If It Sounds Too Good To Be True, It Probably Is

Ben Horowitz has a great post up on his blog, called Why I Did Not Go To Jail.

I would encourage everyone to go read it. But in the event you aren’t going to do that, he tells a story about an options strike price plan that his CFO recommended to him. It turns out the plan was against the law and his GC stopped him from implementing it.

I’ve heard a lot of ideas over the years that, like this options strike price plan, sound too good to be true. And in most cases, they were just that.

I have developed a deep skepticism around anything that sounds like a free lunch. As the saying goes, there is no such thing.


Comments (Archived):

  1. PrometheeFeu

    This is amusing because your job in many ways is to look for a free lunch. Who is likely to succeed and has not had all that value bid away by other investors?

    1. fredwilson

      trust me, they are never free

      1. PrometheeFeu

        I believe you. 🙂 But even too good to be true is rarely free. I used free lunch to mean cheaper than warranted by its value.

  2. pointsnfigures

    Read it and remember when the SEC took action. I was on the trading floor in Chicago in 1989 when the FBI arranged a sting. There are people that will always make different choices, and as Ben’s post illustrates-laws are written so vaguely that it’s almost impossible to make a decision. Lawyers can twist language to anything they want it to mean.Great leaders have great ethics, and trust their gut. They also encourage healthy debate among their closest advisors, and act accordingly.I had acquaintances go to jail in that FBI sting. Funny thing is, they got the small potatoes and missed on the big things.

    1. awaldstein

      I agree that core ethics are the best compass for life.I also don’t believe in blaming attorneys. Without great ones on your team and on your side, you in the boat with no oars.

  3. William Mougayar

    As much as I love Bitcoin and its huge potential, this reminds me there will be some “too good to be true” stories close to it. Buyer beware. The “invisible” part of digital currencies will bring with it some uncertainties we need to be aware of.

    1. fredwilson

      yup. some people are getting phished and losing bitcoin in hosted wallets that led Coinbase to do this http://blog.coinbase.com/po

      1. jason wright

        Bips, Denmark, $1,000,000 of bitcoin swiped.Some of these incidents have to be inside jobs.

  4. Twain Twain

    There’s a misperception about startups (and particularly SV) being “Wild Wild West” where “anything goes, unbridled innovation”.In fact, startups are subject to securities laws and corporation laws like all other entities so founders should make getting great Counsel a priority, as Ben Horowitz’s post highlights.

  5. jason wright

    London, England, 2014.Three men were charged under the Vagrancy Act of 1824 (!) for climbing over the wall of a supermarket late one night last year to help themselves to the out-of-date food dumped in the waste bins (incidentally one was a web designer – London is an expensive place to live). The powers that be decided to prosecute because it was “in the public interest” – a laughable statement. In the end public outrage saw the case dropped. They had their free lunch, and made the powers that be look very out of touch, which was the icing on the… lunch.

    1. LE

      Don’t know that story but of course they should have been prosecuted. [1] This was not a case of imminent danger but of hunger. Not having food doesn’t allow you to trespass on the property of others and take what they are going to throw out. In the US scotus did say your trash in a trash can is fair game.Consequently if they had climbed over the wall to flee a person with a gun that would have been fine and they almost certainty wouldn’t have been charged.(So now I go and look up the story):http://www.theguardian.com/…called the police to report three men scaling a wall at the back of Iceland in Kentish Town. Police arrested the men as they left the area with a holdall and trolley containing food.So I’d like to know exactly why you think it’s ok for someone to tresspass like this. Would you want someone slipping by your unlocked kitchen door to take food that was in your trashcan? So now we have a system where people just make up whatever rules they want and make decisions (vagrants no less by the way..)Added: [1] Subject to of course the benefit to the public and any PR disaster that the company wanted to avoid. I’m saying in a strict sense not what I would have done if I was the decision maker. Makes a great newspaper story of course to rev up the masses.Other example this week was the AOL “distressed babies” internet backlash.

      1. jason wright

        i don’t think they should trespass, and because i don’t think they should have to trespass to gain access to food being thrown away by a supermarket. it’s a senseless waste. supermarkets should be made to give away out-of-date food to soup kitchens and the like, with the conditional that they are not to be held legally responsible for any health consequences suffered by those so desperate that they are willing to take the risk.it’s not that they were arrested. the police have to respond to reports they receive. it’s that they were to be prosecuted for ‘no harm’ and ‘no criminal damage’ actions. it’s petty beyond measure.

        1. LE

          supermarkets should be made to give away out-of-date food to soup kitchens and the like, with the conditional that they are not to be held legally responsible for any health consequences suffered by those so desperate that they are willing to take the risk.”Should be made”?What you want a law for this? So if I am running a restaurant I now, in addition to worrying about inventory and people showing up and payroll I have to also make sure my expired food is separated by edible and non edible (with no liability?) so it ends up in food kitchens? Where is the labor going to go to do this? And what about the lost jobs from the waste haulers that are being paid now to cart away that food? (Unintended consequences).Closest thing I can think of is somewhat mandatory recycling in the US. Not seeing anyone go to jail for not doing it at least where I am.You are not taking into account the practical aspects of what you would like to do. The cost of setting up and monitoring the program. Who is going to do that? You can’t just have ideas (anymore than you can have startup ideas) and not consider the implementation details. Ideas are a dime for 144.It’s a fine idea so now put in the effort to make it happen.Otherwise who do you expect to run with this idea?And if they run with this idea what other ideas are they going to then not run with because they are doing this idea?People don’t have unlimited time and I personally don’t like knee jerk reactions of the public which put the squeaky wheel to the top of the “to do” list.

          1. jason wright

            when i’m in Munchen i like to stay here. it’s a very humble place, where everyone is briefly brought down to a similar level of human coexistence. a bit like a kibbutz but without the work. good for the soul. Fred should try it;http://www.the-tent.com/there's a supermarket through the woods, a Lidl, and some people go through the front door there and pay for fresh food, and some people go round the back and take what’s being thrown out, and the ‘authorities’ don’t have a problem with it, and this is a city where the police are everywhere and you do obey the laws or else. societies are different. countries are different. vive la difference.

