Month: December 2006
A regular feature of AsktheVC will be to highlight great posts by other VCs that we think are relevant for all entrepreneurs. We subscribe to and read (ok – at least skim) as many of the VC bloggers as we can find. It’s fitting that one of the first VC blogger – Fred Wilson of Union Square Ventures (and one of the guys that introduced me to blogging) – has the first post (in this case – set of posts) that we are highlighting.
While Fred was eating his way across Italy with his family over the past two weeks, he managed to write five insightful posts about areas he thinks are going to be important in 2007.
- Social Search
- Broadband Internet Video
- The End of the Page View
- The Implicit Web
- User Generated Devices
I’ve seen way too many 2006 lists and 2007 predictions the past few weeks – most that aren’t worth reading. However, Fred’s are.
Our goal is to have AsktheVC ultimately be a broader information source for entrepreneurs than just “Brad and Jason’s thoughts.” To that end, we’ve started with a few additional things on the site worth noting and will be adding others on a regular basis. If you are only getting this via an RSS feed, take a quick trip to the site to see some of the stuff that’s currently there.
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- FeedBurner Venture Capital Network: We are members of the FeedBurner Venture Capital Network (and Brad is the coordinator of the network.) This is a network of as many of the blogs written by Venture Capitalists that we could find. Click through to the FeedBurner Venture Capital Network landing page to see some of the neat things you can do with the network.
- Personal Network Search: This search allows you to search all of the blogs in the FeedBurner Venture Capital Network that is brought to you by Lijit (one of our portfolio companies – as is FeedBurner.) Simply choose “Me” and type in a search phrases (two words or more result in better searches) and you will be searching across the entire network. If you choose “My World” you’ll end up searching across all of the FeedBurner Venture Capital Network bloggers and any other things they’ve incorporated into their Lijit profiles.
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Question: Could you recommend some of the more respected VC and private equity publications (ie., industry-specific magazines, newsletters, journals)? Are there any trade media or trade associations who I should be aware of? I like to be well-informed.
Our Take: Let’s divide up into daily emails, paper publications and associations.
Daily emails: Dan Primack from Thompson sends out a daily email that is part People Magazine and part USA Today. You can find his site here and subscribe. The other daily email is from Venture Source. Send an email to email@example.com to subscribe.
As far as paper publications, check out the Venture Capital Journal. It’s a good read and has good guest columnists. Dow Jones Venture Capital Analyst is also very good. Russ Garland writes a ton about the industry, is a good writer and gets his stories correct. I would say that the paper copies of both of these sources is superior to their online presence. (You get what you pay for).
When you look to trade associations, there is just one: NVCA – National Venture Capital Association. You have to be in the industry to get invited to events, but is a great forum
Question: I have seen two pre-funding startups that have had 1 of 2 and 2 of 3 of the original founders quit. Neither of these companies had founder buy-sell agreements. In the latter case, the 3 founders had split the company equally which means 66.7% of the ownership is now outside and passive.
Fortunately, they realize that this is a non-starter when the current company reaches a point (soon) of funding and are willing to give back significant ownership. What is the best mechanism for the company (C Corp) to absorb enough of the outside founders’ shares without serious tax ramifications?
Our Take: There are three ways that we’ve seen this work. In any of these scenarios, there are important legal considerations / risks to consider. Please consult your lawyer.
1. Recapitalization of Stock. Chances are if the founder left, the company wasn’t white hot. In fact, our bet is the company isn’t doing well at all. Someone could put in a bit of money and recap the whole company washing people out to what they should have, then grant new options (that can be partially vested on day one) to those who are left.
2. Company tender. The board of the company determines the FMV of the company and then company buys back for FMV. Again, assuming the company isn’t super hot, the spread should be little or even negative.
3. Company buyback and release. The company could buy back the stock for $X in exchange for the founder shares coming back into the company and a release. Make it a release of potential claims. The company pays cash for the stock. Whatever the spread on the stock is, can be expensed by the company as a payment to protect business reputation.
What on earth is 280G? What is a parachute payment?
