In this day and age where Democrats and Republicans both do their best to distort any real facts in the tax and deficit debate, I think that I’ve come up with a way to increase revenues (yes, increase taxes) that everyone should love.

Kill IRS Section 409(A) and allow companies to issue stock to employees at any price that they wish until such company is public.  If you need a refresher on what 409(A) is, check out this post which will get you there.

When 409(A) forces companies to raise their option strike price, who wins?  Certainly not the employees who have higher strike prices.  Certainly not the company who will have  trouble incentivizing employees as the option price increases and not even the IRS! Because of the heightened price, there is less gain at a liquidity event.  So even the IRS loses money every time the price is raised.

Let’s be controversial for a moment and suggest that if all strike prices were set to 1 penny, then the employees make a lot more money, the IRS receives more tax revenue on a bigger gain and the company doesn’t have to worry about 409(A) valuations and timing of material events and fundraising affecting their option grants.

I realize that this will not work in the public company setting given the market’s need to see option expensing in the financials, but for private companies, who really cares?  It’s just a made up number at the end of the day, anyways.

I probably need to think a little more deeply on what happens if a public company acquires a private company, but I’ll get there.  The main point is that doing away with 409(A) leads to both more money being put in consumers’ hand and more money in the IRS coffers and it’s essentially “free.”

Recently, I posted about how I believed VRBO’s online reviews were worthless in that they allowed landlords to manipulate renter feedback.  My article was picked up and expanded upon in a column by Maureen Farrell in Forbes.

There were literally hundreds and hundreds of link backs, retweets and comments regarding my blog.   What came to light was that I was not alone.  There were many people who shared similar stories about dissatisfaction about the transparency of the reviews.  I found interesting that many landlords commented saying they agreed with my assessment of the problem.  (Reason: Quality landlords want quality reviews).

Today, I was sent an email today from a friend informing me that VRBO / Home Away is changing its review policies.  From a VRBO / Yahoo Group forum:

“After considerable thought, we changed our policy in December 2010.  We no longer offer members the option to “opt out” and there is no longer an “opt out” button on your administration page. New members can no longer choose to opt out of the Reviews system either. We understand that some of our members have their own view as to the value of Reviews. We realize that this decision, which will be announced within the coming weeks, may disappoint some of our members. While we can no longer opt your listing out of the Reviews system, we will do what we can to satisfy you.”

(After this statement, there was a fair amount of chatter from landlords threatening to take down their listings, just proving the point that the ability to hide from transparent feedback was indeed a selling point).

I declare victory.

I tried my best to get VRBO to pay attention to the issue, but the best that I got directly from them was a Twitter mention telling me that if I had issues with their reviews, to check out their FAQ page.  (er… Thanks)

But clearly they heard me and more importantly YOU – the folks who took the time to read, share and comment on the earlier post.  A special thanks go out to Maureen Farrell and Erika Napoletano who helped amplify my original message.

Congrats everyone. Social media works.  Sometimes the little guy can influence policy at a large company.  Thank you.

If you are a reader of this blog, or Brad’s you know that we are keenly interested in the ideal that we should be able to arrive at a model document set for venture financings.

Whereas, I argued that he’d never succeed in coming up with a standard set of seed documents, I used the story of the model form document project from the NVCA.  The project actually produced model forms of documents, but most of us were disappointed by the actual usage.  In my opinion, this was because the documents had too many options and took lawyers a while to deal with them.  (For instance founders reps which you never see on the West Coast and things like that).

But at the same time, these documents live and breathe and are updated by some of the great minds in our business on a regular basis.  I feel safe in saying that are more vibrant and accurate than most law firms. 

Today, I’m delighted to announce that our portfolio company Brightleaf has released their platform including the standard form of NVCA documents.  In short, their document automation and assembly software can save lawyers a ton of time using the NVCA forms, while giving them the piece of mind that they are always using the latest and greatest forms in the business. 

Oh yeah.  Did I mention that it’s FREE?

They are offering free “NVCA ASAP” trial accounts to a limited number of VC’s and Emerging Companies law firm practices. For more information about the project (and how to get a trial account) please visit their NVCA ASAP page here.  For a quick overview demo of how Brightleaf works, watch the video here. 

This could quite possibly be the tipping point in getting us to one standard set of documents.  Maybe Brad won’t fail after all. 

Great picture of who’s suing whom in the Telecom world.  Man, I love patents…

The Bilski decision came down yesterday and I’m still in a state of complete denial.  Basically, the court punted on the difficult issues and while denying Bilski his patent, they didn’t do anything to help the horrible state of the patent ecosystem that we have today. 

