaly goes on to say that CAFE forces carmakers to produce small cars in order to meet the regulations, but consumers want big ones. What this really seems to mean is that Mullaly thinks gas prices are too low, so there is not enough incentive to get people out of big, full-inefficient cars. Replacing CAFE with a gas tax could make pump prices rise, which would make people think harder about how much of their paycheck they want to hand over at the gas station. He offered Europe’s high (and highly taxed) gas prices as a leading factor in the relatively smaller car sizes in Europe.
It is an interesting argument: carmakers want to do the “right thing” by the enviroment, but consumers won’t let them. I suspect Mullaly is at least partially correct. Higher fuel costs might help swing the balance toward smaller cars.
At the same time, Mullaly’s reasoning falls well short of solid. The success of the Prius belies the argument that consumers just aren’t interested in efficiency. Maybe the small cars Ford makes just aren’t sexy enough. Europe is also so different from the US that it’s tough to make an apples-to-apples comparison. Are high fuel costs the main driver there or do Europe’s narrow streets have something to do with it as well?
More to the point, if Mullaly is saying CAFE doesn’t work because low gas prices cause a mismatch between consumer demand and carmaker requirements, wouldn’t the gas tax help that problem? Do we still need to scrap CAFE as well?
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Cyber-Twitter Squatting on Bill Clinton’s Name
I recently tuned in to Barack Obama and John Edwards’ Twitter feeds, which offer somewhat interesting, informal glimpses of the candidates. Shortly after, I discovered what is really a fake Bill Clinton Twitter feed. Someone reserved the BillClinton user name and posts asinine garbage that might be malicious if it actually had any relevance to anything.
Still, this got me thinking about “user name squatting”. It is pretty well established that someone with a “famous” name can oust a squatter from a domain name, but I wonder if they same is true of user names on social networks? If I went around and registered “RudyGiuliani” (to pick a famous and unusual name), would he have rights against me? My gut tells me that the larger the platform, the more likely name-squatting would be deemed impactful on the famous person (e.g. Mr. Giuliani). I also suspect that the nature of the platform would be relevant as well- fake Rudy Giuliani on MySpace is potentially more damaging to the candidate than fake Rudy Giuliani on Digg.
I’m going to poke around a little on this one to see if anyone has actually tried to bring “user name squatting” actions. I’ll update if I find anything interesting.
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Kaboodle Gets an Exit
Congratulations to the group at Kaboodle, who just announced their acquisition by Hearst Media. I was privileged to work with them at their inception- it’s a cliche, but you would be hard pressed to find a nicer group of people. They worked hard to build Kaboodle into a solid shopping bookmark destination, and I know Hearst has big plans for the future as well. I’m looking forward to seeing it.
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ProfileBuilder Misses the Point of Online Presence Management
I have written previously about my wish for a social network dashboard that will let me manage my presence on multiple platforms. It is admittedly a pipe dream since no service I am aware of publishes an API for account management information- and probably never will for fear of privacy issues.
Still, I was intrigued to see ProfileBuilder’s launch this weekend and I checked it out. Unfortunately it looks as though they weren’t really ready to launch at all. There’s no explanation of what the site actually does and the text is rife with typos. More to the point, it doesn’t work whatsoever with Firefox on my Mac. Maybe the traffic they picked up from the TechCrunch crowd will stay with them until they get the site working properly, but it sure seems like a shaky start- the downside of the “Launch Early and Often” ethos.
As far as I can tell, the site aggregates content from whatever feeds I add to my profile. Aggregation is useful- Lijit is a nice tool that offers cross-platform searches of my content. It would be really great if I could aggregate (or maybe even just search) comments I have made across the internet in one location, but I don’t see the value of piling up all my content in yet one more dead end. If I can’t post from it and I can’t administer my other various presences with it, then I definitely don’t need another place to send people. Lijit is useful because it works inside my existing networks.
I am scaling back my wish. For now, all I want is a single point from which I can send out social network “friends” invitations. I list which networks I want to invite someone to, then they can check the boxes to accept one or all in one fell swoop. Should be simple, right?
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Case Study on Wallstrip at Startup Review
I wrote a case study on Wallstrip that has just been published on Startup Review. Wallstrip is a really interesting little “test balloon” for what can be done with online video. Producer Adam Elend is also one of the brightest, most web-savvy guys anyone could hope to meet. His theme about “putting content where the audience is” is one of those things that sounds so elementary that once you’ve heard it you don’t understand why people aren’t constantly repeating it every day, all the time. The trick is that the simple phrase belies the difficulty of doing that properly.
Case in point is that the same idea was behind Paul McCartney’s Starbucks-released CD, and Prince’s distribution of his new CD through England’s Mail on Sunday newspaper.
To me, both of these efforts seemed like weak attempts to think outside the music distribution box. Yes, consumers are in Starbucks and they read the newspaper, but getting to them requires a bit more than just putting the music in front of them. These efforts lack authenticity, somehow- they seem like clumsy publicity stunts. Wallstrip’s genius is in being candid about foisting product on you, but being open enough, and entertaining enough in the process that lots of people don’t mind the pitch.
Intimacy, authenticity and getting to the audiences where they already live on the web- Adam’s insightful blog piece covers it all.
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Politics of the 2.0 Meme Courtesy of Wikipedia
Just when “Web 2.0″ lost all meaning and people stopped saying it, along comes “Enterprise 2.0″. Brad Feld grudgingly acknowledged that the latter term has become entrenched, but not everyone agrees, as shown by a really interesting piece in Harvard Business School’s Working Knowledge e-newsletter both about the term and the mechanics/politics of Wikipedia itself.
Harvard professor Andrew McAfee used (coined, says Working Knowledge) the term Enterprise 2.0 and a reader posted a stub about it on Wikipedia. Someone else nominated the stub for deletion as a “neologism of dubious utility” (as if that’s ever stopped anyone).