  6. JimHirshfield

    My sense is that most folks aren’t looking to commit fraud. they’re just trying to figure out a fair way. It’s easy to judge or come to harsh conclusions about stock options when examples like Google, Facebook, Opsware are used. But when the vast majority of companies fail or exit sideways – and the Feds tax the implied value of options (liquid tax on illiquid asset) it is unfair, potentially financially detrimental and a constraint on entrepreneurship.

    1. pointsnfigures

      Agree. Trying to come up with an ethical sensible economically efficient way to reward and incentivize employees is different that trying to commit fraud.

    2. JLM

      .The tax treatment of options was the first shot in the war on success and wealth.Options — before the revisions — worked exactly as planned. People dug in, worked hard and went to the pay window.This new wealth created more jobs in a trickle down effect.JLM.

    3. Matt Zagaja

      I am a bit confused on this issue, largely due to my lack of knowledge. Generally in tax law the tax events occur when you have some kind of transfer of wealth. My expectation would be that if a company “fails” its value would be nothing. So is this not the case, and if so why?

      1. JLM

        .In the case of options, they are owned by individuals subject to a grant from the company.The tax implications are personal not corporate.When the company fails it does not wipe out the personal implications such as an 83(b) election.JLM.

      2. JamesHRH

        The basic issue that @philipsugar:disqus is pointing to is this: they were revising history to the benefit of employees.Unfortunately, their fiduciary duty includes many other stakeholders.Extremely unfortunately, is once you start revising history, it makes things sooooo much simpler than actually doing things at the time they happened, that it becomes addictive.

    4. PhilipSugar

      I think what happens is you push the areas of gray. Eventually if you keep doing it you realize the line is way, way behind you.

      1. LE

        That is almost close to my “red light theory” actually.It’s the reason you need to stop when you see a red light in the middle of the night and nobody else is around.Because if your brain doesn’t subconsciously recognize that a red light means “stop” it will then shoot through a red light where it matters. So never run red lights.That said what you are referring to is really being desensitized in a way (to danger) and I’ve always said the same thing.Most people don’t start off with the big crime they inch their way up from small gateway crimes. Not getting their hand caught in the cookie jar emboldens them to take bigger and bigger chances. And while i would like to say “eventually they go bust” as we both know that is not the case.Remember the scene in “Bad Boys” where I think Sean Penn was framed for a crime that he didn’t do? And I think the prison guy said something like “well you are guilty of something else then”. So anytime you see someone who is caught for a big crime there are most certainly a million little ones that they didn’t get caught for.

      2. JimHirshfield

        I can see that happening.

        1. PhilipSugar

          Read the SEC and IRS agreements. Now I fully will agree once the government has their hooks into you they pile on. But it was not what Ben said.

      3. JamesHRH

        My father always said, ‘there is no such thing as a little bit dirty.’As a ‘who cares what your Pops said’ relevance refresher, my Dad was a leading CDN criminal attorney for over 35 years.

        1. PhilipSugar

          We are all faced with shades of gray every day. Do you speed? I do. But then the question is how far do you go?

          1. awaldstein

            Ain’t that the truth.

          2. JamesHRH

            Perhaps a little context is required..@awaldstein:disqusYour choice to speed is your choice (i think NA highways should run more like the Autobahn) – its not ‘dirty’, in the sense that you did not do it at the request of another.You can call it risky or stupid, if you like.Your choice to break the rules at the request of another, is dirty.Once you are known as dirty, its a snowball. Everyone who is inclined to will ask you to break the rules.

          3. PhilipSugar

            I think we agree: My point is that we all stretch the boundaries, but the problem becomes when you continue to stretch them. I don’t think she did it as a request. I think she did it because it was good for her and made her look good.When you read Ben’s blog it sounds like the issue was picking the lowest price that month. I thought: hmm, that’s bad but not that bad. I mean you pick the lowest price during the day, who could argue about that. What about the week, what about the month?But then I read what she plead to. I understand that it was a plea and she might not be guilty of all its just easier to come to an agreement. But it is a list. So its not like I did this one thing and get in trouble. It was a ton of stuff.And I guess that is my point. When you push the boundary you have to know you are doing it and stop.

          4. JamesHRH

            I am glad you replied. I had not gotten your idea that ‘we are labelling this as pushing the envelope and will go no further.’Its a great principle.The older I get, the more these discussions are about framing issues to fit your basic personality, your cultural background and then your experiences.My personality is one of rules & structure. I am always trying to codify human behaviour, to help me navigate. Principles are the best way to navigate (way better than situation specific rules). My Dad was a similar person.His principle was ‘people who ask you to break the rules will be back with bigger rules to break.’ So, in this instance, he would not have been surprised to find out that a CFO who suggested pushing it to the CEO would be breaking rules all over the place.As he would have understood it, the job of that type of person was to tell when other people were pushing it.A loooong time ago, (late 90’s during the Enron era) I read a great article about the change in role of PubCo CFO. In short, the article stated that CFOs used to tell CEOs when execs were lying or pushing it. The switch that put CFOs in front of Wall St, the article suggested, exposed them directly to the temptations of ‘pushing it until it broke.’They had been a brake; now they were part of the driving decision making. Not working.Or, using how Ben described things, they have moved from lie detector for execs to, apparently, to a lie detector for CEOs.Can’t be right. Duty is to CEO, not investors.

        2. James Ferguson @kWIQly

          Clay Christensen makes this point brilliantly (I think in How will you measure your life)

          1. JamesHRH

            have to get to that one…



    1. JLM

      .Grim, my man, where you been?You coming to SXSW this year?JLM.



        1. JLM

          .Yes, let’s see who else is aboard and have a big lunch.JLM.

          1. FAKE GRIMLOCK


          2. pointsnfigures

            need a place to stay, thinking about going.

          3. FAKE GRIMLOCK


          4. JLM

            .Ping me on email. You and Grim can stay at my house if I am in town.Dates?JLM.

    2. LE

      NO EASY TRICKS TO SUCCESSWell there is the luck trick for sure though.