(For a great summary of the case, check out the Groklaw summary). 

To make my stomach even more upset, today I was alerted to an article authored by Ted Sichelman entitled “Why Bilski Benefits Startup Companies.”

In short, Sichelman points to a study that he was involved with and tries to come to the conclusion that these types of patents are good for startups. 

To quote him:

“in a recent survey of startup firms, the Berkeley Patent Survey—which I conducted with Robert Merges and Pamela Samuelson of UC Berkeley School of Law and Stuart Graham (now Chief Economist at the PTO)—startup executives reported that nearly 70% of venture capital firms and 50% of angel investors said that patents were important to their investment decisions.”

While I vehemently disagree with the article, what I found most interesting was a commenter who used a prior post that I wrote on why the study that Shichelman was involved in may be flawed.

Sichelman attempts to refute my post in the comment section, but fails badly.

First of all, it seems clear to me that Sichelman has intuitions on patents based on his experiences and has used the data to fit his theories, rather than using the data in an unbiased way to figure out what is really going on with patents and startups.

I make this assertion based on a couple of observations:

1. Everytime he speaks about patents, he begins with the story of his one experience with a startup company and how patents may have helped.  I’ve had dinner with Ted and I’ve heard the story.  I’ve also seen the story pop up in every situation he discusses patents.  A sample size of one does not make a scientific set. 

2. Sichelman’s co-authors are no where to be found when he comes up with his conclusions.  Ted acknowledges that he doesn’t speak for his co-authors, but very easily uses the word “we” when discussing the study and “his” conclusions.  The blog post that I wrote refuting some parts of the conclusions of the study were not all my own ideas – they were the thoughts of his co-author Pam Samuelson who herself said the article really doesn’t say anything about VC attitudes toward patents.

It’s really clear that Sichelman has a bias that was probably preconceived on a data set of one (his startup) and not supported by his fellow authors who have not backed him up publically.

Furthermore if you read his comments on my blog post, his rebuttals don’t hold water as well.  (And you’ll want to read the comments for this part of this post to make any sense).

1. Response rates – just because you are the most comprehensive study doesn’t make the study necessarily any better.  It might, it might not.  I could be the world’s tallest midget and that still doesn’t get me much (no offense to midgets, sincerely).  I never definitively said the sample size was too low, rather it’s not rock solid clear that it was the right size or targeted the right companies.  It’s not an easy thing for them to do, granted, but we shouldn’t just accept the number “1300” being thrown out and assume that this is sufficient.  And per Sichelman’s own admission in his comments, only about 175 of the respondents were VC-backed startup companies.   This is not a large number.

2.  Only 75% answered the patent question and Sichelman says this is acceptable.  This is not.  In fact, others involved with the study have specifically questioned where the answer rate was a piece of data in itself.  Again, I’m not saying definitively this is data, rather the way Sichelman uses data like this as “proof” is not dispositive. 

3. Results biased toward non-venture backed companies.  Sichelman again presents a non-compelling argument.  First, 2/3rd of the sample size, according to his co-author Pam Samuelson were D&B companies, not VentureExpert companies.  Secondly, him trying to convince readers that I only have a sample size of 25 current portfolios is either poor research on his part about me, or ignoring the facts.  I’ve been involved in VC for over a decade and with well over 250 companies, which alone is larger than his sample size of 175 companies.

4. (My Favorite) – Just because we didn’t survey VCs doesn’t mean that we don’t know what VCs think.  To quote him:

“VCs were not surveyed directly – Although it would have been more reliable to survey VCs directly, unfortunately, our time and resources were limited. Nonetheless, there is little reason to believe that the reports of executives at startup firms regarding the views of VCs during the financing process—which is lengthy and involved—are inaccurate. Rather, executives are presumably well-aware of those items that VCs found important during due diligence.

Basically his response is:  “we couldn’t afford to interview VCs, so we just guessed by asking entrepreneurs.”  This is totally bogus and backed up by Pam Samuelson herself in recent remarks at the University of Colorado law school.  This only talks about perceptions that entrepreneurs have of VCs.  This says nothing about what VCs think.  To think that one study group can be substituted for another study group and presented as fact discredits the valid parts of the paper.  This is just bad science.  If it was good science, we’d just ask parents about what their kids really thought about things. 