The stub was deleted by an administrator, then re-added as a longer article. That article was also tagged for deletion despite conforming (again according to HBS) to Wikipedia’s editorial and content standards. After heated discussion among Wikipedians during which Prof. McAfee came to believe that the pro-deletion camp simply didn’t like the 2.0 name, an administrator determined that the article met all standards and should be kept.
We can hope that Enterprise 2.0 avoids the pitfalls of Web 2.0, because the end result was that after re-posting, a Wikipedian heavily truncated the article and changed the title, saying to McAfee “It’s a free-form, open environment. If you don’t like my changes, make your own”.
Enterprise can certainly benefit from the wisdom of crowds approach (check out Atul Gawande’s book Better for an example of what happens when a hospital asks its staff how to enforce hand-washing practices), so the “2.0″ approach makes a lot of sense. It’s still a tired name, though.
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Peak Technology- and You Thought Peak Oil Was a Problem
First came Peak Oil- the idea that we are at, nearly at, or past (depending on whom you ask) the point where more oil has been removed from the ground than there is let to extract. Shortly after came Peak Gas, Peak Coal and Peak Uranium before someone put the pieces together and pointed out that the common factor among all these “peak” theories is that the world produces energy for the most part by using finite resources- and called the whole concept “Peak Energy“.
Follow the idea downstream and you start to wonder about the underpinnings of modern society, and technology in particular. Never mind that a Second Life avatar uses as much electricity as the average citizen of Brazil- check out Data Center Knowledge for a glimpse at how important a consideration energy is to web-centric businesses. Yesterday’s PG&E outage in San Francisco certainly shows how even local disruptions can affect the web in a big way.
Writer James Kunstler posted a recent polemic in which he points out that technology has led us to this point in history, and yet we put our hopes in technology to lead us out again. To paraphrase, the question he asks is “where will we get the energy to build hybrid cars, solar panels and wind farms” when oil costs skyrocket?
Global warming activists have started talking about “stabilization wedges“- numerous varied efforts each designed to reduce or replace a portion of CO2 currently being emitted through fossil fuel use, and using currently available technology.
I think this idea is right on- or at least more realistic than saying we need to return to localized economies- but it’s going to be a close race. If we can’t bring together enough wedges it’s going to be tough to maintain a technology-based society- and then there’s the question of how to rebuild a society where all the readily-available energy resources are tapped out.
I hate to end this on such a glum note. I’m certainly hopeful, but as I said, it’s going to be close.
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Google vs. the Wireless Carriers- No Question Who the Audience Favorite is
The FCC is putting up for auction next year a slice of radio spectrum that will go dark when analog TV is shut down net year, and is due to set the rules for the auction in the next few weeks. To the great pleasure of many, Google plans to bid on a portion of that spectrum, with the intent of providing carrier-neutral cellphone service. In other words, consumers with phones that use the spectrum could freely jump around to any carrier. No more 2 year contracts.
Google’s bid depends on the FCC approving this use along with other conditions that go along with it, like (somehow) requiring handset makers to make phones using the new 700mhz spectrum. The network would need to be built out as well, so I guess the handsets go, err, hand in hand with cell site relays that can handle the traffic, etc.
The major carriers were up in arms about Google’s bid at first. They claimed that Google was stifling competition by imposing these conditions and that the spectrum should simply go to the highest bidder- no conditions, just whoever can pony up the most cash. More recently, AT&T had an about-face and endorsed the FCC’s proposed rules, which largely accept Google’s proposal, but also impose a reserve price so that if the bids aren’t low enough the FCC can re-run the auction.
Phew! So the carriers are slamming Google for being anti-competitive, Google says its conditions are necessary in order to allow anyone other than the major carriers to compete in the space, and some third parties are lambasting the FCC’s reserve bid rule as anticompetitive insofar as it prevents startups with shallow pockets, like Cyren Call and Frontier Wireless from making a bid.
Here’s my take. People are wary of Google and more and more seem to take the “don’t be evil” motto with a big grain of salt. On the other hand, consumers hate their wireless carriers about as much as they love the convenience of their mobile phones. So when Google and the carriers start slinging “anticompetitive” mud at each other it’s no big surprise which side wins and which gets told to ease up on the chutzpah.
Personally, I think “wireless network neutrality” will fill a niche in the industry, especially for early adopters (such as iPhone buyers) willing to pay more for handsets. If consumer ability to jump carriers easily pushes carriers a bit then that would be great as well- maybe they will stop charging more to buy a ringtone than it costs to buy the whole song on iTunes. It will be a great experiment, if nothing else.
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“Copyjacking” legal meme- a gem of a term
Intellectual property lawyer Erik J. Heels coined a new term that I really like: “copyjacking“. More commonly known as “hotlinking”, it refers to the practice of embedding content from another website in order to use the content, but save on bandwidth charges.
I like it because hotlinking isn’t necessarily bad and it is useful to distinguish the bad kind of hotlinking from the good kind. YouTube (and loads of other video sites) encourages users to embed video content on non-YouTube domains. As an example of the bad kind (i.e. copyjacking) Erik takes Freakonomics to task for habitually linking inline to images hosted elsewhere without attribution or apparent permission.
I love this term. What I love even more is that unlike many legal issues there is a sure-fire way to get people to stop the practice- change the image on the host end to something less desirable, such as happened to John McCain last spring.
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My (Wished-for) Social Network Dashboard
I wrote the other day about how I long for a unified invite process for social web applications. I realized that wouldn’t satisfy me, though. I really want a social network dashboard where I can manage not only invitations, but contacts, avatars, profiles, etc. from a single place.
The new Plaxo comes closer than anything else and may turn out to be useful. Thanks to it my iCal and Mac Address Book are now sync’d with my Gmail account. I only use that as backup email, so I guess that it’s a good thing but I’m still not totally clear.