        1. LE

          All survivorship bias aside, the more shit you throw at the fan the more chance of getting hit by something.In any case it takes initiative as well as all of that other stuff to long to list.But if you don’t recognize opportunity (and you are lazy) “to hard to try” you won’t stand as good as a chance.The following recent events illustrate this.My sister went to a party. She met someone that she thought I could help with something. That person contacted me.Later she told me that my niece was into doing a particular thing for her career (is a freshman). I remembered that. I also noted that the person that I had helped had some connection to someone that could help my niece. Because I was curious enough as I always am to fully vet anyone that I deal with. So I try to know as much as I can about them. I am curious.I told my sister about the potential connection that could help her daughter, my niece. She did nothing. (This has happened before many times.)A few weeks later we were all at the same party. (Niece, my sister, and wife of person that I helped). I told my sister “tell her to go up and make contact”. My sister didn’t want to be pushy so she didn’t tell my niece. She’s like that.So I went up, dragged my niece to meet this woman that I had never really spoken to before (only her husband). I explained my nieces interest in something that I felt her husband could help her with and it turns out she actually is the one who knows the connection quite well. And she was very glad and excited that I made the connection and it seems like my niece will probably get something out of this. They talked for quite some time.See all the stuff that had to happen here? See what almost didn’t happen? The near miss?This is the type of thing that happens everyday. Except (as you might say) when it doesn’t.My sister had the same opportunity and didn’t recognize it and even when it was pointed out didn’t act on it (that said she made the first connection that led to this simply because she is social).Bottom line: Stand next to me! (or someone who is a connector and don’t be lazy).

          1. FAKE GRIMLOCK


          2. LE

            Or as I like to say those particles also increase the chance of “the thing that leads to the thing” happening.Many times people solely evaluate doing something by what they perceive the potential end result is. This makes sense since you don’t want to waste your time on something that goes nowhere. Otoh serendipity is real and needs to be considered as well.In some places this is obvious (business men who play golf for example because you meet people and can do deals.) And perhaps if a programmer played golf that might lead to something as well. But would the outcome be as good as if he spent his time elsewhere? (Time is fixed).So there is judgement that is also involved.People with good judgement are better able to make the best decisions given the way the world looks at a particular point in time.But just the same there is also dumb luck. Where you do something traditionally dumb and it leads to something really great.For example most people who drop out and get homeschooled and don’t go to college won’t end up having as nice of a career as David Karp has had. (That’s total speculation on my part I will admit but somehow I feel it’s probably true.)Anyone who thinks that isn’t the case can just read some of the highly seemingly educated contributors on Hacker News who can run circles with their knowledge but from other things they write appear to not have a pot to piss in. In other words they can’t translate their intelligence into earning a living. Something that the guy who runs 3 pizza shops has been able to do. Call it “street smarts” I guess.

          3. FAKE GRIMLOCK


          4. ednika


  8. AlexHammer

    You do “get what you pay for” in this world (i.e., no free lunch). At the same time, if one is smarter and knows more than others, than, legally, one can make a financial windfall or killing.

  9. JLM

    .Skepticism is a character trait that deserves a bit more attention.Skepticism is a bit short of being a naysayer. It is a bedfellow of implausibility — one of my personal favorites.In any financial dealing in which value is seemingly created without work (force x distance), skepticism is the order of the day. I have met this particular impostor so many times as to be invited to their Christmas parties.Looking at some of the current administration’s scandals (well, faux scandals to keep the peace here on AVC) a cocktail of a splash of skepticism, a shot of implausibility and a jigger of common sense allows one to reason to the likely answer.The President’s recent “performance” with Bill O’Reilly — a world class blowhard and a guy a bit too much in love with his own mirror — is a perfect example.The Benghazi mess is exactly what it appears to be if you were to take the WORST interpretation of every fact.The CIA/State/WH manufactured absurd talking points. The President sent out his rented mule to espouse them. The lies just kept piling up. It was ALL about the election and nothing else.I only wish they could work that hard on the economy.So, yes, we need some damn good skepticism for all. I am thinking about a startup to produce it in commercial quantities.Anybody else want in?JLM.

    1. pointsnfigures

      Hope and Change=Free Lunch. Obama never dined in TANSTAFL. (Dining room at U of Chicago “There ain’t no such thing as a free lunch”)

  10. Matt Zagaja

    This reminds me of Warren Buffett’s memo to his managers:”As I’ve said in these memos for more than 25 years: “We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.” We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.Sometimes your associates will say “Everybody else is doing it.” This rationale is almost always a bad one if it is the main justification for a business action. It is totally unacceptable when evaluating a moral decision. Whenever somebody offers that phrase as a rationale, in effect they are saying that they can’t come up with a good reason. If anyone gives this explanation, tell them to try using it with a reporter or a judge and see how far it gets them.If you see anything whose propriety or legality causes you to hesitate, be sure to give me a call. However, it’s very likely that if a given course of action evokes such hesitation, it’s too close to the line and should be abandoned. There’s plenty of money to be made in the center of the court. If it’s questionable whether some action is close to the line, just assume it is outside and forget it.”

    1. fredwilson

      So right

    2. JLM

      .True and a bit quirky as BH has colored close to the line on a lot of things.It takes years to build a reputation and 4 seconds to lose one.JLM.

  11. JLM

    .There is one place that you can approach a free lunch — the Lexus maintenance operation. They have a coffee bar that makes a Starbucks look primeval.When my wife asks me to take care of something on her Lexus — I am out the door like a shot.Hell, they even have computers there.I personally do not buy foreign cars however.JLM.

    1. JimHirshfield

      Big Red Lexus? Naw.

      1. JLM

        .Big Black Lexus SUV which has truly been the best car we have ever owned. The quintessential road tripper. Has almost 200K miles and just keeps on rolling.The Big Black Lexus and the Big Red Car get along just fine. Though the Big Red Car does point out that a moonroof is NOT the same thing as a convertible top.Convertible weather in the ATX today.JLM.

        1. fredwilson

          My favorite car we own is the Volvo station wagon my daughter Emily drives Such a wonderful car.Funny thing is that was the first car Emily remembers us having. We had one when we briefly lived in the suburbs in the mid 90s

          1. JimHirshfield

            Built like a tank.