In summary, it’s been a rough day thinking about what could have been with Bilski.  I’m getting a ton of backchannel about the politics behind the decision, which just makes me more upset.  To try to capitalize on the poor decision with articles like this just makes me more disappointed about the system and the supposed “experts” who pretend to know much more than they really do. 

Last week I wrote a blog about Atomic PR and their illegal spamming of folks trying to generate buzz for their clients.  [Note: they’ve since apologized and have agreed to stop doing this and let folks opt out – see the comments area for the CEO’s reaction post].

One of the most interesting things to come out of the post, however, was an article by Mike Melanson on Read Write Web entitled “Does your PR Firm Need a PR Firm?”  It’s a really thoughtful piece and had one piece of advice that is critical: 

“Remember that allowing a PR firm to run free with your brand is essentially allowing it to have control over how your startup comes off to the rest of the world.”

In other words:  Control your brand.  Always.  It’s your most important asset.  Your brand is made up of your goodwill, reputation and public perception.  It’s hard to have a good brand and it’s very easy to have a lousy one.  It’s also easy to have a good one ruined and very hard to go back the other direction. 

One can come up with many examples of companies with good brand equity who have made missteps with products and have lived to fight another day (although you can’t have too many mistakes).  But companies with bad brand equity seem to always be behind the eight ball.  For instance, Microsoft, which allowed Apple to rebrand themselves with the “I’m a Mac” commercial series, can’t buy a break despite Windows 7 being a really good product.  And my bet is that Toyota, which had tremendous brand equity figures a way out of its quagmire as well. 

And startups, which have even more fragile brands, hire PR firms at prices that are equivalent to executive salaries and basically hand over the keys to their brand.  And some do the same with their lawyers who interact with their VCs. This also holds true for all service providers that companies hire that deal with the outside world.  All of this can build or damage a startup’s brand.

Even in AtomicPR’s case, they outsourced their brand to a email database called Cision.  They claimed that they don’t spam because they subscribe to a database that gives them contact information of journalist and bloggers in the technology space.   From the word’s of Andy Getsy, CEO of Atomic PR:

“Jason has an active blogger profile on Cision, which lists him as a VC covering venture capital topics. He blogs on tech products and companies from time to time. I suspect that this is partly how his info popped up again”

AtomicPR decided to blindly trust a database that claims it contacts bloggers for inclusion on their lists.  Well, for at least two of them – myself and my partner Brad, we’ve never heard of them or been contacted.  And I’m not a blogger or reporter who “covers” technology, as Cision claims.  I’m just a dude with bad grammar that occasionally writes things that people read. 

And while their intent might not have been to spam, that’s what they did.  They outsourced their contact list and then furthered outsourced their brand to junior associates who did not respond to my polite pleas to be taken off the list.  So in the end, AtomicPR’s brand was tarnished by their outsourcing and eventually one person who took issue (me). 

Morale of the story:  Be hyper careful about your brand and reputation.  It’s your most important asset.  And it’s a bitch to fix.  If you don’t believe me, Google “AtomicPR” and see what comes up on the first page. 

A little while ago, I blogged about how some public relations firms were spamming me.  In short, I was getting tired of random PR firms sending me emails about stuff that I didn’t care about and thus further cluttering up my inbox. 

These random carpet bombing strategies were both abusive and stupid – some poor client is paying their requisite $10-15k a month for the PR firm to make a bad impression on me.  In fact, I alerted a VC friend of mine that one of the firms was carpet bombing about his recent financings and he was none too happy.

One PR firm, in particular has really taken this to a new level:  Atomic PR.

The folks seriously suck ass.  Not only do they carpet bomb me, but every time I politely ask them to take me off the list of the stupid stuff they send me, they either one: don’t reply, or two: reply that they will, but never do.  And then I get an email from some new “bright and shining face” informing me of some “exciting news” that I couldn’t care less about. 

I tried to warn them, but apparently they didn’t believe me when I said that I would call them out. 

So, I officially start my boycott today, of AtomicPR until they vow to change their ways.  Don’t hire them.  And PLEASE link, share and retweet this post, so that when folks search for “AtomicPR,” the Google gods rank this post highly.

And Atomic guys – if you don’t stop, the next step is to report you to the appropriate government authorities since you don’t really allow anyone to opt out of their communications. 

If anyone has a lot of time on their hands and wants to email my friends at Atomic PR, here are their email addresses:

michelle.sabolich@atomicpr.com

allison@atomicpr.com

korina@atomicpr.com

aileen@atomicpr.com

It’s not just the Boy Scout motto, but some seemingly obvious advice that I’ve seen some folks screw up lately. 