Question: My lawyer mumbled something about 280G and parachute payments. I thought this was only for big public companies and acquisitions? How does this affect VCs?
Our Take: Jason spent some time this year co-authoring an article on this with Ed Zimmerman and Brian Silkovitz of Lowenstein Sandler. It’s every thing (and most likely more) that you’d want to know on the subject.
(We got two questions that were similar)
Question 1: Is it normal to have the founders to have Class A shares, angel investors to have Class B shares, and a Class C pool for employee options. Liquidation preferences have classes B and C funding concurrently, with class A funding last?
Question 2: Is there any reason to issue a new class of company stock when creating an employee pool if the liquidation preference and voting terms are the same as an existing class?
Our Take: Neither of these structures is typical in a VC-backed company. Generally, founders and employees own common stock of the company and VCs (and sometimes angel investors) hold preferred stock. If the company has multiple rounds of financing, assume that each round will be a separate class of preferred stock.
In the first question scenario, the employee option pools would be paid ahead of founders. Regardless if the founders also own employee stock, we’ve never seen this structure.
The second question scenario makes us ask “why?” If the preferences and voting are the same, why go through the issue of creating a separate class? In some states, regardless of what the voting provisions of the company charter say, each separate class of stock gets voting rights for certain transactions.
Now, there is an exception – and it’s an important one. If there is only one class of stock and both employee options and investors hold the same class of equity, one can run very afoul of option pricing mechanics. The options will need to be priced at the valuation paid by investors, which is suboptimal for incentivizing employees. For this reason, we always make sure that investors purchase a separate class of stock apart form the class used for employee options.
What Do VC Titles Mean?
Question: What is a “venture partner” and how do they compare to a “Partner” and / or “Managing Director?” And what exactly is a “Principal?” How are each compensated?
Our Take: Titles have widely varied meanings in the VC world. Unlike most other professions, there aren’t hard “rules” about what means what. But here goes…
– “Managing Director” / “General Partner” (MDs / GPs): In whatever VC organization you are dealing with, this is the top of the food chain. The titles mean effectively the same things, but many lawyers get nervous letting their clients use the term “General Partner” because this term equates to unlimited personal liability in the partnership paradigm. Therefore, the term “Managing Director” is used. Rest assured that all of them refer to each other as “partners” in conversation. MDs and GPs are compensated through management fees and receive direct carry in the funds. They essentially run the firm, engage in fundraising and vote on the deals the firm considers executing. Note, that some larger firms have smaller committees of MDs / GPs that wield most or all of the power.
– “Venture Partner” / “Partner” (VPs): This is generally the next step down the ladder, but not always. In most organizations, Venture Partners / Partners source new deals, sit on boards and act in the eyes of start-up companies just like MDs and GPs. In contrast, VPs may not have carry in the funds themselves, rather deal-specific carry for companies in which they are involved in. In some firms, however, they do have general fund carry. What’s most interesting is that some VPs are really MDs in training, while others are folks who just don’t want to be an MD, or are explicitly only intending to be at the VC for a finite period of time. At some firms, MDs / GPs who have “retired” (either voluntarily or involuntarily) are made VPs. In other words this position can be a position “on the way up,” “on the way down / out,” or “just hanging out for a while.” VPs can or can not make a salary off of the management fees. We’ve seen ranges from $50,000 a year on up to several hundreds of thousands of dollars. It can also be a full or part time position. You see everyone from young bucks trying to make their way up the ladder, to seasoned company executives becoming first time investors. Whatever the case, you rarely see these folks having another job (full-time operation roles at companies) while they are working for the VC firm.
– “Principal / Associates”: As with VPs, this functional responsibilities of Principals and Associates can range from “number crunching deal monkeys” to folks who source deals, sit on boards and act as junior partners. At some firms, the role of Principal immediately preceeds the role of Managing Director. Generally, they are younger folks who are learning the ropes and depending on the firm will each have their own level of autonomy and compensation. Rarely do they have a vote in deals and it’s probably about 50% of them who have direct fund carry. They are compensated through management fees, as most of them are still trying to pay off their business school loans.