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.”

Last week, I had the honor of testifying in front of Congress on the merits of enacting the Startup Visa.  It was a humbling experience.  I can’t remember being quite as nervous before a speaking engagement, but it all went well.  My partner in crime, Shervin Pishevar both sought bi-partisan support for the only guaranteed job creation tactic that I know.  Even better, it would cost American taxpayers absolutely nothing.

In preparation for the oral testimony, I drafted written testimony explaining why this bill must be passed, without delay and without the over politicizing that occurs any time the word “immigration” is heard in D.C.  The overall vibe on both sides of the floor seemed positive, so I’m cautiously optimistic, but then again this is Congress we are talking about.

If you are as passionate about this issue as we at Foundry Group are, get involved.  Tell your Congressperson to get engaged.

Special thanks to the NVCA, especially Emily Baker and Emily Mendell for helping Shervin and I through the process.

In case you don’t believe that I can put on a tie, above is proof.

David Cohen came over to my version of “the Bunker” and filmed an episode of This Week In Techstars.  Also, featured is Coursekit, a New York Techstars team that has impressed me enough that I’m using their software in the class that I teach.

VCs understand the reality that when we exit a portfolio company, a portion of the consideration is virtually always tied up in escrow for one to two years.  We hope that it is all eventually paid out, but sometimes it’s not and that’s difficult to plan for.

What if we could sell escrow interests at a discount, accelerating the payout and avoiding unpredictable losses?  That could help a VC redeploy the cash immediately, close out an end-of-life fund, or even improve IRR by receiving the consideration earlier.

That option is now available through an innovation called SRS EscrowExchange, which is a financial product designed to allow shareholders to convert illiquid escrow holdings to cash by selling their interests.  SRS | Shareholder Representative Services is using SecondMarket’s secure auction platform for the product, which gives sellers the opportunity to set their own offer price.

This is a major innovation for the private company M&A market.  It’s also one more great reason to engage SRS as the professional shareholder representative when selling your company, because the product is only available for select deals where SRS is the shareholder rep.

You can view the full press release here.

Last May, I got an idea stuck in my head that I should create a music video to promote the release of Venture Deals:  Be Smarter Than Your Lawyer and Venture Capitalist, written by yours truly and my partner Brad Feld.  It was a germination of a conversation that I had with Emily Mendell (VP of Communication at the NVCA and great blogger at MothersofBrothers.com).  Emily is a great PR person and threw out an idea that the Foundry Group could actually pull off a music video, in the SNL Digital Short genre, to highlight the book and have a ton of fun in the process.Having very little logical sense and a severely limited good judgment filter, I immediately jumped on what I thought was a great idea and thus “I’m a VC” was born.

For those of you who know me, I can get a bit (a lot?) manic when I get excited about  something.  I stayed up most of the first night writing the song and story boarding the potential video.  I woke up the next day, exhausted, but pleased with my first efforts.  I had never written any music in this genre before (cheesy 80’s boy band) and certainly have never made anything with video, but I felt confident.

First I emailed by partner in business and music Ryan McIntyre, who immediately told me it was a dumb idea and that he generally hated parodies.  Awesome.  My project was starting off perfectly.

Undaunted, I brought the lyrics and story idea to our regular Monday partner lunch and after a beer, I found a receptive audience, including Mr. McIntyre.  I was given a green light to proceed and the rest is history.

We issued a fake press release along with the video that I find funny, especially the quotes from my partner Seth Levine about his insecurities as a venture capitalist.

So without further delay, I present to you “I’m a VC.”  Please share with everyone you know if you like it.  Also, don’t forget to buy our book!

And just in case, here are the lyrics thanks to Ryan.

A new academic paper seeks to destroy the myth that venture capitalists use inside rounds to dilute founders by issuing themselves cheap stock.

Sure, there are plenty of lawsuits that claim this, but I’ve actually never seen it happen when reputable firms are involved.

This paper is the first empirical study of its kind and concludes that inside rounds are most often seen when companies can not find a new funding partner and the pricing seen in these types of transactions tend to be over-priced, not under-priced.

It’s a fascinating report and the authors (Jesse Fried from Harvard and Brian Broughman from Indiana) are seeking feedback on their article. So please read and fire away.