As I often say, there are only two resources that venture capitalist don’t have enough of and that is time and money (to invest in companies).  The money is my issue.  I’d love to invest in more companies, but realistically don’t have the bandwidth to properly advise more companies than our current pool of capital implies.

And while I don’t want to infer that my time is worth more than anyone else’s it really frustrates me when people waste my time.  I take a lot of meetings with folks looking for either funding or networking opportunities.  And despite the amount of meetings I take, there is a constant backlog and folks who can’t manage to get onto my calendar. 

I wrote previously about three things to not do if you are pitching me, which dealt with poor preparation in pitching. Today’s post is directed toward folks whom aren’t going get funding from me and are looking to network.

If I spend some time on someone’s behalf, I have little tolerance for people being unprepared.  I take it upon myself to be as prepared as possible and completing as much background diligence as possible to lessen my cluelessness factor.  (Although admittedly, there are still plenty of meetings where I am still clueless, but it’s not for a lack of trying).

I routinely try to help out folks with introductions to trusted friends and colleagues.  In most cases, I can find a “win win” situation where each party really enjoys meeting each other.  Other times there is not a mutual win situation and I’m calling in a favor on behalf of someone. 

Sometimes, however, the person whom I meet with and then introduce them to a valuable resource doesn’t come prepared to the second meeting.  It’s really insulting to both me and my friend/acquaintance.  I hate getting calls from folks telling that I’ve wasted their time.  I feel horribly, in fact.

Secondly, I am always bummed out when a conversation begins with “tell me about yourself / Foundry Group.”  While most folks like to talk about themselves, this is a total throw away question which makes me think that you haven’t spent any time thinking about our interaction.  I’m sure there have been sometimes when this is just small talk and I’ve misinterpreted it, but perhaps the ex-lawyer in me judges people as much by the questions that they ask, than the answers they give. 

Life is short.  Time is massively valuable and I promise to try my best to be efficient and respectful.  While a small minority in my life, I wish everyone else would too. 

My partner Brad recently wrote a blog post commenting on the proliferation of standardized seed financing documents.  The post was motivated by the highly-publicized release of the fourth instantiation of such a standard series of documents, this time by Ted Wang at Fenwick & West with collaboration from a group of bay-area early stage VC’s and angel investors.

If you are keeping score at home, there now exist the following sets of standards that have been made public:

• TechStars Model Seed Funding Documents (by Cooley);
• Y Combinator Series AA Equity Financing Documents (by WSGR);
• Founders Institute Plain Preferred Term Sheet (by WSGR); and
• Series Seed Financing Documents (by Fenwick & West).

(**Disclosure: I had participation with the TechStars set**)

Brad noted that it seemed silly to have four different versions and decided to invite everyone together in a room to come up with one, universally accepted set of model documents.  The immediate response was tremendous.  33 comments to the post and countless more emails from lawyers, entrepreneurs, VCs all praising the effort and wanting to know how they could get involved.

And all I could think was “Feld, you haven’t a clue what you’ve gotten yourself into.  This is going to end badly.” (and then the second thought was “Damnit, I bet all of these emails end up in my inbox too,” which they did, but then gave me fodder for this blog).

Why? Because there will never be a standardized set.  Not because there shouldn’t be, but rather once you introduce humans to execute the task, it simply doesn’t work.

And those humans are called lawyers and venture capitalists (and not entrepreneurs).  Despite all the handwringing about “doing it for the entrepreneur” I don’t think these two sets of humans will ever get their act together well enough to do what they say they want to do.  Here is why.

Lawyers:

Lawyers are like congress people.  If they aren’t involved in something, it’s nearly impossible to get their vote.  If they are involved then they are obliged to be “value additive” to the process.  In other words, the more lawyers, the more support and the more bloated of a document set, because everyone needs to get in a point to save face.

If you don’t believe me, see the NVCA model documents (I’ve been in the room while they have been drafted).  While the documents are great in that every potential scenarios has been imagined (and even more importantly to show you what should never be included in financing documents by their omission), the documents are too complicated for 90% of the folks out there doing the deals.  And then you add in the east-coast / west-coast differences (I think many east-coast terms can be entrepreneur unfriendly) and now you have a treatise as opposed to streamlined set of documents.  (As an aside, I don’t want this to turn into a east coast / west coast debate.  If you want to see what I think about terms, read this series).

Many of Brad’s email responses included this not-so-veiled threat: “you need me as part of your syndicate, or I won’t sign off on the documents and you’ll not have broad support.  My firm is important [insert canned marketing paragraph here].”  At the end of the day, Brad would have had 50+ lawyers in the room and we’d be right back to where we started with the NVCA project.