          2. Donna Brewington White

            I’ve noticed a few in the student parking lot probably for this reason. I seriously wish I could buy my daughter a Hummer.

          3. JimHirshfield

            Bigger is not necessarily better.

          4. Donna Brewington White

            Was going for armored.

          5. JimHirshfield

            That’s not what they mean when they say “use protection, dear”.

          6. JLM

            .A Volvo station wagon, a wife, 2 kids, a dog.The manifestation of the American dream.I had a Volvo convertible — they never sold well because nobody could imagine a Volvo actually being cool — and it was better than a BMW.Before the pledge to buy American, mind you.JLM.

          7. LE

            “they never sold well because nobody could imagine a Volvo actually being cool”Among cars in competing classes I’ve always found it to be true that the best selling car is typically the best car. Kind of like a wisdom of the crowds figures out the best features and value for the money.A few years ago I test drove the Volvo SUV and quickly found why it didn’t sell so well. Go drive one then go drive a BMW X3 and tell me what you think. The nav system integration was tacked on and rose from the dash. Truly visually interuptive.A shortcut to making the right decision is to go for the car that is the best selling or next best selling in a particular price category and class. Want a good cute ute for your daughter? Buy the Honda CRV.As far as Volvo being better than BMW that would depend on what factors you are considering as “better”.I had a BMW and actually got rid of it because I found it boring (everyone else really liked it). But it did come with that bumper to bumper maintenance that covers everything and anything. What is that worth? Ever pay for periodic maintenance on a Mercedes or Porsche? Ever pay for brakes? I have. (I’m guessing it is the same with Volvo but don’t have time to check).With your wife’s Lexus don’t they charge you to essentially maintain the warranty? ( Mercedes, Porsche do, BMW doesn’t).

          8. sigmaalgebra

            The rust in Chevy’s products is getting torqued off at them.In my Blazer, the brake and fuellines rusted. In the Chevy pickupthe guy who plowed my drivewaylast week had, the rust in therear had removed a large fraction ofthe sides, and he told me that thefront ‘posts’ attached to the framethat the body rests on have rustedout. Chevy has to take corrosionresistance seriously or I’m goingelsewhere, maybe overseas.200K miles for a foreign luxurycar sounds terrific.

          9. Matt Zagaja

            I drive a 2002 S60. Even though I’m now employed I just can’t see myself replacing it. It seems like in 12 years the only major innovations the car industry seems to have pushed out are automatic parking and cruise control, and some finally have electric motors. Once in a while the Volvo has some problems but I’ve done enough maintenance that it now runs better than when I bought it.

          10. LE

            Are you married? Are you dating?

          11. Matt Zagaja

            I am single.

          12. LE

            If you can afford a nice car buy it. It will help you dating wise. I’m not saying to spend money you don’t have or to go into debt. But having a nice car has it’s benefits. And no it doesn’t mean the women are gold diggers or anything like that (although it could mean that of course).Now on the other hand if you are worth multi millions you might want to pursue a different strategy to purposely make sure that the women who wants to date you isn’t doing it for your money. But success signals do work more often than they don’t. Just ask the peacocks.

          13. William Mougayar

            Funny I have the 2012 S60, but starting to get bored with it 🙂

          14. LE

            Sounds like you are about as into cars as I am into music (and sports).

        2. PhilipSugar

          It most definitely was not on Wednesday and Thursday, here is coming into DFW where I spent 5 hrs on the tarmac.Somehow I think the bad weather is following me. I was stuck in ATL last week, and PHL on Monday.I didn’t take pictures of ATL I would rather wipe that one from my mind. I was more crowded on Marta than the Subway’s in Tokyo.

          1. LE

            I’ve done this at PHL:http://minutesuites.com/loc…It’s also at atl and dfw.It was great and well worth the money.

          2. Donna Brewington White

            That’s fantastic. And was surprised at how affordable!

          3. PhilipSugar

            Yes, I have too. Very much worth the money. Doesn’t work when you are stuck on a plane.

          4. JLM

            .Yes, that was our winter those couple of days. Good riddance?Huge difference between Dallas and Austin weather.JLM.

          5. PhilipSugar

            Yes, I must admit, I usually am very good at not getting upset and rolling with the punches. By the time I got to DFW and caught my flight by minutes I must admit when I realized somebody took up all the bin space with huge bags (I was in Row 1) I let lose with some words I am not proud of.

          6. Donna Brewington White

            Two days of winter… ha!I semi-joke that I love going to the beach during all two seasons.Now just wishing we could get some serious rain here in SoCal.

          7. Donna Brewington White

            Ughh…sorry Phil! I avoid DFW when I can. I guess I should appreciate their sensitivity to safety but …

      2. jason wright

        a Big Red Nexus is infinitely cheaper and so much more useful 🙂

        1. JimHirshfield


    2. LE

      I personally do not buy foreign cars however.Ok so let’s hear the reason why.

      1. JLM

        .My effort to support American jobs only. Old School.JLM.

        1. William Mougayar

          I had a Cherokee for a long time. Now thinking of ditching the Volvo and going back. I like the new Cherokee models.

          1. LE

            I just rented the new Cherokee. Was going to buy a Mini Cooper Countryman as a 2nd car but after driving a brand new Cherokee for the week I am actually considering buying that.One thing though it wasn’t that great in deep snow but I think the trailhawk (just featured in a review in the WSJ) has tires that would be much better.

          2. William Mougayar

            Yup. I think the trailhawk has a higher ground clearance.

          3. JamesHRH

            MB GL 450.Especially if you want to do long haul trips.

          4. William Mougayar

            It’s powerful for sure.

        2. awaldstein

          Must admit that not owning a car is a real pleasure, especially as they now have a full line of Audi’s at ZipCar which I grab often.