It would be nice to have Linkedin contacts sync automatically too, but I have to pay $49.95/year for that feature. For $50 I can upload my contact list manually. Still, the fact that Plaxo is “pass-through” is great. Users can view info on Plaxo or just use it as a conduit for other services. I like that, though it makes we wonder how they make money.
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Parallels Here I Come
When I started my business I decided to switch from PC to Mac. It’s been a very happy transition generally, but there are a couple of applications I haven’t been able to adequately replace on the Mac platform. One is a Word redlining-on-steroids program called DeltaView that is tremendously useful for comparing documents. The other is billing software. I just haven’t found a satisfactory legal billing program for Mac.
I’m also start to use contractors and QuickBooks online holds out great promise of easy remote data entry. That sounds good to me- I hate entering my own time notes, never mind someone else’s as well. Unfortunately, QB online only works on Internet Explorer for PCs.
Enter Parallels. It looks really amazing. I’m excited to see how it works in real life.
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IP Protection for Contractors
I wrote a piece for Found|Read on how contract professionals can write service agreements that let them develop specific work product without handing over their their toolsets to clients. I have definitely worked on both sides of this issue and it can be sensitive. “Residuals” and generalized tools and methods are pretty fuzzy concepts. It takes care and specificity to be sure each side understands what is being delivered to the client and what isn’t.
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“Widget Law”, Privacy and Did You Really Mark that Photo “Friends Only”?
Internet law presented an interesting set of new challenges for lawyers around privacy, permissions, click-wrap contracts, etc. Recently I have seen a new set of issues arise around widgets and the interactive web generally. It’s very interesting, though my clients wish there were clearer answers.
Client confidentiality stops me from talking much about issues I am working on, but here are a couple of public matters within the same sphere.
Virgin Mobile is apparently in a spat with a Flickr user over a photo Virgin grabbed for an outdoor advertising campaign. As reported, Virgin complied with attribution requirements of the Creative Commons license under which the photo was posted, but the photo contained an image of a minor, whose parents say they did not consent to use of the likeness.
Somewhat related, here is a series of posts from employment lawyer George Lenard on the legality of using social network sites for background checking on employee candidates. The conclusion is that it is legal, but don’t take everything you see as verified truth, and be aware that many profiles contain age, ethnic background and other personal data that employers are allowed to know, but need to handle carefully.
The common thread here is that information posted in one context can be used ever more easily for others. More to the point, permission to one use does not mean permission to others, but the technical tools can’t always recognize these distinctions. A friend can give me special permission to see his/her semi-private Flickr photos. Do I violate my friend’s copyright or privacy rights if I stream those photos to my own blog- with unrestricted access?
Probably yes, is the answer. Given how easy it is to do that, what are the consequences and how can we address it? Good questions- no sure answers.
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I Want a “Make Friends” Widget
I have and regularly use accounts on LinkedIn, Facebook, Last.fm, Flickr and a couple of other social internet sites. It’s awkward and I find it almost embarrassing to send out a bunch of separate emails from each service to link up with people I know in the real world. I want a widget that will let me send a single message to someone offering to connect on all of the services at once.
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Facebook, Walled Gardens and Skating to the Puck
With all the recent talk about Facebook I finally decided to check out the F8 platform. I opened a Facebook account a year or so ago but abandoned it when I couldn’t find anything to do there. F8 is cool, though.
The range of different applications people have built is impressive and some of them are even interesting (to me). What impresses me more is their vision (to paraphrase Wayne Gretzky’s famous phrase) of where the puck is headed.
In the past two days I have read two articles about walled gardens. They’re everywhere, but no one likes them. OpenID is a great idea to put some holes through the walls, but at best it seems like it will let users tunnel from one walled garden to another with a consistent user identity.
Facebook gets it a little better. By opening the platform to outside developers they let users lob content out from behind walls elsewhere. It is terrific as far as it goes. It comes closer than anything else I’ve seen to letting people aggregate their web “presences” in one place.
Problem is that it’s a walled garden itself. All that stuff that gets lobbed out of other gardens is basically stuck inside Facebook’s own walls (Kottke explains this better than I can). It’s certainly an interesting problem- how can you take the walls down entirely so that data can flow in and out, back and forth, and still make money?
Facebook, by embracing “inbound-openness”, certainly seems to have skated past its other big competitors at the moment. I’m fascinated to see whether Mosh and Socialstream envision social networking platforms as moving in the same direction.
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More on Avvo.com- a better way to verify identity
The folks at Avvo apparently saw the post below, because they called me about it today. I didn’t talk to them, but their voicemail said they understand the concern and are working out a system to use email addresses registered with State Bar authorities (?) as a way of verifying identity instead of credit cards. Good for them for realizing the credit card system is a bad idea. I’ll look forward to checking the service out further once the new system is in place.
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Update on Avvo.com - you need my credit card for what?
I am listed on avvo.com and I just tried to claim my profile and update it. The site brings up an interesting issue- my information is listed, but how do they know that the person who tries to claim the profile is really me? Anyone could submit an email address claiming to be mine and take over my identity.
Avvo’s answer is to ask for my credit card information. That may well be the best and most foolproof way to verify that I am who I say I am. I’m not going to go for it though. Yes, my credit card number is on file in about half-a-zillion places, but I’m not going to start using it as proof of identity.
I really believe that avvo is a great idea. California is one of the few states to publicly list contact information on licensed attorneys and I use it regularly. I dearly wish I had the same resource for other states and I hope avvo is successful for that reason alone.
However, if the price of participation in the avvo community is offering up my credit card information then I’ll pass. Thanks anyway.
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Avvo.com and thefunded.org - but what about the doctors?
Plenty has been written recently about newish sites avvo.com and thefunded.com. Each seeks to add a layer of transparency to the otherwise murky-seeming fields of law and venture capital by listing people and firms and providing a rating system.
I think the idea behind both sites is good, though I am sure that there will be inequities in rankings, re-working of the systems etc. What interests me more is why people have chosen those two fields to cover.
