Posts from February 2011

Anatomy Of A Pirate

I like to buy music. I buy it from emusic (where I pay $23/month for use it or lose it credits for music downloads), Amazon, and when in a pinch, iTunes. I also have two Rhapsody music subscriptions that cost an additional $20/month. My kids also regularly spend money on iTunes for music (often for tracks we already own somewhere else in the house). I suspect between all of this, our family spends well over $1000/year on mp3s, probably closer to $2000/year.

And yet, today I find myself pirating an album on the Internet. I thought I'd outline how this happened to showcase what a fucked up system we have for content sales on the web.

Last week, I saw a tweet from my friend Anthony:

Streets tweet
I'm a huge fan of Mike Skinner/The Streets so that was an instant click. It turns out The Streets had uploaded their new record, Computers and Blues, to Soundcloud and the Hype Machine was featuring it. I gave it a listen and was smitten. I tweeted it out myself.

Then I searched the Internet for the record. It was not even listed in iTunes or emusic. It was listed on Amazon US as an import that would be available on Feb 15th, but only in CD form. I'm not buying plastic just to rip the files and throw it out. Seeing as it was an import, I searched Amazon UK. And there I found the record in mp3 form for 4 pounds. It was going to be released on Feb 4th. I made a mental note to come back and get it when it was released.

I got around to doing that today. I clicked on "buy with one click" and was greeted with this nonsense (click on the image if you want to read it).

Restrictions
So then I went to find a VPN or proxy service that would let me grab a UK IP address so I could buy the record. That was an exercise in frustration. All I could find was monthly or daily services that were 2-3x the cost of the record. I could not find a free service that would let me change my IP address for a few minutes so I could download the file. As much as I wanted to pay the 4 pounds and pay for the record, I wasn't going to lay out $10 or more to do that.

So reluctantly, I went to a bit torrent search. I found plenty of torrents for the record and quickly had the record in mp3 form. That took less than a minute compared to the 20+ minutes I wasted trying pretty hard to buy the record legally.

This is fucked up. I want to pay for music. I value the content. But selling it to some people in some countries and not selling it to others is messed up. And selling it in CD only format is messed up. And posting the entire record on the web for streaming without making the content available for purchase is messed up.

I don't know whose idea this is of the way to market a record but I'm hoping they read this and never do this to a fan again. Fans love music. They want to support the musicians and they want to pay for music. But if you put enough hurdles in front of them, they will become pirates. As I did this morning.

When The Streets and their record label choose to make the Computer and Blues mp3s available for purchase in the US, I will go buy the record legally. Until then, I'm a pirate. 

M&A Issues: The Stay Package

We continue our discussion of M&A Issues this week on MBA Mondays. Today we are going to talk about the "stay package."

When a company acquires your business, they are buying the people as much as anything. Experience has shown that the most successful acquisitions require the team to stick around, at least for a while. But if everyone is getting cashed out day one, there is very little incentive to stick around. Therein lies the stay package.

There are a number of different variations on the stay package to deal with different deal scenarios. I will group them into three main categories for the purposes of this blog post but there are many variations around these three main categories. Every deal is different. There is no standard deal in the M&A business.

1) When the employee and founder equity is worth a lot of money and much of it is unvested – In this scenario, the buyer usually assumes the unvested equity, converts it to unvested equity in its cap table, and uses the remaining unvested equity as the bulk of the stay package. The buyer is likely to adjust the stay package by issuing new employee equity or cash bonuses to certain members of the team to further incent them to stay.

2) When the key employees have equity of significant value and most/all of it is vested – In this scenario, the buyer is going to have to come up with a large new employee equity grant or cash bonuses for the key employees and it often comes out of the sale price. Let's say your company is getting purchased for $300mm and the buyer believes it will take $30mm of cash or equity in the buyer to incent the key team members to stay. It is typical to see the purchase structured as $270mm for the company and $30mm for a stay package for key employees. In this scenario, the rest of the team usually has remaining unvested equity and will typically be treated similarly to scenario 1. It is common practice, but by no means standard practice, for the employee equity and investors equity to be split up and treated differently in this kind of situation. In one situation I was involved in, the founders owned 40% of the company and the investors owned 60%. The company was sold for $100mm and the investors were cashed out for $60mm and the founders got a two year stay package for $40mm plus some additional equity in the buyer's stock.

3) When the key employees' equity is worthless – This usually happens when the company is being sold for less than the total invested capital. The deal most investors make is they get their money back before the founder and employee gets paid out. In an investment that doesn't work out well, this means the founder and employee capital is worthless in a sale. But the buyers know this and won't allow all of the sale consideration to go to the investors, who don't matter to them, and none to the employees, who matter a lot to them. So what buyers typically do in this situation is create a carveout for founder and employee equity. The carveout can often be as high as 25% of the total consideration. I have seen buyers propose 50% or more but those deals don't get done because investors usually control the exits and they need to feel that they are being treated fairly. The founder and key employee carveout is usually paid in cash over a two to three year period.

The typical stay package is for two to three years. The consideration is generally paid ratably over that period. But it can be back end loaded to further incent the team to stay.

