My partner Seth has a great interview on Stocktwits TV, hosted by one of the smartest and funniest entrepreneurs that I know, Howard Lindzon.  The topic is whether or not the Web is Dead.  (It’s not).  Also, he will give you his stock picks, as well.  This I can’t wait to see if he is correct.   

Today, my partner Seth wrote a great piece on the merits of early-stage startups raising convertible debt rounds versus traditional preferred stock equity structures.  The piece was inspired by Paul Graham’s recent tweet that said:  “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.”

Seth’s piece is a must read in this debate that is only gaining more participants, including a nice follow up from Mark Suster about his thoughts.  I can’t do justice to either Mark’s or Seth’s pieces trying to summarize them, so I strongly encourage you to read them.

I’m going to go out on a limb and break out my old law bar card and bring up one issue that I don’t think is getting enough focus in the debate:  the use of debt fundamentally changes the fiduciary duties of managers and board member of the company.

If a company raises cash via equity, it has a positive balance sheet.  It is solvent (assets are greater than obligations) and the board and executives have fiduciary duties to the shareholders in the efforts to maximize company value.  The shareholders are all the usual suspects – the employees and venture capitalists.  Life is good and normal. 

However, if a company is insolvent, the board and company now owe fiduciary duties to the creditors of the company.  By definition, if you raise a convertible debt round, your company is insolvent.  You have cash, but your debt obligations are greater than your assets.  Your creditors include your landlord, anyone you owe money to and folks that you might owe money to you, like former disgruntled employees and founders who have lawyers. 

How does this change the paradigm?  To be fair, I have had no personal war stories here, but it’s not hard to construct some weird and scary situations.

Let’s look at the hypothetical:

Assume the company is not a success and fails.  In the case of raising equity, the officers and directors only own a duty to the creditors (landlord, etc.) at such time that cash isn’t large enough to pay their liabilities.  If the company manages it correctly, even on the downside scenario creditors are paid off cleanly.  But sometimes it doesn’t happen this way and there are lawsuits.  When the lawyers get involved, they’ll look to try to establish the time in which the company went insolvent and then try to show that the actions of the board were “bad” during that time.  If the time range is short, it’s hard to make a case against the company.

However, if you raise debt, the insolvency time is forever!  Not just when cash got below the ability to pay liabilities like the equity situation, because the company has never been solvent. 

What does this mean?  It means that if your company ends up failing and you can’t pay your creditors, landlords, etc. that their ability for a plaintiff lawyer to judge your actions has increased dramatically.  And don’t forget, if you have any outstanding employment litigation, etc., all of these folks count as creditors as well.   

The best part of all of this is that many states impose personal liability on directors for screwing up things while a company was insolvent.  Read this to be:  “some states will allow creditors to sue directors personally for not getting all of their money they are owed.” 

Now I don’t want to get too crazy here.  We are talking about early-stage / seed companies and hopefully the situation is clean enough that my doomsday predictions won’t happen, but my bet is that few folks participating in convertible debt rounds are actually thinking about these issues.  And no, I don’t know of any actual cases out there, now.  But I’ve been around this business long enough to know that there is constant “innovation” in the plaintiff’s bar as well. 

Today, I was called for jury duty.  Upon arrival, we sat for 30 minutes, then we watched a 12 minute video for juror orientation. The voiceover kept cracking me up, however, as they were unable to pronounce “voir dire” correctly.  (Think “vor dire” as in Dire Straits).  If you don’t believe me, watch the video.

Anyways,we kept moving rooms, filling out forms, being segregated into different piles of humanity and I thought “couldn’t this be simpler?” and made some snide comment under my breath about the efficiency of government.

While I was sitting there being frustrated, I realized that over complicated things, maybe more than anything, really ruin my day.  Then I realized that I was an arrogant ass, because I’m not sure my ecosystem is all that more simple or efficient most of the time, either. 