Someone once pointed out to me that picking a lawyer is like choosing a car mechanic. Unless you are one yourself you don’t really know what they are doing. Even if things work out well you don’t know if it’s because of something your lawyer/mechanic did or in spite of it. You really only know if they screwed up.
And in fact this applies to every service profession, from accounting to x-ray technician. So why did lawyers and venture capitalists get chosen to be ranked?
My guess is that they are seen as gateways to cash. VCs invest it, of course, and the stereotype is of an insular group that makes decisions based on criteria few really understand. Business lawyers can provide introductions that help companies get cash or otherwise move the business forward. Litigation often works around the idea that cash should be in one place and not another as well.
This probably isn’t a huge revelation to anyone. It’s interesting to me, though, that I haven’t seen any similar services for doctors. Health is important, right? Wouldn’t it be useful to know if a doctor you’d been referred to had a good reputation?
Maybe this service is out there and I just haven’t seen it. If anyone has seen a doctors’ ranking site, please let me know in the comments.
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Target.com ADA lawsuit - a leading indicator
I went to a really useful lawyer’s education panel yesterday courtesy of the San Francisco Bar Association on “2006 Hot Topics in Business Law”. The panel was a Matrix-style download of a year’s worth of legal developments jammed into my brain in the course of an hour and had numerous great nuggets.
One of the biggest, I thought, was the status of a case called National Federation for the Blind v. Target. It is still at a preliminary stage, but the results could be game-changing and to my mind it is a harbinger of ideas to come regardless of how the case itself turns out.
The National Federation claims that the target.com website fails to adequately incorporate technology to help blind users shop on the site. Wikipedia does a good job describing the basic technical details.
Last fall the case survived a motion to dismiss by Target on the grounds that the Americans with Disabilities Act doesn’t apply because the site is a mere adjunct to Target’s physical stores and 800 number. The court found that the ADA can apply equally to web sites, regardless of the existence of physical stores. The case is now being certified as a class action and will wend its slow way through the courts.
If the court ultimately rules in favor of the plaintiffs, the outcome could be huge. The result could not only mean that potentially a huge number of web sites must accommodate blind users, but also every other condition covered by the ADA as well.
The chances of this happening are hard to gauge currently. However, my own view is that alternative-access concerns are going to become more prominent as the Internet gets more fundamentally integrated into daily life. Smart businesses will start thinking about these ideas early to avoid playing catchup later on. I once worked on a technology platform that had to be abandoned after $100M+ had been poured into it just because the software couldn’t be made Y2K compliant, so I am sensitive to the importance of planning ahead.
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The World Isn’t Ready for Crowdsourced Securities Offerings
Steve Poland is a bright guy with an interesting business idea at webothlike.com. More interesting is that he is blogging the entire startup process and seeking active input from the general community along on the way. I am one of his advisers.
Early in the process Steve was trying to figure out how to get started, and we talked about ways he might be able to bring in some early cash. Almost everyone- Steve, the public and me- agreed that it would be a lot easier to get the $20,000 he needed if he could sell shares to his readers.
Unfortunately, US securities laws were the holdout. They say that anyone who wants to solicit money from the general public needs to do so via the expensive, highly regulated public offering process. Private securities offerings must be just that- private. Publicly offering to sell securities, such as through a blog, automatically strips away the ability to use private offering rules.
i was intrigued, then, when Steve told me about Cambrian House. That company is using the wisdom of crowds to solicit its own set of business ideas. The twist is that for every idea submitted, participants get a “share” of Cambrian House stock. I signed up to test it out and now have a share of stock listed in my account.
Being a securities lawyer, I wondered how the company does this. They recently put up an FAQ that explains in part.
The FAQ says that a separate entity, Cambrian House Coop, has a right to 1% of the Cambrian House equity, revenue and/or dividends (the text is a little unclear). This leads to a couple of thoughts:
First, the economics. 1% of a company is not a whole lot and my share is a tiny fraction of that. If the company becomes worth $100,000,000 the entire program will have a value of $1,000,000, which must then be divided among as many thousands or millions of people as register and earn shares. So this is a neat gimmick but I’m not sure the reward matches the effort. If I kill myself to crank out more ideas than anyone else I may end up making a few tens of thousands of dollars between now and whenever the company is sold. Neat, but I won’t cut back my day job to work at it.
Second, the mechanics. Crowdsourced program participants will not actually own a piece of Cambrian House, but of the Cambrian House Coop. Participants will be entitled to elect the Board of Directors of the Coop, whose role is to determine how shares are distributed. So participants own no part of Cambrian House itself, but of the related entity that exists solely to help distribute 1% of whatever money Cambrian House decides it has made. This seems like an incredible amount of effort to distribute a relatively small amount of money.
This isn’t meant to be a criticism of Cambrian House. They seem to have a lot of faith in the wisdom of crowds and are simply trying to extend the financial reward to the people that make it all possible.
It’s not a critique of securities laws either. Their purpose is to help make sure that investors receive enough information about a business to understand what they are getting into before they sign on.
Unfortunately, these two concepts sail right past one another. Crowdsourcing is based on the idea that aggregating the ideas of communities increases value for everyone in the aggregate. Securities laws worry that any single individual might not have the resources to make a sufficiently educated decision.
It might be fun if Digg-style ratings could be used to help determine a business’s investment worthiness and the public could rely on that. We are definitely not there yet, though and probably never will be, so for Steve, Cambrian House and everyone else there may always be an imbalance between the benefit a company can get from the community and the equity value the company can give back to individuals within that community.
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Reading List: VC Money for Women and Market Forces to Stop Global Warming
Harvard Business School’s Working Knowledge e-zine is one of my favorite weekly reads. They dig a little deeper than many press outlets into many fascinating issues. Two that seem sure to provoke debate have to do with How Women Can Get More Venture Capital and whether market forces or government regulation will do more to stop global warming.