          1. LE

            What is the big pleasure from not owning a car? A car is transportation. What could be better than having transportation at your fingertips? That you own and control and is available when you want it and is consistent and does not vary?I guess it comes down to how much you need a car and whether you want to spend the money on a car.If you have the money to spend on a car then why would you want to be inconvenienced by having to drive a zip car? Plus with any rental car you are depending on the fact that the car will be serviced and reliable as one that you own. Plus you can’t store your shit in it. And depending on how much you use the car even with zipcar your own car will generally cost less (I just paid $460 all in for a Cherokee for the week (base was $250 but when you put all the other stuff it costs more).Lastly if there is some type of thing that happens in NYC and you have to get out quickly and others are trying to do the same doesn’t that present an issue?That said NY is an entirely different animal in terms of automobiles. You can always tell what I call “a ny car”. Because it tends to be beat to shit. When I have to drive into NYC I don’t take a car I rent a car.

          2. JLM

            .I suspect that not owning a car, even in NYC, is a big money and stress saver.No?JLM.

          3. awaldstein

            Of course I pay dearly to live in a place where not having a car is not limiting, in fact empowering.Is cool to be able to no plan and just head out, walk, subway, little need for reservation if you know your way around.

          4. ShanaC

            Up to a point, yes

  12. John Frankel

    Never accept market practice as what you should do. Always think through things from first principles. Always question.

  13. Tom Labus

    There had to be something else going on to make the SEC start re looking at what was their own language. But when you;re getting Well’s Letters you really don’t care about the big picture.There is risk everywhere.

  14. Joe Wallin

    It is really too bad that our tax law discourages the sharing of equity with workers. I am not sure why it should do that. It seems like people on all sides of the political spectrum ought to agree that sharing equity with workers is a universal good.Right now, if a company wants to give stock to an employee–there is a big tax hurdle.And now, thanks to IRC Section 409A, an option is no longer an easy thing to give either. Remember, before 409A we could grant discounted stock options. It was perfectly fine.We ought to repeal Section 409A as it applies to startups and early stage companies. What a waste of societal resources, and a huge disincentive to sharing with workers.Why aren’t our elected officials helping us out on this?

    1. Matt Zagaja

      Interesting point, Joe. My guess is that many are unaware of the issue and/or IRC Section 409A does not sound sexy in campaign commercials. Start-up founders and others in the community need to meet with their local congresspeople and other elected officials to educate them on the issues. This sounds like something that people in unions and those concerned about worker’s rights could also rally around, but again they have to be made aware.

      1. Joe Wallin

        I agree. We need to be better advocates for better laws for startups.

    2. JLM

      .Much of what you speak about is “inside baseball” tax accounting and is governed as much by rules as it is by law.When you have an administration which is dedicated to punishing achievement and success, the rules will reflect that sycophantic reality.Witness the IRS scandal — the IRS union, the President’s utterances, the political leanings of the administration (remember the two top dogs and the GC are political appointees) all shaded the operations in a certain manner.Folks have missed the fact that Lois Lerner — she of the 5th Amendment invocation — used to work at the FEC (Fed Election Commission) and saw first hand the effectiveness of political free speech and fundraising.When she could not win those confrontations at the FEC, she did exactly that in her new duties at the IRS — she invoked the Four Corners and froze the 501(c)(4) organizations out of the 2012 election cycle.When you have an admin that punishes wealth creation, accomplishment and success, all of its minions do likewise.JLM.

      1. Richard

        Here is the closest thing to a free lunch (this actually happened):1) Buy a first class fully refundable ticket with an airline for a late evening flight.2) Have lunch at their First Class Lounge.3) Exchange the ticket for the following day.Repeat.

  15. howardlindzon

    Obviously you don’t understand Gold

      1. howardlindzon

        i was being sarcastic…sounds like i need some fine tuning…

  16. Glenn Horowitz

    Horowitz’s story makes little sense, leaves a big narrative hole in the reader. A person for whom he clearly has intellectual and emotional respect very very publicly recommends a compensation methodology at a major American company; sheleaves that company and hires on with Horowitz’s firm where she recommends the same practice—one a major forcein American accounting has vetted and approved. The Feds step in; she gets a Wells letter; she graciouslyexits Horowitz’s company to avoid causing additional stress in an already stressful situation; and then the newly-named Michelle ends up in the slammer for 3 and a half months. For what? A disagreement over how to interpretand act on an opaque securities code? Horowitz even admits that his GC had to read and think through the regulationssix times to arrive at his recommendation. There surely must be much much more to this story than was emailedacross today.

    1. LE

      Horowitz’s story makes little sense, leaves a big narrative hole in the reader.Agree. Would have liked for Horowitz to be a bit more circumspect.Michelle ends up in the slammer for 3 and a half months.As they say “a pox on both houses”.Reminds me a bit about bridgegate (Chris Christie).In other words this person who “did the nasty” was also hired and vetted by Horowitz and his team. So if you believe one part of the story you have to believe that a big mistake was made in that area.I’m sure if the GC hadn’t nixed the idea and Horowitz got nabbed the tune would be sung differently. (Which is of course what anyone (including me) would do as well nothing wrong with that..)

      1. Vineeth Kariappa

        buy the book ?!