Some deals can include an "earn out" which is additional consideration based on the performance of the business. Earn outs can be for the entire shareholder base or can be made available only to the key employees. Earn outs can work well when the business is being left alone and the metrics are easy to establish and the team feels confident they can meet them within the confines of a larger organization. I don't consider earn outs to be stay packages. They are a different beast for a number of reasons. But they can be very effective at keeping the key employees around.

I'll end this post by saying that I can't think of a founder or key early employee of one of our portfolio companies that has stayed at a buyer for more than three years. Most are gone after two years and some leave well before that. There are a host of reasons for this, and most have to do with the psyche of founders. So it is wishful thinking to expect a founder or early key employee to stick around for the long haul, but getting them to stick around for a couple years can be done and should be done. So make sure your deal has a well thought out stay package. It is in everyone's interest to do so.



Free Software, Paid Support

There is a thread on programmers.stackexchange.com that asks the question "Why do programmers write applications and then make them free?" The top answer right now is:

Because I don't want to feel obligated to provide technical support or offer refunds.

I have always found the free software approach to be instructive. There are many forms of creative expression out there and most of them involve a paid model. But there is a very vibrant community of software developers that build things and then make them available to anyone who want to use them for free. The key is that they don't offer any ongoing support or maintenance.

If you dissect the model, you'll see that the one time effort of building something is something many software creators are willing to do for free. But the ongoing time and effort of supporting and maintaining the software is not something that can be done for free.

This is, of course, the insight that provided the open source business model. Build software, give it to the community to maintain, and charge for ongoing support. There have been a number of successful businesses built using this model including Red Hat, MySQL, and hopefully, our portfolio company 10gen.

Having worked with software driven startups for many years now, I recognize the cost model all too well. The initial founding team can often build the product in three months. That team is often two or three developers. But once the software becomes popular, it requires dozens of developers to maintain and enhance the code base. It takes a team of tech ops people to keep the software available if it is a web service. It requires a team of people doing support via email. The cost of building software pales in comparison to the cost of maintaining, enhancing, and supporting it.

This approach can be mimicked by anything that is made of bits not atoms. It can be applied to writing. It can be applied to music. It can be applied to film. It can be applied to photography, anime, cartoons, etc, etc.

This does not mean that the paid model of writing and selling software is a bad one. It works and will continue to work. This does not mean that the paid model of recording and selling music is a bad one. It will work for some. This does not mean that the paid model of writing is a bad one. It will work for some.

But it does mean that the free model is very powerful and should be considered by anyone who like to create things but does not like to deal with hard work of maintaining and supporting the work. It is the model behind this blog in fact. You get the content for free. Anything else, you have to pay for with equity in your company.

Windows Phone 7 First Impressions

I got the unlocked Samsung Focus that I bought on eBay last week. I've been playing with it for the past couple days. Here are some first impressions:

– The hardware is great. The device is very similar to the Nexus S I use. Great screen, very light, good screen size, feels great in my hands.

– The UI is slick. Very intuitive. It takes no time at all to figure out how to get around the OS. The home screen in particular works very well.

– The Facebook integration is excellent. If you are a serious Facebook user, this phone is for you.

– The way the contact book is totally integrated with Facebook shows that the Windows Phone 7 team gets that the contact book can be the unification point for all of our social graphs. However, it is more of a proof of concept right now because Facebook is the only integrated social network on Windows Phone 7. If they integrated a dozen or so of the most popular social services, we'd see this vision in full force. I hope they do that and do it soon.

– The explorer browser is a disappointment. It is not nearly as good as the Android and Safari browsers. And I hear we are getting a full Chrome browser in the Honeycomb version of Android. Microsoft needs to up its mobile browser game if it wants Windows Phone 7 to be competitive with iOS and Android.

– Windows Phone 7 offers gmail support in the mail app. But I have a hard time using any mail app other than the gmail app on Android which fully supports priority inbox and a host of other power user features. This for me is a very big deal. For others, maybe not so much.

– The marketplace requires a windows live login. I have one of those but it's a bit fubared because I've used it for my son's Xbox and there is some kind of parental controls setting that makes it impossible for me to download apps onto my Samsung Force. I found a support thread that explains the problem and how to fix it, but I could not make it work.  And I am worried about messing up my son's Xbox profile. So I have not been able to download any apps onto the phone. It's a frustrating experience and I'm not entirely sure why Microsoft needs a Windows Live login to allow me to download apps onto the phone anyway.

– There's an Xbox Live app on the home screen. My son saw this and lit up. I didn't play around with it, but the idea of a seamless experience between the Xbox and the mobile phone is interesting.

The bottom line is I don't think this phone is for me, but it has a bunch of features that make it a compelling phone. I think I am going to give it to my son. Facebook and Xbox are his two most important networks and this phone apparently supports both of them very well.

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Do You Ever Get Bored Of Blogging?

In the cab home from her basketball game yesterday (they won), my daughter Emily asked "Dad, do you ever get bored of blogging, tumbling, twittering?" I chuckled and handed her my post from yesterday to read (on my android).