The latter piece is interesting mostly for the comments. I will admit that I am surrounded by more like-minded people that otherwise on the subject of global warming, so I find it fascinating to read through the comments on a site that writes for a business-oriented rather than green-specific audience. It is fascinating to see the range of intelligent viewpoints represented- from “increasing oil costs will drive consumers toward alternative energy sources” to “companies should pollute if it rewards shareholders more, and vice versa”.
The VC money for women entrepreneur article seems certain to fuel extensive debate, and I wish it was open for comments as well. One of the author’s findings was that VCs worry more that female entrepreneurs will leave the business prematurely or put other (family) needs first, and at the same time the author’s research on women in the VC industry found that women *did* leave the field at a much higher rate than men between 1995-2000.
The conclusion seems to be that women need to work harder than men to convince investors they are committed to the business. On the other hand, the article cites the case in which two women, one six months pregnant and the other having come back from a family-related year off work successfully raised money for Zipcar.
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1,400 Year-old Family Run Business Comes to an End
Apologies to readers for a dearth of posts recently. Recovering from a bicycle accident has gotten in the way of my writing. I should be back at it soon, though.
In the meantime, here is a neat, sad story about a Japanese temple construction company supposedly in operation by the same family since 578. Its long run finally ended, apparently, as the company folded under excess debt.
The article’s author does a good job identifying some factors that helped the company survive for 1,400 years. Perhaps unsurprisingly, they aren’t that different from what helps startups make it: focus on the core business, but be flexible to changing circumstances and the needs of the business.
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Cablevision’s Remote DVR Unplugged
I have just finished reading the opinion in the Twentieth Century Fox v. Cablevision case from the Southern District of New York and boy, is it ever a stinker (to use the legal jargon).
Briefly, Fox sued Cablevision for setting up a “network digital video recorder”, a device that operates like a DVR, but uses equipment sitting in Cablevision’s facility rather than in a box in the consumer’s house. The court held that such a system violates Fox’s copyrights in its programming because Cablevision both copies and transmits the content to consumers without the proper licenses from Fox.
My first thought on reading the case was that it focused on extremely technical details only to reach a completely anachronistic ruling. In the age of Software as a Service, we have all gotten pretty used to the idea that technology can be administered remotely. We don’t need to have the set-top box, many of us may be happy not to have to plug yet another device into our TVs, and the end result for consumers is exactly the same. As Sherwin Siy notes, the main difference is the length of the cable.
Unfortunately, the more I think about it, the more it seems like it is the Copyright Act that has it wrong these days. Distinctions that used to matter no longer make a difference.
The court talked extensively about the fact that Cablevision was “transmitting” the content. Cablevision tried to argue that the consumers were actually doing the transmitting when they choose which programs to watch, but it doesn’t take much to see that argument as a loser.
A little tricker was Cablevision’s similar line of reasoning that consumers actually do the “copying” as well, another basis for finding copyright infringement. Consumer-copiers can rely on a fair use exception for home use of content, but Cablevision can’t. The court really didn’t like this argument either. It left the door open a crack based on Cablevision’s complex N-DVR architecture, but held that the copies were made on Cablevision equipment maintained by Cablevision personnel in Cablevision facilities, so Cablevision was really the copier.
The place where it all starts to come apart is where the court tries to distinguish “devices” from “services”. Sony’s Betamax is the precedent-setting case here, from 1984. Consumers could install a Betamax machine and have nothing further to do with Sony. The court found that the N-DVR was nothing like a Betamax, because consumers subscribed to the “service” to get the DVR functions.
Of course, this is only a hair removed from every other type of DVR, including the Tivo in my house. Sure, I record content onto my Tivo within the walls of my own house, but my “device” would be useless without the “service” that tells my Tivo what is on which channels.
My own belief is that the judge realized this and the focus on technical operation was his attempt to confine his ruling to the narrow N-DVR issue in front of him rather than come out of left field with an opinion that could be read to say every DVR everywhere (and probably VCR+ scheduling codes as well) are copyright-infringing.
The scorecard, then, is something like this:
Judge Chin gets the law right, even if he doesn’t seem to like the result.
Prof. Eric Goldman sums up the issues nicely.
Mark Cuban gets it right for sure when he says Fox is far better off distributing content this way than to see it pirated, or just losing the distribution channel entirely as the Internet changes video progamming models.
Copyright law is the big loser for foisting arbitrary rulings like this on consumers. Trying to draw a line between hardware and software isn’t going to make for happy caselaw.
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Smart Grid Rubber Hits the Road in Stockton
NPR this morning reported that PG&E is starting a trial program in Stockton, Calif. they are calling “SmartAC”. In exchange for a $25 discount, homeowners agree to install a “smart switch” on their air conditioning units that will let PG&E cycle the units off during peak demand periods- reportedly for 15 minutes every hour. According to the Central Valley Business Times, the first switches were installed recently, and the hope is to ramp up to 400,000 customers by 2010, which would give the ability to reduce demand by 300 megawatts.
The challenge of the smart grid, I believe, has to do with the “tragedy of the commons”, the idea that if I don’t use shared resources, my neighbors will take them all and I will end up with nothing. The tragedy comes in when resources that could be managed to support use sustainably over the long term get depleted by short-term thinking.
In the energy context, PG&E and all the smart grid operators need to overcome this hurdle. Particularly in the hot Central Valley, it may take some work to convince many consumers that turning off an A/C is actually a good thing for everyone in the long term. If successful, the program’s most immediate benefits will be that the power stays on, rates might not go up, and less CO2 may hit the atmosphere- none of which will be apparent unless PG&E makes an effort to point them out to people.
It sounds like the program has started with people with energy efficiency and carbon footprint ideas already in mind. I question whether they will be able to hit their 400,000 household target without moving out of that demographic. This will be a pilot program to follow closely. I am especially interested to see which marketing ideas sell best to the general public.
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California Stock Option Plans Get Friendlier
The California Department of Corporations seems likely to adopt a new set of rules affecting compensatory benefit plans by the end of March. The rules cover a variety of plan types, but stock option plans are the most commonly used type of plan.