    2. PhilipSugar

      Read the settlement: Here are excerpts. This was not simply granting at the lowest point of the month. To summarize it was not reporting, it was inflating sales numbers, it was moving money around oveseas, making up board minutes, lying on tax returns, and much more.I am sure as I said in my top comment, it started off with picking the lowest price of the month. That is not where it ended.This is why I hate reading about failure. Everybody Sugar coats it and with a last name like mine you hate that.The senior officers used hindsight to select the purported grant dates of the options, backdating the grants by over four months and making the grants in-the-money from 44 cents to $60 on the date they were actually approved. The complaint alleges that from 1997 through 2005, the accounting consequences of these benefits were then concealed as Landan, and at various times Abrams, Smith, Skaer and others, caused Mercury to fail to record over $258 million in compensation expenses and to provide false and misleading compensation disclosures to Mercury’s shareholders in filings with the Commission. Mercury and the senior executives continued the backdating for years in spite of a specific change mandated and approved by shareholders in 1998 that required the exercise price of all employee options to be 100% of the fair market value of the company’s stock on the grant date.The SEC alleges that the company backdated 45 different stock option grants to executives and employees, representing every grant made by the company to executives and employees during 1997 to April 2002. As alleged in the complaint, Skaer, or others at here direction, prepared false documentation memorializing the grants, including false written consents and meeting minutes. The complaint alleges that Landan, Abrams, Smith and Skaer each personally benefited by receiving backdated stock options that were in-the-money by, in the aggregate, millions of dollars through the fraudulent scheme.The complaint also alleges that from 1998 through 2001, Mercury, acting through Landan, Abrams and Skaer, fraudulently backdated the date of option exercises of certain senior Mercury officers. According to the complaint, senior executives were given preferential treatment and on multiple occasions were permitted to backdate the date of exercise of stock options with the company. The complaint alleges that these executives, including Landan and Abrams, backdated option exercises to dates consistent with low-points of the company’s stock, in order to minimize their taxable gain on exercise or receive more favorable long-term capital gains treatment on profits they earned upon the later sale of the stock acquired through exercise. For example, the complaint alleges that in connection with three backdated exercises, Landan was able to underreport over $18 million in gains upon exercise. In fact, Landan and Abrams at times backdated the exercise of backdated option grants. The company concealed from its shareholders the benefits reaped by these executives by making fraudulent proxy disclosures relating to officer stock option exercises, while Landan, Abrams and Skaer also concealed the backdated exercises in Forms 4 filed with the Commission.In addition, the complaint alleges that during at least 1997 through 2001, Mercury, through Landan, Abrams and others, secretly managed the company’s reported earnings per share (“EPS”) to meet or exceed financial analyst expectations by manipulating the recognition of revenue and making fraudulent disclosures concerning its sales orders. According to the complaint, Mercury stopped the shipment of its products once revenue targets for a period had been achieved, pushing the recognition of the revenue into subsequent periods. Between 1998 and 2001, this practice allowed the company to shift material amounts of revenue between reporting periods (from between $35 million to approximately $182 million in revenues). The company concealed the effect of this stop-shipment practice from the public through fraudulent and misleading statements and omissions concerning the “backlog” of its product bookings. Landan and Abrams understood that the backlog of revenues was material information that was being concealed from analysts and investors. For example, a 1999 PowerPoint presentation by Abrams to Landan and others concerning the company’s financial picture stated in a slide: “Our Hidden Backlog . . . What Any Analyst Would Love to Get Their Hands On!”Finally, the complaint alleges that during 1999 through 2005, at various times Abrams, Skaer, and others participated in the fraudulent structuring of loans for stock option exercises by overseas employees of the company in order to conceal the variable accounting consequences of those transactions, causing the company to fail to report approximately $24 million in required compensation expenses, which materially overstated the company’s reported pre-tax earnings during this period.SAN JOSE, Calif. – The former CFO for Mercury Interactive Corporation (Mercury) pleaded guilty Monday toobstructing the due administration of the Internal Revenue Service, First Assistant United States Attorney David L.Anderson and Special Agent in Charge, IRS Criminal Investigation, Scott O’Briant announced.In pleading guilty, Sharlene P. Abrams admitted that between 1993 and October 2001, she served as the ChiefFinancial Officer of Mercury, which is located in Mountain View, Calif. In April 2002, her joint federal tax return forthe tax year 2001 was filed with a Form W-2 that included a 2001 taxable income that was calculated in part on anumber of her Mercury stock options being exercised on April 4, 2001. When her joint 2001 tax return was filed inApril 2002, she knew that on April 4, 2001, she had not yet told Mercury what options she was exercising. She alsoknew that on April 4, 2001, there had not yet been a written action by the Mercury Board of Directors that formallyapproved the executive loan to pay for the options. Abrams was aware that Mercury’s Stock Option Plan requirednotice of exercise and payment before a stock option could be considered exercised. She also knew that on April 4,2001, her stock option exercises had not met those requirements. By failing to meet the requirements of the Plan,Abrams endeavored to claim an exercise date on which the company’s stock price was lower than on later dates. Thiscaused her to file a tax return and amended tax return that understated her wages and caused the IRS to assess anincorrect amount of tax for 2001, thereby obtaining a tax benefit for which she was not entitled.Abrams, was charged in a superseding information on Sept. 13, 2010. She was charged with and plead guilty to onecount of corruptly endeavoring to obstruct the due administration of the Internal Revenue Service, in violation of Title26 U.S.C. §7212(a).According to the superseding Information, in addition to her duties as CFO of Mercury, at various times between 1993and November 2001, Abrams served as Secretary and Vice President of Finance and Administration. She had theadditional title of Securities Compliance Officer as early as May 30, 1996 and was appointed a member of the stockoption committee on July 15, 1999. Mercury granted stock options to its employees and executives. Options grantedunder the stock option plans could be either incentive stock options or non-qualified stock options.According to the Superseding Information, Abrams supervised the exercises of stock options for officers andexecutives. At times, officers and executives exercised their stock options and then held the stock for a period of time,usually at least one year, to take advantage of the lower long-term capital gains tax

    3. Richard

      First day of grad school program in finance Professor and accomplished options strategist discussed Rule #1 in Finance, “Pigs get slaughtered”.

      1. ShanaC

        This just means to me that we need to write less opaque laws

    4. James Ferguson @kWIQly

      See my comment above on common sense – the fraud is glaringly obvious from first principles

  17. LE

    But in the event you aren’t going to do that, he tells a story about an options strike price plan that his CFO recommended to him. It turns out the plan was against the law and his GC stopped him from implementing it.As you know there was a big discussion on HN about that blog post.What I didn’t see (at least in the comments I had time to read) was the fact that business is about taking risk. And this very well might have been evaluated as an acceptable risk to take vs. the potential punishment. The fact that (once again from memory) 200 companies were nabbed ignores the fact that 200 companies did evaluate and decide to take that risk. Ok so in this case they got caught. How many people from those companies went to jail vs. the company or individual paying just a fine? In essence a slap on the wrist.As one commenter on HN says:The author’s council could have given him “yes” answer as easily as “no” answer – many other lawyers obviously did since 200 companies got “yes” answers from their councils. And he’d never known anything was wrong(I’m taking that statement as correct I haven’t verified it..)Anyone who wants to go back (as Horowitz did) and pat themselves on the back like a Monday morning quarterback well then fine go ahead and do that if it makes you feel better.But in business you take risks every single day. You simply don’t have the time to cover all bases and make everything 100% perfect and ritually correct. You literally have to perform triage and decide what to spend your time on by what your seat of the pants feel is.What “200 companies” tells me is what I already know. There is a ton of things going on that are never uncovered and never will be.Everybody has a different comfort level with the chances they are willing to take for sure.Lastly it’s interesting that this appears at the beginning of the blog post:Here’s a piece that I wrote for the book that did not make the cut. I still think it’s a pretty good story and gives you a flavor.So why did that not make the cut exactly? Sounds like something that is certainly good enough to make the cut in a book that you are writing, right? Typically if you are trying to get people to buy your upcoming book you put a chapter or part that will appear in the book not something that won’t make it into print. I’d like to know more about why it didn’t make the cut.