One piece of information that I’ve already given them is that in good economic times (like today) one sees more and more inside rounds done at attractive increases in valuations between companies and VCs that don’t want to waste management time to go seek a new outside lead investor.

The article is here.

One of our companies Organic Motion is powering an awesomely cool exhibit at Seattle’s EMP Museum. By use of their marker-less computer vision platform, one can put themselves in the middle of James Cameron’s Avatar. Here is a great news report about the event including an intro from James Cameron, himself.

Also, here is an example of a person using the system to reenact a scene from Avatar.

Today, the University of Colorado Law School announced that Phil Weiser will be its next Dean. This is a tremendously good day for the law school and community.

Phil was previously a professor at the law school, the founder of the Silicon Flatirons and worked as a senior adviser for technology and innovation to the National Economic Counsel.

Alright, so what’s the big deal? Simple. I’ve spent a lot of time with Phil and I can confidently state that no academic leader is more innovative or thoughtful as Phil. In a time of turmoil for most law schools and their students, Phil is poised to bring his wealth of experience to evolving the law school into a truly great institution that is responding to the new world economy.

In addition, through his continued support of the Silicon Flatirons, all of Boulder can celebrate knowing that one of our central support hubs of the startup ecosystem will prosper for the foreseeable future.

A special thanks must given to outgoing dean David Getches whose leadership has brought the school to its current leadership position and has been an argent supporter of all things related to the Silicon Flatirons.

Congratulations Phil. This is an honor well deserved and I look forward to helping you in any way that I can.

Recently, the New York Times published an article called At Well-Paying Law Firms, a Low-Paid Corner. In short, the paper is reporting that some very well known firms are hiring lawyers at cut rate prices (less than half) of what associates on partner track are making at the firm. And these cheaper resources are performing the same services as their partner-track colleagues. This feels like a recipe for disaster to me.

I’ve known a few people who have positions like this at firms. Their names and the firms they work for will remain nameless, however in this post. In each case, the lack of transparency of how this arrangement really bothers me as a client.

First, how do the firms determine which work gets assigned to which group of associates? And does it differ depending on how busy the firm is? If I hire a firm to represent me in a financing, are the folks doing the diligence (which really is the most important part of a financing, not the documentation) sometimes partner-track folks and other times not? Do the clients have a right to decide?

And how are the firms billing out for these lower-cost resources? If they bill the same, it feels like I’m getting ripped off. If they bill less, then my bill will reflect that I’m be represented by the lower-paid people. While I think many junior associates aren’t worth what they are paid (but it catches up later), one does normally get what one pays for. I refuse to believe there is no quality difference in an associate making $160,000+ and one making $60,000.

I worry about mentorship and training, too. What incentive does a firm have to really train folks that aren’t on partner track and might not stick around long term?

Lastly, I would propose the theory that camaraderie is important to the concept of the law firm. Clients hire partners at law firms, but also the firms themselves. This includes the firm culture and the knowledge that client teams traditionally are near each other physically, not in outpost office where some lawyers are making less than have of their other colleagues.

While the reason for this shift was to help with escalating billing rates, I’m still perplexed why lawyers and accountants are the only professions that every year raise their rates. It doesn’t fit with the rest of the economy or their clients. Perhaps instead of creating a group of second-class citizens within the firm, they should pay attention to some of the things I prescribed in my law firm 2.0 series.

Dan Primack has a great article today called “The Private Equity Firm that Trusted Too Much.”

It’s the sad story of private equity firm General Atlantic taking the role of shareholder rep and in doing so, acquiesced to an $8 million dollar claim without doing any research to see if it was valid.

What next? Well, of course everyone ended up in court and there was a settlement. Read Dan’s article for the nitty gritty.

Why would anyone take this job? Your upside is that you get to work a lot for free and no one even takes you out to dinner to thank you.

Worse case is well…. this, getting sued (as I’ve done) or spending way too much time with lawyers.

This “public service announcement” brought to you by Shareholder Representative Services.*

(* Actually not brought to you by anything. I just like saying that since they are friends of mine and I’m an advisor to the company. But use them, anyways).