Posts from February 2023

The VC's Customer

I saw Dan Primack assert that the venture capitalist’s customer is their limited partners in this tweet about the Citizen app, the recap, and their VCs:

I DM’d Dan to let him know that is not the right way to think about the venture capital business.

Back in 2005, in the early days of this blog, I wrote this post on the topic.

The entrepreneur is the customer and the LP is the shareholder. That’s the only way to think about the venture capital business that makes sense to me.

https://avc.com/2005/11/the_vcs_custome/

I encourage everyone to read that post. It is one of the most important things I’ve written about the VC/founder relationship and I would not change a single word in it almost twenty years later.

#entrepreneurship#VC & Technology

What Does "Native" Mean

When a new technology comes to market, we often look for “native” applications of that technology.

What is a “native” AI application?

What is a “native” Web3 application?

I have not seen a better articulation of “native” than my partner Albert’s post from 2009 on native mobile applications.

He started out by laying out the new primitives that mobile smartphones made available to developers. In the case of mobile, he cited:

  • Location
  • Proximity
  • Touch
  • Audio Input
  • Video Input

He then went on to say that it would be the combination of these primitives, more than any individual one, that would make for native mobile applications.

And then he went on to lay out some of the applications he was seeing that were native.

If you want to figure out what the native AI applications or the native Web3 applications will be, or the native AI/Web3 applications, start by laying out the new primitives and going from there.

#entrepreneurship#VC & Technology#Web/Tech#Web3

The 83b Election

First and foremost, this is not tax advice. I am not a tax advisor and you should never take anything you read here as tax advice. If you read something here that makes you think you should take some tax-related action, please always consult your tax advisor.

With that disclosure out of the way, I would like to talk about 83b elections.

An 83b election is a choice a taxpayer can make to pay the taxes in full at the time of the grant of an asset that vests over time and would otherwise be taxed as the asset vests.

So why would you want to do that?

Well, if the value of the asset at the time of grant is quite low and the taxes would not be significant to you, you might want to make an 83b election. Otherwise, you will be taxed as the asset vests and if the asset increases in value, those taxes could be significantly larger.

Let’s look at an example. Let’s say you join a company that is very early stage and you are one of the first employees. Let’s say you are granted 100,000 shares of restricted stock that vest over four years and the current value of each of those shares is $0.10. That means the entire grant is worth $10,000 (100,000*0.1). If you file an 83b election, you are volunteering to pay the taxes on that $10,000 even though the shares vest over the next four years. The taxes on that $10,000 will depend on where you live, but will generally be in the range of $2500 to $5000.

Now let’s say you decide not to file an 83b (or worse, you never heard of an 83b election and nobody suggested you file one). Let’s say one year later, your first vesting period happens, and 25,000 shares vest. And let’s say that the stock has increased significantly in value to $1/share over the first year. That means that the 25,000 shares that have vested will generate $25,000 in taxable income to you and the taxes you will owe on them will be in the range of $6,000 to $12,000. And you still have 75% of your grant unvested and the stock might keep going up, creating more taxes for you over the next three years.

You have 30 days post grant to file an 83b election so you must move quickly if you want to do this.

The downside of the 83b election is you will have paid the taxes on the stock even though you may leave the company and not vest into any or all of it. That is the risk you are taking when you file an 83b election and you must consider that risk when you make the election. In life, there are generally no free lunches.

If you are being granted restricted stock, founders stock, or some other asset that vests over time, you should ask your employer and your tax advisor if you should file an 83b election. There is a good chance you will want to.

The reason I decided to write about 83b elections today is that USV signed onto a comment letter to the IRS last week asking them to make e-filing and e-signing of 83b elections permanent. You can read the comment letter here.

83b elections are an important tax strategy for founders and early employees in startups and they should be used more frequently than they are. And it should be dead simple to file one. Taxes are hard enough for the average startup employee to understand and comply with. We should not make it harder.

#economics#employment#entrepreneurship#life lessons

The Rebrand

I’d guess that upwards of half of USV’s portfolio companies have changed the name of their company during their lifetime. It is not hard to understand why. Founders start out with an idea and not much more. By the time they have built a product, built a team, and found product market fit, they might be doing something a bit different or a lot different than where they started out.

Most often the name change comes in the first few years when the business opportunity comes into clarity and the original name becomes an issue.

But occasionally it comes much later in life.

A good example of the later in life name change is our portfolio company Dronebase which changed its name to Zeitview this week. We made a seed investment in Dronebase eight years ago about six months after the company was formed. So the company is in its ninth year.

Zietview does aerial inspections of buildings, renewable energy infrastructure, and telecommunications systems using advanced AI/ML software. It is a high-growth business that just raised a $50mm late-stage round.

Over time, the company has adopted many techniques to acquire the imagery that they use to do the AI/ML inspections. Drones are still a big part of the mix but only when they are the best way to acquire the imagery.

So it came time for a rebrand. The Company took its time, thought a lot about it, hired a rebranding agency, surveyed all of its stakeholders, cleared all of the typical conflicts, and landed on Zeitview. They rolled out the name change this week.

I will miss the name Dronebase. I have had good success investing in companies with “base” in the name 🙂 But I am already warming to Zeitview. The two-syllable name with a well-known noun in the second spot is always a great approach to a name.

#entrepreneurship