  18. howardlindzon

    helped me write a new post on howardlindzon.com (why cant i share a link in comments btw?

  19. BillMcNeely

    If you don’t have well defined black and white areas you can’t define the gray at all.

  20. Elia Freedman

    Great article by Ben. There is something else to this, too, though, and something I often worry about with young founders. Ben was an experienced guy at this point and had enough experience to know it didn’t feel right. Young founders don’t have that gut feel yet. I sure know I didn’t. A younger founder might have said great! to the older and more experienced CFO.

    1. JLM

      .The biggest dividend of experience is an inkling of knowing what you do not know and calling “calf rope” — calling for assistance or advice.Inexperienced CEOs and founders do not have an inkling of what they do not know they do not know.JLM.

      1. Elia Freedman

        Absolutely. I wasn’t ready to be a CEO a decade+ ago when I first raised money. I am now. And mostly because I understand what I don’t know and have a better sense of whom to ask.(Love your Dick Cheney impersonation, by the way!)

        1. JLM

          .Donald Rumsfeld?JLM.

          1. Elia Freedman

            Oh, yes, Rumsfeld:”As we know, there are known knowns. There are things we know we know. We also know there are known unknowns. That is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don’t know we don’t know.”

          2. Aaron Fyke

            I have no particular fondness for Rumsfeld, but to be fair I always thought that the negative media attention to that comment was unfair. He was spot-on. If you don’t know something you can make contingency plans. If you aren’t even aware of what you don’t know, then you’re a sitting duck.

          3. Elia Freedman

            I’m not trying to be negative. I thought it was well said.

          4. Aaron Fyke

            You weren’t negative, but if you remember the time that Rumsfeld said it, there was a lot of negative press making fun of “unknown, unknown, unknown, unknowns….”.

  21. Guest

    100% of all the trouble you guys talk about comes from the fact that 99.99% of people are not enlightened (unnatural). If you knew how much life-time you would safe were you enlightened (natural).

  22. Jeremy Robinson

    Thanks for the link to Ben’s blog. Great, illustrative story. My take away- not only if something is too good to be true, it probably is but…..follow your own gut instincts. And if you don’t good gut instincts on this stuff surround yourself with trusted advisors who do and who are Prudent with a Capital P, tell you the truth and don’t cut corners. Ethics is sometimes hard for business folks to get their brains around.Doesn’t matter how obscure the law is. That’s not the point here- that’s the diversion.

  23. sigmaalgebra

    Many things are good beyond belief: A largefraction of products and services common in dailylife now and more in mathematics, physical science,medical science, engineering, technology and medicalpractice standard now were 100 years ago, or 50 oreven 20 years ago, very much too good to be true.Yet we have them and accept them now.We have to give up on (1) placing limits on how goodsomething can be and (2) find some ways to separatethe golden needles from the haystack.One way is to do some applied math, that is, go insteps from real problem, mathematical assumptions,mathematical problem, mathematical derivations anddeductions, mathematical solution, computing to dothe data manipulations for the mathematicalsolution, real world interpretations of thecomputing solution, and the real solution.The math and software can be checked. Then we canargue about the assumptions and interpretations. Ifwe pass all of those tests, then we about have toaccept the correctness of the proposed realsolution.

  24. Richard

    Difference between Finance and Economics: Economics teaches “No Free Lunch”Finance teaches “Pigs get slaughtered”

  25. JWR

    Horowitz’s story makes perfect sense to me. There is no free lunch. Something of value was taken from one party and given to another. While you may be free to do this in a private company, you cannot in a public company. I believe the GC had to read it six times not to arrive at his recommendation, but to try to figure out how PWC could have possibly arrived at theirs.

  26. Pete Griffiths

    I love Ben’s posts. Hard boiled twice distilled trench warfare.



    1. Paul Dakin

      silver sofa bed tenner double mattress folds in a couch fits 3 on



        1. Paul Dakin

          u wnt it

  28. James Ferguson @kWIQly

    Back in the day I took the CIMA exams (UK management accountancy) – not because I wanted to be an accountant (who would ? ), but because I didn’t want to be “in the dark”.It seems PWC overlooked a simple concept – by “setting the stock option price at the low during the month” – they were ignoring a fundamental : Net realizable value http://en.wikipedia.org/wik…Since you cannot know you are selling at a low, except in hindsight, the sale price does not represent Net realizable value at the time of sale. Therefore this systematically moves assets off the books below their book value – sounds like fraud – looks like fraud and whooaa – it is fraud.Sometimes testing for common sense is a better proxy for good advice than relying on an “interested” expert – hence the jail sentences !

  29. Guest

    I think a good trick of the trade here, is to find yourself that good patient lawyer. Not a VC, not a board member, not your CFO, etc. (although they all can be of great help too.) But, find that good lawyer, keyword here is PATIENT, and have him give you a week primer of the DO’s and DON’Ts of basic securities law. He should know it, and know it well. If you have selected him correctly, he will know it well. Have him teach you the basics, and then stay in contact. If you have a question, consult him. Always pile on the knowledge regarding what is, and what is not, above water beyond that, but use it as your judgment base. It’s a little bit trial by fire but you can get a crash course in securities law from him/her, and measure everything else that comes across against that knowledge.

  30. Ignatius Sir Pig

    Being a guinea pig and all, I’m confused.