Vesting Terms Reflect Real Life
The new rules generally conform California law to IRS rules. California has a few requirements that aren’t covered by the IRS, so the changes will help to avoid a few different “gotchas”. Some of them are basically stenographic, such as the (soon to be former) requirement that options vest at least 20% per year. I have not yet worked with a company that used a 5 year or longer vesting period, so the issue was moot for all practical purposes, but the language still needed to be in the plan. It always makes me happy when I cut language out of a document, so this is a nice step.
2/3 Shareholder Voting to be (Mostly) Eliminated
The other notable “gotcha” is the funny rule that companies can not have options outstanding to purchase shares in excess of 30% of the company’s capitalization without 2/3 shareholder approval. The new rules would eliminate the 2/3 voting requirement (majority vote for option plans is still required for favorable tax treatment) if the plan otherwise complies with IRS rules.
It is the rare company that *needs* that many options outstanding, but I have once or twice encountered a situation in which it made sense, esp. the “late co-founder” situation where a person comes in after the stock price has risen and assumes such a critical role that s/he should be treated as a de facto co-founder for equity purposes.
In those cases, it may be too expensive for him/her to buy founder’s stock and an option is the simplest way to get a substantial equity share to the person. Once or twice I have worked with companies where it has made sense to authorize options in this situation, pushing it up to the 30% of outstanding capital limit. Shareholder voting would not be required to issue stock outright to the person, so it is nice to see that the voting requirement has been eliminated if the equity comes as an option as well.
California Steps into Line
All in all, the new rules aren’t particularly momentous, but that is really the point. California is such outlier on so many issues, with its own special rules, that it is nice to see it simply come into line with “standards”.
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Smart Grid/Demand Response: an Alternative Energy Space to Watch
It struck me that most of the attention in the cleantech/alternative energy space seems to go to solar and biofuel technologies. A look at 2006 venture investment trends confirmed this impression, so I bugged a friend who knows far more about the space than I. He pointed me toward Demand Response, or “Smart Grid” technology, as an up-and-comer. After a bit of research, I think he is on to something.
Both terms refer to a distribution system for electricity that can detect and manage peak loads more efficiently. The electric grid is designed to handle loads up to a certain amount. Past that and adding capacity becomes much more expensive (esp. if it requires new plants to be built) and/or reliability becomes a concern (witness the East Coast US blackout of 2003 and various “brownouts” in California over the past few years). And then there’s the issue of added pollution and CO2 emissions arising from inefficiencies in the existing system, where the grid has excess capacity for parts of the day and struggles to meet demand at others.
Enter the Smart Grid. There are some really interesting technologies maturing in this field and I believe it is going to start getting more attention in the near future. In particular, two companies in the field have filed for IPOs in 2007. Investors will be watching Comverge and EnerNoc closely as bellwethers for the sector.
Comverge is a fascinating business because it demonstrates the power in aggregating small changes. The company sells equipment that lets utilities reduce demand during peak periods- for example by turning down air conditioners and hot water heaters slightly across a large group of consumers. The net effect can be enough in the short term to keep the lights on, or reduce the need to buy expensive “emergency” power. Long-term, the idea is that the savings can help the grid make do with fewer power plants.
EnerNoc focuses on commercial and industrial electricity customers instead of residential ones, especially customers with their own backup generators. By monitoring demand and capacity, EnerNoc is able to switch on these generators both to reduce overall demand at peak periods, and to put energy back into the system as well. The result for these users is not merely cost savings due to reduced drain from the grid, but potentially money back for the power supplied back into the system.
VentureOne (subscription required) described in a recent article a host of companies that can help monitor and regulate demand, including chipset, broadband-over-powerline and wireless sensing companies such as Current Communications, BPL Global, Intellon, Miartech, DeepStream Technologies and SmartSynch. These companies will be falling in behind the Comverge/EnerNoc vanguard, I am sure.
Coming at the issue from a different part of the spectrum is Fat Spaniel, a provider of online monitoring tools to users of grid-based electricity as well as solar systems. The principle is to let consumers see their energy consumption in better detail and decide when to increase loads and when to conserve. The company doesn’t appear to aggregate customer data right now, or plug into DR management systems, but to me it seems like a natural adjunct to something like Comverge’s technology. I have to think that consumers would be a lot happier about having their ACs turned down if they could see the savings to them personally.
It will be fascinating to see how the Comverge and EnerNoc IPOs play out. If successful, I have to think that the space will start getting a lot more attention. Many of the companies are past the startup phase as well, so we could see some real growth in fairly short order. We will stay tuned to see how things unfold.
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Jumpcut Case Study on Startup Review
This week I published my second case study on Startup Review. A short summary of the study is below. Startup Review’s founder, Nisan Gabbay, is a great guy who came up with a brilliant idea to analyze successful internet companies and accumulate a library of strategies, tips and tricks other entrepreneurs can use. I am pleased to have been named a co-author on the blog and I am working on a new batch of studies now.
Jumpcut Case Study Excerpt
Jumpcut is an online community for video creators. Jumpcut provides free video editing tools that let consumers upload short video segments and edit them online to add music and effects. Its Flash-based tools attracted immediate attention in the blogosphere and from consumers, resulting in the company’s acquisition by Yahoo! approximately six months after launch.
Because of its short operating history, Jumpcut makes an interesting study of the launch phase of a business without considering subsequent growth. The company (the business’s legal name was MiraVida Media, Inc. prior to the acquisition) worked very quickly to develop its product and build a team, and was then acquired before the product had time to make more than an early dent in the market.
Visit Startup Review for the complete study
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Richard Branson’s “CO2 X-Prize”, the Prius Principle and the Theory of Anyway
The UN’s Intergovernmental Panel on Climate Change released a major report at the beginning of February concluding that increasing average global temperatures are at least 90% likely to be the result of human activity. The group’s last report was released in 2001 and found human causation between 66-90% likely, so the finding is significant.