The truth is I never get bored of writing. It is something that came relatively late in life for me. I started writing when I started blogging in 2003. I was 42 years old. It's a hobby, something I do to entertain and educate myself and I enjoy it very much. I love putting the puzzle that are my thoughts together every day.

But an unintended consequence of this writing hobby is that I've developed an audience and a public persona. I didn't set out to do that. But it happened. And now I've got a responsibility to serve the audience and manage the public persona. At least I feel that responsibility.

The "work" I referred to in my post yesterday is that responsibility.

I never get bored of "blogging." At least I don't get bored of the writing part of it. I do get bored of maintaining an audience and a public persona. That can get old and lead to ruts like the one I got in with Twitter last year. But all it takes is some great feedback (notes in Tumblr, RT and replies in Twitter, and comments on this blog) to get me over that. The ability to get immediate feedback on my thoughts is a magical thing and at the end of the day, it is what keeps me going day after day.



Falling In Love With Twitter All Over Again

When you've been in a relationship for a long time, you start to take things for granted. And then something happens and you are in love all over again.

That's what is happening with me and Twitter right now. I was in a rut with Twitter for much of the past year. I'd tweet out my blog post every day and not a lot more. I'd check my @mentions and a search on fred wilson a few times a day. It was a routine. Work.

But in the past few weeks, I've found myself reading tweets a lot more. I'm replying to tweets a bit more (something I've never loved to do for some reason). I'm retweeting more.

I just spent 20 minutes reading my timeline from this morning back to yesterday morning. I have built an amazing set of people I follow, 564 of them, all curated one by one over the past four years. The timeline is so rich, so full of different things from different people. Tech, sports, politics, music, family stuff, humor, and way more.

Twitter's mission is to instantly connect you to the things that are most important to you. It does that so well. It's love all over again.



Startup America

On Monday , the White House announced Startup America. The CTO of US, Aneesh Chopra, blogged about it on Techcrunch.  My friend Brad Feld was there and blogged about it.

I have no involvement with Startup America, at least yet. But I am a fan of it for one simple reason – they are paying attention. Let me explain.

For years, entrepreneurs in NYC, particularly tech entrepreneurs, labored largely in silence. The city government was focused on the big employers and real estate. Tech entrepreneurship was something that happened elsewhere. It was largely ignored.

Then a year or two ago, the city woke up. Our mayor, himself one of the best tech entrepreneurs of his generation, woke up. They started paying attention to the emerging tech sector. The Mayor started coming our our events. The city took our calls. And they are now working with the tech sector to make things easier and support good ideas. I tell them privately and publicly that I don't agree with all that they are doing and wish they would do other things. But at least they are doing and listening. That is a huge step in the right direction.

Now it appears the White House is paying attention too. They've got smart experienced people like Steve Case, Carl Schramm, and Brad Feld advising them. They've got programs in place and more on the way.

Do I agree with all that they are doing? No. Just like NYC, I wish they would do other things. Just like NYC, I will blog about them.

One thing that jumps out to me is the focus on what is working (tech entrepreneurship) and the lack of focus on what is not working (health care entrepreneurship, energy enetrepreneurship, community entrepreneurship). I'll make sure they hear that criticism, from me and from others.

But this effort gives us an opening. We can get things like visa reform on the White House's agenda through new channels. We can push back on nutty ideas like regulating VC firms so that my blog posts would have to be signed off on a compliance officer before they go public. We can shine a light on areas that need help and those that are doing "just fine, thank you."

I live and work in startup america and I am glad the White House is paying attention to us now.



MBA Mondays Everywhere

I provide all of the content on this blog for free via a creative commons license (link at the bottom right of this blog). Anyone can repost it as long as it is not comingled with porn or hate and I require attribution and a link back to the original post here at AVC. That is why you see the posts that run here at many other sites on the web, ideally running the post's disqus comment thread.

The same is true of MBA Mondays (which is a subset of AVC). Last week DailyLit (books by email) started offering MBA Mondays via its service. I'm told that well over 1000 people have subscribed already.

And my friend Pravin, who inspired the MBA Mondays series, is helping me with a MBA Mondays iPad app. It will be free as well. I will let you know when it comes out. Hopefully we can port it to Android tablets after we get it working on iPad.

And long time community member vruz is working on an illustrated version of MBA Mondays. I am not sure what the status of that is, but I will alert people when it sees the light of day.

I am still considering also running the MBA Mondays posts on their own blog with special formatting so that they can be easily searched, read, and so that they feel as much like a textbook as possible. If I do that, I will do that via wordpress and I'd like to use the domain MBAMondays.com. The owner is hidden by domainsbyproxy and I can't figure out who it is. It was purchased last spring, a few months after the monthly series started. If anyone can help me identify the owner and secure the domain, I'd appreciate it.

If you have an idea for doing something useful with MBA Mondays, I say go for it. You don't even need my permission as long as you follow the creative commons license. But I'd love to know what you are doing so I can keep track of all the cool ways people are helping to hack education.