I could write tomes on all of the efficiencies that I see every day – the same ones that I’m sure you don’t like either.  I think all this artificial complexity probably plays back into our lives in that we start to overcomplicate things that don’t need the added brain damage.  This includes both professional and personal contexts and the sad thing is that we have so little control on most of these situations.

But we should rethink about how we do things when we do have control. 

Thinking back over my career – and specifically even if I just think deeply about the last few  weeks of meetings that I’ve had -I think the number one piece of advice that I’ve given is “keep it simple.” Whether it’s a business model, financing plan, product user interface, or a plan to deal with human conflict, simple is best the vast majority of the time. 

And likewise, when I think back to those seminal moments of mentorship that I’ve been fortunate to receive, there has usually been a component to simply what I was trying to accomplish.

So, there’s my fortune cookie advice for the day: “keep it simple.”  Likely you and those around you will be happier for it. 

Last week, Silicon Valley Bank hosted a roundtable discussion featuring members of the New Democrat Coalition and SVB clients from the venture capital community.  The event allowed Silicon Valley entrepreneurs and innovators to discuss first-hand with legislators focused on championing innovation a variety of ideas for promoting U.S. economic growth.  SVB summed up the event well in a press release. 

As part of the discussion, there was a focus on the Startup Visa effort that has been introduced in both the Senate and House of Representatives (including by Jared Polis in the House).

I think Jared says it best:

"As a former entrepreneur, I know first-hand what it takes to build a company — and I know what opportunities a successful company can create for its workers, its suppliers, and its community.  If an entrepreneur has an idea for a company that will attract investors and hire workers, we should be welcoming and encouraging that entrepreneur to start their company in the U.S.,"

Furthered Mary Dent General Counsel of SVB when speaking about the impetus of the event:

"There is a great deal of evidence showing the profoundly positive effect that venture-backed companies have on our economy — creating jobs, creating entire new industries, and promoting U.S. competitiveness around the world," said Mary Dent, SVB’s general counsel. "Congress hears a lot from companies that have already made it.  We want to make sure they also hear from the growing companies that will shape our economy in the future.

Kudos to SVB for organizing such a worthwhile event and the New Dems for supporting their efforts.  Among all the issues that are important to our continued leadership role in technology and entrepreneurship, the value of initiatives like Startup Visa can not be overstated. 

Today, the NVCA hosted Jared Polis for lunch.  Jared is the Congressman for the 2nd District of Colorado. 

Why is Jared important to you, if you aren’t from his district?

Simple.  He’s absolutely one of the most intelligent and thoughtful elected officials in our country when it comes to issues regarding startups, innovation, education, immigration and jobs.  (And probably a lot of other subjects, too, but these are just the ones that I engage him on). 

Jared was previously a serial entrepreneur (Proflowers.com, Blue Mountain Arts) and has been a thought leader on many issues that affect our industry.  He has stood strong in the face of political pressure to change his views.  In fact, I’m am most impressed with Jared’s resolve to do the right thing for our country as a whole, although he represents one district in one state.

Jared has been a steadfast partner with the NVCA on issues such as job creation, innovation, immigration, education reform and tax policy.

Today, Jared and the invited guests talked about everything from future policy decisions to mechanics of how things really get done in Washington.  It was a great learning experience.

I’m also happy to report that the NVCA PAC contributed to Jared, as well as several of the attendees personally, including yours truly.  I’d highly recommend folks contributing to Jared, no matter how small of a donation as every bit counts.  We need more people in Congress who really understand what drives this country’s success. 

Contribute here.  (Picture, L to R.  Me, Jared, Paul Schanitter and Mark Heesen, President of the NVCA)

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. 

Unless you have been living under a rock, you’ve no doubt read about the debate in Congress going on regarding carried interests for venture capitalists.  Many in Congress, in order to continue to fund their agenda, are looking to change the tax classification of VC profits from capital gains to ordinary income.