Major changes are in store (whether the threat is addressed or avoided) in energy production, renewable and non-renewable resource use, agriculture and water consumption, among other areas. Such changes entail great risk, and also great opportunity for business- those that can figure out how to work under and profit from the new rules are likely to do very well.
The “venture ecosystem” consisting of startup companies and the venture capitalists and others who help build them is well suited to address this growing area. In addition to capital and a strong pool of management talent, the ecosystem allows individuals and companies to fail and try again. A thousand flowers may sprout, and a few will bloom.
In this vein, Richard Branson’s announcement of a $25M prize for the first person to develop technology to remove 1 billion pounds of CO2 from the atmosphere is a wonderful carrot to hold out for innovators everywhere. Just as Elon Musk’s X Prize (now expanded well beyond his original offer) spurred competition to develop a launch-and-return space vehicle, we can hope that Branson’s prize will bring attention and resources to the problem of increasing CO2 accumulation.
At the same time, it is important keep an eye on the whole picture- technology can’t and won’t solve all problems. Technology-based solutions are immensely attractive because they promise to increase efficiency and reduce waste without really changing our behavior. I call this the “Prius Principle”- we don’t drive less, we just do it in a less-polluting vehicle.
I don’t mean to disparage this approach. Every bit certainly helps. I like the phrase, though, because it makes it easy to see the drawbacks. Imagine if all 6 billion people on the planet- or even half of them- all drove Priuses 14,000 miles per year like the average American. The net impact of so many people doing such activities would not be positive.
I strongly believe that innovation in energy production and storage, water management and food production will ease the burden of transitioning away from CO2 dependence. At the same time, as Jared Diamond observes in his great book Collapse, new technologies solve many problems, but almost always cause new ones in the process (he cites CFCs and automobiles as examples; I would add the printing press, which expanded literacy and knowledge in previously unthinkable way, but has also caused the demise of countless forests for paper).
This post is already far too long, so I will conclude with two points:
*Hooray for Branson. It is incredibly important for people with his stature to take such a proactive stance. I hope the competition is unbearably intense and picking a winner near-impossible (in a good way). At the same time,
*Technology is only part of the answer; conservation is also hugely important. Let’s not let our Priuses and solar panels distract us from that. This essay on the Theory of [what I would be doing] Anyway makes that point better than I, so I will sign off with that.
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Lessons of Napster: Grouper, BitTorrent, Jumpcut and YouTube
Napster was the original user-generated content company. It was shut down in 2001, of course, after the Recording Industry Association of America sued the company for maintaining a database of songs that anyone could download without paying royalties or otherwise respecting copyright law.
A host of new file-sharing companies then rose up that didn’t maintain their own song databases. The RIAA sued several of those companies as well, resulting in the important Grokster decision by the US Supreme Court in June 2005. Grokster held that companies can be found liable for copyright infringement by distributing a “device” with the clear intent to promote infringement, as shown by affirmative steps to promote infringement. While these actions certainly didn’t put an end to illegal music file sharing, the battle lines are at least clear now in the music world.
Video is a different matter. Online video sharing has grown along a different trajectory and the issues there are overlapping, but distinct. Events over the past year have led me to believe that some businesses have taken the lessons of Napster/Grokster to heart, while others have not.
YouTube
The biggest non-learner of them all in both size and non-learningness. (There are a myriad other video sharing sites that feature copyright-infringing content just as prominently, so I will use YouTube here as a stand-in for all of them.) YouTube’s business is even more Napster than Napster itself: at least the latter company declined to host content. YT both hosts and indexes all of its videos. Its only hope for salvation is to appease the movie studios in a hurry (witness its rush to remove 100k videos two days following a demand from Viacom) while it desperately scrambles for a non-infringement-dependent business model. No wonder Google made a big public statement about keeping YT as a separate entity- bringing it in too close to Google’s core might expose Google to spillover liability.
Grouper
Here is a great example of an anti-YouTube. Founder Dave Samuel told me that staying on the right side of copyright was a critical piece of the puzzle from inception. Copyright violations may exist on the site, but they are much harder to find. Unfortunately, Grouper’s traffic is also a drop in the bucket compared to YT, which probably says a lot about what the market wants to watch.
Jumpcut
Another site that doesn’t depend on copyright violation, Jumpcut cleverly tries to focus users’ attention away from “pre-consumed” media grabbed from other places and toward the videos consumers themselves produce on digital cameras and phones. Jumpcut’s editing tools make it easy to cut and edit short clips, and their copyright-friendly position no doubt helped them to win content deals with Warner Brothers and Fox, and also to be acquired by Yahoo. Again, copyright infringement is relatively rare, and the focus on user-shot video makes an easy argument that the site lacks a “clear intent to promote infringment” under the Grokster standard. Jumpcut was acquired only six months after launch, so they have some time to figure out whether the public really wants to watch home video clips in significant numbers.
BitTorrent
The backbone of many filesharing applications, Bittorrent sees the spigot slowly closing on pirated content and is trying hard to find an infringement-free business model itself. It cut its own deal with Warner Brothers in May 2006 that led to more deals during the year. These moves are helping the company remake itself from the pirate’s best friend to a smart way for companies to save on bandwidth costs and promote content virally. This might be a stroke of brilliance from Bram Cohen and crew: BitTorrent’s history makes for a near slam-dunk case of clearly promoting infringement, so the company’s best bet is to make itself so useful to the studios that they couldn’t bring the hammer down without hitting their own thumbs.
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Apple Finds the “Key Logs” in the Music, Video and Wireless(?) Industries
Ok, I will admit that I have spent a week scanning stories (ever more quickly) about the iPhone and trying not to get sucked up in the hype. The phone looks beautiful, it will probably work reasonably well, and successively better and at lower price points with each generation. That part is not very exciting.