  31. pointsnfigures

    I saw some FAKEGRIMLOCK shirts on some African kids. Other kids were wearing Denver Broncos Super Bowl Champion shirts. : )

  32. pointsnfigures

    i was making a joke about the value of the FG t shirt…

  33. JLM

    .Any person who ever investigated the real fiduciary duties of a Board member would never serve on a Board.A quick look at Delaware law — where most public companies are chartered — would make one resign on the spot.JLM.

  34. LE

    good intention isn’t a valid defense of illegal behavior by someone with fiduciary responsibility. Someone (a number of people) with the resources and responsibility to know better made the call to interpret the law in favor of that good intention.Some of this is also the curse of being a big picture person. Not being well suited to interpret small details necessary to make correct decisions even given the advice of council.I recently got a trademark for something and wanted to go for another trademark for the same thing. I asked my quite experienced attorney whether he thought it was a good idea to issue the 2nd trademark in the name of another entity which I control (instead of the entity that got the trademark that was recently issued).. He said “sure that would be a good idea”. The question is why did I think of this and not the attorney suggest it if it is a good idea?Legal advice is a tool. It can always benefit from the perspective of a knowledgeable person with some knowledge of law but also other knowledge that is valuable in the decision making process. (BTW, not stuff read on the internet either.) My feeling is that this is not something that big picture people really possess. They don’t even know what they don’t know and many times are flying 100% non seat of the pants on the advice of professionals simply not having the time to delve into the details.

  35. fredwilson

    So true. And that’s what i do for a living

  36. sigmaalgebra

    Thanks. A keeper. A good reason notto have a Board and to remain a 100%owner, sole proprietor or Subchapter Sor maybe an LLC but not a C corporationor public corporation.I want to spend my time running my businessand making money directly from my businessand not from mud wrestling with lawyers.

  37. JLM

    .And you DO seem to be getting a handle on it, no?JLM.



  39. Joe Wallin

    Right, I am just not sure why we need it to apply to startups at all…

  40. awaldstein

    When I’m ready (which is very soon) to shop for a delivery van/SUV to retrofit with refrigeration I’ll ping you as I’m so out of the zone for this type of purchase.

  41. LE

    Do you really mean that you will buy and retrofit?http://www.ryder.com/en/tru…Also liability wise you may want to investigate having a separate llc operate the van as opposed to the main company. I’ve seen that done frequently.Also not uncommon to essentially lease a solution I would start by seeing what the usual suspects are doing (names on their trucks usually show all of that) and go from there. Unless of course you’ve already determined the best way to go is “shop and retrofit”.You may find this interesting (see “evolution of the truck”).http://reubenonrye.com/

  42. awaldstein

    I need to get up and someday actually come visit.

  43. ShanaC


  44. JamesHRH

    The big picture people are able to answer the question ‘when is a trademark useless?’ and 2 trademarks, while, you can do the math……

  45. JamesHRH

    You cannot develop good insight or strategy without details.How-why-what are all related.

  46. JamesHRH

    Having separate water fountains used to be standard…

  47. JLM

    .I am not against Boards in any form or fashion. I only caution Board members that their duties are the highest in the organization by law.Shareholders hire Board members.Board members hire CEO.Board members oversee CEO.Where many Boards are deficient is in not organizing, documenting and implementing an orderly oversight function with required reports to document their oversight.Boards are often guilty of turning a “blind eye” to their duties. This is an offense under the law as Board members are literally required to be both diligent but also curious.In your instance, it sounds like you would be wise to take advantage of an experienced CEO coach who has years of experience actually being a CEO.JLM.

  48. sigmaalgebra

    With my current project, so far I am a solo founderand solo developer. I don’t spend a lot of time inmeetings!At this point my software is in such good shape thatwhat’s left to do for the software to be ready to golive (more will be needed in gathering initial data)is less than 1% of what I have in quite good shape,as good as code the group I was in at IBM shipped asa Program Product, IBM’s highest quality softwarecategory.So far, all of the work unique to my project hasbeen fast, fun, and easy for me, a fun vacation, awalk in the park, easy.So far the greatest challenge has been getting goodenough with the available documentation ofMicrosoft’s software tools for programmers, but I’vemade enough progress with that documentation so thatit is not a problem now.In the future, when my business has grown some,there will be cash enough to hire consulting for,say, more advanced aspects of, say, Windows Server,SQL Server, the server farm LAN, and systemsecurity.I’ve seen a lot in management, and nearly all of itwas really bad. For me to do better in a smallorganization should be easier than falling off of alog. For a big organization, well, I can learn andget some help.I’ve seen arrogant, inwardly directed, processoriented nonsense, goal subordination, ignorance,gentleman C grade work, etc.E.g., at FedEx, once my software for scheduling thefleet pleased our two Board representatives fromBoard member General Dynamics, enabled a nice chunkof funding, and saved the company from going out ofbusiness, I got invited to the weekly seniormanagement meetings. FedEx founder Smith was at thehead of the table (inexpensive tables with foldinglegs) with the senior managers around the table and’staff’ worker bees like me along the wall. So, atone meeting Smith went to each manager and discussedfor a minute or so the manager’s work. In nearlyall the cases, Smith said that the manager neededmore information and asked that the information beready by the next meeting. At the next meeting,Smith again went to the managers one by one.Result: Not one of the managers had the informationagreed to at the previous meeting. Smith hung hishead.Net, Smith had all gentleman C students around thattable. My wife, Valedictorian, PBK, etc. wouldnever, ever, not once in her life, have made such amistake. That the mistakes were on the way wasobvious: At the first meeting, none of the managerstook notes on their ‘assignment’. Smith hadn’tpicked high quality people.I can pick better people than that easier thanfalling off a log. Still, Smith has been quitesuccessful.If my company gets to be a big thing, then I willneed coaching and senior managers able to handletheir parts of the work. Some of your advice therehas been amazing.I have concerns about a Board, so many that I’dprefer to have a business organization that has noBoard. E.g., if a Board got into trouble with theSEC or IRS, then no doubt as CEO I, too, would getinvolved. Big waste. A part left off a car, say,12 way, heated, cooled power seats, will never causetrouble! No Board, then no Board problems!