It looks like the next 48 hours will determine how this debate works out.  The finance folks on the Hill are in full swing deciding on a number of issues, including the good news today about leaving angel Investors alone and allowing at least that part of the startup ecosystem to remain unscathed. 

As for the carried interests issue, it’s been overly-politicized in a myriad of ways including those who like to frame this as class warfare, those who see this issue as just a bunch of winey VCs who don’t want their taxes increased or those who claim that VCs make money off of services and should be taxed accordingly.

I don’t think any of these are accurate.  What this is really about is the future health of the innovation economy in the United States.  It’s really that simple.

Now don’t get me wrong.  I understand the political rhetoric.  Every time a new tax is proposed, some group of politicians rise up claim the sky is falling and that the new tax will “kill” an industry.  The fact that it usually doesn’t means that when there are real concerns, they fall upon deaf and / or suspicious ears.

I’m not one of those folks.  I don’t like taxes (like most folks), but understand that in many new tax cases the markets adapt and life goes on.  I honestly feel, however, that this is not one of those cases. 

Whatever you believe about VCs, their wealth, they way they earn their income, etc., one thing that is apparent is that VCs partner with great entrepreneurs to create jobs.  And we create a lot of them.  In fact, we risk our personal wealth and reputations to invest money in highly risky startups that take 5 to 10 years to mature in these efforts.  

Most of our investments do not work out as we plan.  The ones that do, create sustainable, long-lasting jobs that benefit the job market today and for future generations. 

And for this, Congress is thinking of effectively tripling the tax rate on our risky efforts.  This at a time where job creation is the single most important issue our country faces.  This at a time when countries like China and Russia are considering EXEMPTING VCs from taxes that invest in startups.  This is simply stunning to me.

We’ve already seen a lot of investment capital (from both VCs funding startups and those that invest in VCs) go overseas to places like India and China.  Anyone who is active in our ecosystem knows that money available to U.S.-based startups is less than it has been in 15-20 years.  I guess that i could argue that 2009 might have been a bit worse, but go ask most entrepreneurs or VCs what it is like to raise money these days and they won’t wax poetically.

And the Congress is saying: “hey, we don’t care.  Take more of your money overseas.  In fact, let’s move all the VC activity offshore.”  What’s left of our long-term economic viability if we give other countries the ability to compete better than we can?

Nice.  Really nice. 

Another argument that I love is that “VCs haven’t returned profits in the last decade to their investors, therefore they shouldn’t get incentive-based tax treatment.”  This makes no sense on a number of levels.

1. It’s arguably true if you look at the entire industry, but says nothing about many funds who are successful making their investors money.  We cannot assume the successful VCs will continue to want to work hard  if their taxes are tripled; and

2. And, if true, this just proves my point about how risky all of this activity is, further supporting the point that incentives need to exist.

And remember, VCs do pay normal income taxes on management fees (salary) that they receive.  And many VCs return all the management fees to their investors before they take profits, so effectively they are paying normal income tax rates on money loaned to them. 

But what worries me the most is the slippery slope that we are going down.  Even if you believe that VC profits should be taxed as services/income, then how on earth do you distinguish this from the cheap equity that founders allocate to themselves when starting a company?  Isn’t all of their success based on the labor and services as well?  While VCs may be using other people’s money to invest, so are entrepreneurs.

So how do you distinguish?  Answer:  you can’t.  Entrepreneurs, you are next. 

Bottom line, the Congress is going down an irreversible path that threatens to undermine the innovation economy in this country.  I hope that logic, instead of politics, prevail.  We’ll know shortly the answer.

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. 

The numbers are out and believe it or not, Q1 of 2010 saw the most venture-backed company M&A transactions EVER in a single quarter.  Let that sink in for those of you around this business in the late 1990s. 

Also, the data showed more quarterly venture-backed IPOs since the fourth quarter of 2007 and 8 of the 9 IPOs are trading above their initial offering prices. 

This is really encouraging.  Fingers crossed.  Also, if you are interested in more detail, check out the NVCA’s blog about the numbers. 

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……