Even more importantly, however, lawyers are driven by more important things (to them) than helping entrepreneurs save legal costs.  Lawyers are driven by fees and thus they want to acquire more clients.  Releasing a set of documents that get you on the cover of peHub and Techcrunch is good for business.  You may streamline some hours, but you are betting on more clients.

Therefore, you have no incentive to join other groups, as it’s your name that is getting all the good publicity.  Why be a part of “working group X” when you can be “Joe Smith, super lawyer to the entrepreneur?”  While I can’t disclose the particular emails, rest assured that this paragraph is much more than an assertion, but a fact.

Lastly, there is also pride of authorship, by lawyers, even in situations where the documents should be boilerplate – as the case is here.  Every firm has their set of documents that they consider “better” than others.  Are they?  Or are they lazy and haven’t even read the other firms’ (or maybe they don’t have access).  I haven’t read them all.  I don’t want to either, but I can tell you that I’ve only seen a few firms out there that actually have better forms.

Bottom line:  Too many cooks spoil the soup, while the celebrity chefs don’t even want to cook with you.

Venture Capitalists:

Let’s not let the lawyers take all the blame, though.  While I do think the incentives of the VCs are good here, we have our own issues.

First, we, as the business drivers of the provisions, can’t necessarily agree on the basic terms.  That is problem one.  I don’t have a way to fix this one.

Secondly, most VCs aren’t lawyers and their level of deal comprehension varies greatly.  (Note: there are plenty of non-lawyer VCs that can take me to the woodshed, so this isn’t a statement that all lawyer-VCs are better).  So what do we, as an industry do?  We hire lawyers to produce a standard set of forms that we might not completely understand ourselves.

The end-result is our trusty lawyer tells us “our forms are better” and we take it for granted never minding the misalignment of incentives (lawyers want to make money, we want to save money for the entrepreneurs).  In fact, if you ask some of the business people around the table of these four sets, they really can’t tell you how any of these documents differ from the others.  They will always refer you to their lawyer.

Want more proof?  The latest set of documents from Fenwick and supported by a number of investors has a provision allowing for $10k of investor counsel fees.  If the investors really understood everything in the documents and were prepared to take them “as is” I would expect that number to be zero.  In fact, the three other sets of standardized documents have $0 fees for investor counsel.

Bottom line: until the VCs truly understand everything in these documents, they are going to continue to rely on the forms of their favorite lawyers and not those generated by others.

So which of the four forms are better to use?  I don’t know.  I’ve only read half of them.  And I don’t really have the burning desire to read more of them, as I predict even more proliferation.  That being said, here are a couple of interesting factoids.

1.  Yokum Taku has a nice post and matrix comparing the documents; and

2.  I heard from one name-brand law firm that working with one of these standardized sets (which I won’t name either for professional courtesy reasons) is a horrific experience in spell checking, capitalized term mismanagement and sloppy draftsmanship.  So just because they are released and publicized doesn’t mean they are necessarily any good.

So my prediction?  My dear partner Brad, while heart in the right place, will fail to come up with one set of widely used seed documents.  Sad, but true.

Of course the horrible irony is that none of this is intellectually difficult.  Maybe I’ll just come up with my own set of documents and…. oh wait……

Is it just me or are you receiving a lot more emails that look like this:

Hi Jason,

Wanted to make you aware of the below funding announcement just released regarding a new [BLAH-nothing I care about]. Happy to make any introductions to the CEO, [John Smith] or any of the  below individuals for further comment, if interested in learning more.

Any questions or additional information you may have, I can be reached at 212-867-5309 or jenny@randomprfirm.com

Thanks,

Jenny

Then this is followed by a large press release about something that I don’t care about and I usually get two copies to boot.

And, of course, none of these folks are complying with the law by offering the ability to unsubscribe, so I bitch back and ask them to take me off the list, which about half the time they don’t respond.

So, I take their name and numbers down and make sure that when my companies need PR help, they won’t be using these spammers.  I realize that folks have a job to do, but why would I want my companies paying for a PR firm that is just carpet bombing information?  I can find ways to do that MUCH more cheaply than hiring a PR firm. Use some creativity, target your audience and if you can’t – at least follow the email spamming laws.

One more thing – not all PR folks are bad.  I’ve worked with some really great ones who don’t behave like this, but it feels like the velocity of those that do is increasing.

Rant over.