What has me interested is comparing the (perceived) relationships between the iPhone and the wireless carriers, and the iPod and the music and video content studios. It makes me think of something I once read about logging.
In the heyday of the logging industry, timber would be cut and floated downstream to sawmills. Frequently logs would pile up into a logjam and experts would be called into determine which logs needed to be freed to release the entire jam. The handful of logs tying up the entire bunch were referred to as the “key logs” and the people who could find the key logs were extremely important resources in the logging industry.
In the modern era, logjams are metaphorical and sometimes only visible as such in hindsight. Looking back to 2000, the music industry had clearly gotten itself stuck behind a rights-based logjam of sorts. At risk of losing a big piece of its harvest to piracy, the industry was unable to figure out how to let consumers buy music online. Apple’s iPod and iTunes store may not have broken the jam completely, but let the industry bring a bunch of its timber downstream and earn revenue from music sales. Studios are slowly allowing iTunes to do the same for video content.
In a similar way, the wireless carriers have created a logjam of wireless services. Consumers want wi-fi/wireless connectivity and access to services that aren’t necessarily offered through the carriers. The carriers have consumers locked in to the wireless networks with little or no ability to work around the jam. Thus, consumers pay $2 for a ringtone from Cingular, but $0.99 for the entire song on iTunes. To date, no handset manufacturer has been able to break the jam and give consumers what they really want- fast, inexpensive internet access to online content.
This is where the iPhone comes in. Time will tell whether reality lives up to the promise, but Apple is saying that the iPhone has built-in wi-fi as well as Cingular Edge support. That means I could use Edge to get online (slowly) from just about anywhere, and jump to a wi-fi network for a much better online experience where wi-fi services are available.
At least for me, the winner there is likely to be T-Mobile, since it runs the most reliable wi-fi networks around where I live and being able to get online from my iPhone *and* my laptop would be enough for me to spring for a T-Mobile wi-fi account.
That’s the short term, though. If I am writing this then Cingular and every other carrier must have figured it out as well and are working on their own wi-fi networks. Here’s hoping that if nothing else, the iPhone will break the online access logjam created by wireless carriers, allowing consumers to get fast, cheap connectivity and the carriers to find a new revenue stream.
[Link]
Week in Review: Saddam, YouTube, Apple & Cisco
Recent happenings were just to good not to comment on.
Saddam Hussein Execution Filmed by Phone Camera
And we thought “regular” video cameras let us see things as never before. I am amazed that someone was able to wave a phone around in the execution chamber without being spotted. Nevertheless, this episode gives us a glimpse of the possibilities user-generated content allow in the political sphere. The raucous footage gave the lie to the solemn, sedate image the Iraqi government tried to offer of the execution.
Moreover, the immediate dispersal of the footage shows clearly that once something has been recorded and uploaded somewhere, the cat has not merely been let out of the bag, but instantly cloned and distributed worldwide. Were it not for the fact that just about everyone’s response to the execution was “good riddance” (by contrast, imagine if it had been Moqtada al-Sadr being mocked as the noose tightened), this could have been a disaster for the Iraqi government.
YouTube Blocked by Brazilian ISPs, then Un-blocked Again
On note related by technology though decidedly seamier, a Brazilian court ordered YouTube to completely remove videos of a Brazilian model from its site. YouTube protested that it couldn’t do so selectively and moreover it couldn’t prevent users from re-uploading the video. Since I can’t read Portuguese I can’t verify the chain of orders, but it appears that the court order extended both to YouTube itself and to Brazil’s ISPs. The ISPs, also unable to selectively block one video (or more accurately, many copies of a single piece of footage), instead blocked all of YouTube for several hours until the order was reversed.
The entire episode demonstrates a couple of things. First, courts are wishing for a simpler time when they could just lock the cat away and be done with it. Part of the court’s final order was apparently a request to explain why YouTube and the ISPs were unable to comply with the initial order. Second, this story ended happily for YouTube, but the next one might not. Being at the vanguard of the user-generated content revolution is going to leave some scars for sure.
Apple and Cisco Outdo One Another in Shows of Chutzpah
Apple announces the long-awaited, much-delayed iPhone, only to be promptly sued by Cisco for trademark infringement. Cisco had just released its own iPhone-branded product in December. Word is that negotiations stopped without a signed deal Monday night before Tuesday’s product unveiling and Apple let Cisco know after the announcement that there was no deal after all.
From where I sit, it seems like there is plenty of hubris to go around on all sides here. Sure, Apple’s move is brazen. I imagine their view is that the litigation will serve no one and they are going to make so much money off the device that they can afford to let it drag on for a little while until a deal is made.
Cisco certainly knew what it was doing too. The iPhone name has been used by everyone and his mother to describe Apple’s phone project for at least a couple of years. I am sure the December product announcement was not a case of accidental timing, either, but an attempt to grab the spotlight for a moment as anticipation built toward MacWorld. Moreover, one report I saw said that Cisco’s proposal required interoperability of the two iPhones- Apple has “walled garden” in its DNA, so I can’t imagine how anyone really thought this might fly.
In the end this is really just a game of chicken between tech giants. It’ll be interesting to see who swerves first. On the facts, I give slightly better odds to Cisco. Their Infogear division has used the name since 1996 and Apple has only a weaker “iFamily” claim to the rights. Cisco’s pressure play is to enjoin sale of the product using the iPhone name. Of course, with an expected June delivery date this leaves plenty of time for a deal to emerge. Look for Cisco to lose on the interoperability angle when the dust settles, but pick up a giant cash windfall from licensing rights.
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Grouper Networks Case Study on Startup Review
I recently authored a case study of Grouper Networks, a popular video hosting website acquired last summer by Sony. You can click here to read the study, which looks at Grouper’s history, launch strategy and important success factors, including its emphasis on copyright-legal videos and its simultaneous pursuit of consumer-facing and white label distribution.
[Link]
April 20th, 2007 at 9:04 am
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