Friday, September 29, 2006

Stock Options: The Myth of the 4-Year Vest

Fall is the time for term sheets to be issued and compensation committees to meet here in Toronto, and once again I ask: why do VCs continue to design stock option plans that contain a 4-year vesting schedule?

Stock option grants are made to attract and retain the best talent for a startup at a specific phase of growth. During the internet boom, employee churn was high and liquidity came fast often before a company had recurring revenue. Back then, it made sense to design a plan around a 4 -year period, which was roughly proximate to the time a company would go from formation to IPO.

Applying the same strategy to today's market makes as much sense as applying fake tan before exfoliating: either way, things don't look natural and you get uneven results. Without an irrational stock market to take companies out early, it is inevitable that companies will go through employee and executive churn. In fact, it's desireable. The hard charging Series A CEO who can manage many roles as the company grows is not likely to be a good fit for the company as it matures. Why create an artificial incentive for him to hold on to his job after his time?

Stock options should incent employees to deliver value during the phase that they are most valuable to the company. I understand why an investor would wish to pursue what is an outdated strategy; it creates a nice hedge against investor dilution by betting employees will churn before they vest. But why is a 4-year vest in the best interests of the company?

For those VCs who insist a 4-year vest is consistent with the market, I invite them to pay closer attention to the high tech companies in the US public markets. Thanks to changes in the IRS treatment of change of control payments made to employees, more and more companies are shortening the vesting periods - and making upfront vested grants- to the major option plan participants.

Thursday, September 28, 2006

Bill Gates: A Legacy in Danger

There is an ongoing debate as to whether Bill Gates will be remembered as a great entrepreneur, or simply a gifted business strategist. I know only one thing: his fashion legacy is in great danger. There are lessons to be learned from Bill's recent fashion misdaventures. If you are going to reinvent the PC (or any other) industry, make sure you dress the part. This means:

1. Do NOT clothe yourself like an IBM executive. If you must wear a suit, reinvent it. Try Oswald Boateng. Disruptive tailoring never hurt anyone.

2. Avoid posing with your arms folded. It evokes the smugness of the Old Guard, and makes people wonder if under that suit coat, your pants are being held up by your Six Sigma black belt.

I miss 1980s Bill (on the right). 1980s Bill and I have been through a lot: MS-DOS, content portals, Mephistos with knee socks. These were all labeled failures at the time, but it turned out they were just ahead of the market. I want my Mephistos, and 1980s Bill, back.

Monday, September 25, 2006

Venture Law Line: $150/month

I've only ever wanted to be a lawyer. The reason may be partly genetic; for the last 240 years (since my ancestors snuck across the border from New York to Canada), the folks in my family have either been doctors or lawyers. Some people wander in the desert; my people bill by the hour.

Many of my early stage clients take an emergency room approach to getting legal advice. I often meet them for the first time when a legal issue has become chronic. Their reasons ? 1. cost; and 2. getting advice that is relevant to their size and stage of growth. Unlike the US, Canada does not have a large number of lawyers who have spent time in house or in venture capital. We are a rare breed, and we often charge a premium for it. (Then we take equity in our client and claim that this doesn't create a conflict of interest (we'll discuss this later)).

We developed VENTURE LAW LINE to reduce emergency traffic. The law line is a low cost service for entrepreneurs and businesses who need affordable, responsive access to senior lawyers who can answer a wide range of issues - from employee comp and HR , to using open source in systems and services, to technology licensing.

Here's how it works: For a flat rate of $150 a month, clients have unlimited telephone access (through a toll free number) to a team of senior lawyers whose experience includes time at leading law firms, venture capital funds, and as part of management for emerging and leading corporations. They can call as often as they want during normal business hours during any month for which they've paid for service. Some early stage clients will only need to talk to us once every few months or so; larger clients - Canadian branches of US companies or companies with a full time controller or CFO - may want regular access to us for day-to-day questions that may arise. Our monthly subscription accommodates both needs. Our team is located in Ottawa and Toronto; you can learn more about our members through the VENTURE LAW LINE link at

The value to our clients: a regular line to first rate, seasoned advice at a low fixed cost, and a chance to test drive our expertise for future projects. Plus (of course) access to lawyers who can use our own networks to help our clients build their own business network, introducing them to director candidates , key employees, customers and suppliers.

Please let us know what you think.

In the beginning, there were golf shirts

I acquired my first entrepreneur as a client fourteen years ago, when I was in an associate at a large white shoe law firm in Toronto. I still haven't figured out how he found his way there; we catered to large banks and corporations and wore pinstriped suits with (in my case) floppy silk bow ties. Bill owned a wallpaper printing plant, had meathooks for hands and wore the kind of brown shirts that Original Penguin now sells for $79.00. (They aren't pretty now, and they weren't pretty then.)

Bill predicted the do-it-yourself boom and re-tooled his plant to mass produce wallpaper that was rolled with the print facing out. Retailers loved him, because they could now display wallpaper in self-serve racks, and Bill sewed up huge retail contracts. We helped him float a modest public offering. At the closing dinner we held, he wore a brand new Jack Nicklaus golf shirt. It was his way of saying he'd joined the leisure class.

Since then, I've worked with dozens of entrepreneurs in high tech and telecommunications, as well as more traditional industries. They, too, embrace the golf shirt as their uniform. Their fashion credo is, the rattier the shirt, the more serious your start-up chops are. Think I'm exaggerating? One of my clients wore his Webvan shirt to lunch last month. Real entrepreneurs are fashion traditionalists.

At the height of the high tech boom, the venture capital industry exploded and a number of pretenders joined the ranks as VCs. They were easily identifiable by their mock black turtlenecks. Wearing a mock turtle told the world that you had done at least five IPOs and, in between the 7 board meetings you had that day, you were taking a MIG for a test fly. I will always have complicated feelings about the town of Los Gatos, where I once spent several hours trapped in a restaurant booth listening to a co-investor explain why he was trading in his F-14 fighter jet for a Russian MIG. (FYI, the MIG is the VC’s equivalent of a Birkin bag. Difficult to get ahold of, but SOOO easy to land at smaller airports like Carmel that it’s worth the wait).

Like parachute pants, the mock turtle guys turned out to be a fad with no staying power. Today you can find most of them wearing Canali suits with ties that add visual impact and talking about technology buyouts.

This BLOG is for those of us who are traditionalists, and who stay the course no matter which Elliott Wave the market is riding. It's a forum for discussing issues affecting operations, growth and liquidity for entrepreneurs and their businesses. And clothes. Less than 7% of the venture capital industry is female; less than 10% of emerging companies have female CEOs. Maybe if you all had worked harder at cracking the glass ceiling I would have more people with whom I could discuss tweed and whether pumpkin is a valid fashion colour.

[Fall fashion tip: There are some golf shirts that need to be permanently retired from your wardrobe. Think of them as you would courdoroy and acid-washed denim: they may come back into style, but they just aren't as flattering on you as some would have you think. In no particular order, I recommend purging golf shirts with any of the following logos:
YOUtopia (sorry, Britney and Justin)
Anything from the Nortel "Come together" series]