A number of entrepreneurs have asked me recently about how VC's view founders taking money off the table these days as part of a financing. Until the past 5-10 years, this was a non-starter for most VC's. VC's want to have strong alignment of interest and complete commitment to a deal if they are going to place their capital in. VC's often use the "Cortes burning his ships (1519 at Veracruz)" analogy. If the entrepreneur has taken money out, he/she has one foot partly out the door and should things not go well, he/she has a cushioned exit. One could also argue that he/she is not as hungry or driven. It also emphasizes more the "making money" over the "changing the world" aspects of starting a business.

However, as VC's raised larger and larger funds, they began to have trouble getting large enough chunks to work as new capital (too much dilution). So, they began to encourage entrepreneurs to take money off the table as a way to get $5m, $10m or even $50m more into a deal. As word got out, more and more entrepreneurs began to push for this ranging from a couple hundred thousand to several million.

The counter to the Cortes point is that having too much "on the line" (especially when family is involved) does not lead to healthy decision making either. Too much stress and fear of loss will result in some irrational moves.

So, while I am not a big fan of entrepreneurs taking money off of the table, one could argue that perhaps letting entrepreneurs take a bit off the table is healthy as long as it ends up providing more of a safety cushion for family versus a change in lifestyle. That said, it still begs the question: if the deal is so attractive and a must for a VC, why is the entrepreneur giving up 10x on that equity sold (or is he/she)?

One of the things that has startled me throughout the Democrat nominating process is that it’s a good glimpse of what a future dominated by the Democrat party would look like. In their quest to legislate fairness into their nominating system the Democrats have found themselves with a byzantine rules structure that, in the words of George Will, is utterly rococo-esque in it’s complexity and ornamentation while creating a result that is anything but fair.

This is the party that complained bitterly about the importance of the popular vote after the 2000 election, downplayed it in 2004 while pointing to the importance of the electoral vote centering on Ohio, yet has effectively crowned a candidate that as of today is losing the popular vote among primary and caucus voters. For a party that often references disenfranchisement and non-democratic allocation of votes, indeed arbitrary in this case, it is bitterly ironic that this is exactly what they are doing with Florida and Michigan.

It would be amusing were it not for the seriousness of the event at hand. I am never hesitant about stating my conservative ideology and Republican party membership, but the truth is that I believe in democracy above party politics and hold dear the belief that a robust democracy creates the conditions upon which the United States can continue to thrive. By robust democracy I mean competitive parties that put forward the best candidates, but as I sit here in 2008 with an appreciation of the tremendous advances we have made as a country in our brief history I have to wonder if this is really the best we can do.

The chaos and vitriol seemed to confirm Democrats’ fears that they might blow an election that should otherwise be an easy victory for them. Nor did the compromise fit well with the Democrats’ oft-voiced commitment to voting rights. They decided they would give Florida and Michigan half of their voting rights — one of the more arbitrary compromises since the 1787 decision that a slave should count as three-fifths of a person — and voted to award Obama 59 Michigan delegates, each with half a vote, even though his name wasn’t even on the ballot in the state.

[From BuzzMachine » Blog Archive » The day the Democrats lost it]

I’ve decided to start a series of posts called “Why Xs Frustrate Me.” Today, X = Venture Lawyers. In future posts, X will equal academics, entrepreneurs, accountants, venture capitalists, drummers, the patent ecosystem and other targets of my affection.

Given that I used to be a start-up lawyer and that even today more than half of my friends continue in this profession, what better group to complain about? Besides, I don’t get enough negative emails per day, so this will surely help.

My two main gripes are pricing and execution:

Pricing
As everyone who hires startup lawyers knows, it’s more expensive all the time to get help. $300 hourly rates that were once reserved for partners, are now allocated to junior associates. To put this in perspective, when I started as a venture lawyer in 1998 my starting salary was $71,000. Ten years later first-year attorneys at good firms are starting at $165,000. I was eligible for a 10% bonus back then and have been told the same is true today. So with bonus the spread is $78,100 and $181,500. That is a difference of 132% in ten years! And yes, compensation at all levels in law firms has changed at least this much.

Now, what I find really interesting is to compare this compensation change versus the average amount of money that venture-backed startups raise in their first rounds. According to the latest NVCA yearbook, in 1998, the average company raised $5.1 million in their first round of financing. In 2007, the number was $5.7 million. That is a difference of 11.7% over ten years. Admittedly, in 1999 and 2000 companies were raising two and even four times the 1998 first round amounts, but these numbers quickly fell back into historical averages after the bubble burst.

One more comparison that is interesting: CEO compensation at venture-backed companies. There aren’t consistent professional studies that track the last ten years, so I’ll draw on my own experience, some of which was part of my research for a series on compensation published on AskTheVC.com. in 1998, CEO cash compensation ran was in the $150,000 to $160,000 (median) range while in 2007, the median was $200,000 to $220,000. Even taking the largest spread possible the ten year difference is 46%.  I’d also argue that the pool of world-class CEOs has not expanded nearly as much in ten years as the amount of competent venture attorneys.

So these are pretty compelling statistics, right? (If you are like me, you normally fall into the “lies, damned lies and statistics” school of thought). Well maybe, because I don’t see our companies spending 132% more in aggregate legal fees, although the charges for our counsel to help with financings has doubled during the past ten years. What I see is that our companies go the “self help” route a lot more often than the past and do not seek legal help when it actually may be a good idea to do so. Unfortunately, a lot of it ends up on my plate and I end up rendering a lot of “informal” advice. It’s not a great position to be in, as I’m far past my days of being an every-day and competent lawyer, but what can companies do when they can’t afford to call their lawyers? So today, we have the worst of both worlds – disproportionately higher legal spend when compared to other costs and less actual legal counsel on situations that would previous dictate legal involvement.

Execution
While my first gripe pertains to nearly all lawyers, this frustration is more particularized to about 50% of the venture lawyers I run across. Simply put, why can’t lawyers know when to leave well enough alone and not feel like every piece of paper needs a mark up?

Especially given how expensive lawyers are these days, why on earth would the culture of “must mark up documents to show value” persist? (Answer: lawyers make more money). Especially in the world of venture financings this is very frustrating. Ten years ago, I admit there was a lot more mystery and uncertainty in getting venture financings done. However, with the advent of the NVCA model documents collection (of which I was a draftsperson), resources like the term sheet series that I co-wrote with my partner Brad Feld and just the sheer number of trained experts in the field, financings (especially early-staged deals) are largely cookie cutter.

Then why on earth did I have to spend last week negotiating registration rights with a partner at a major law firm? In fact, I got to do that twice last week along with other stupid boilerplate language that no one really cares about. Sigh. I got to watch our money that we financed the company with being transferred to the law firm. Perhaps the most annoying comment that I heard last week was from an experienced venture lawyer who told me that he got a set of documents that were perfect and that he and his teamed “struggled” to find things to mark up because they couldn’t just say the documents were fine after round one – even though they were. He had three lawyers on the deal work on the markup.  Also last week I got to see a bill that one of our companies received from its law firm:  $72,000 for a Series A financing.  That was bad enough, but when you figured in the fact that our counsel drafted all the documents and charged close to $15,000, it was especially appalling.  These deals are not complicated.  This should not happen.

I’d like to point out that not all lawyers are like this – but at least half of them are and the problem is compounded by the compensation trends discussed above. The half that aren’t like this have learned that efficiency and reasonableness is respected more by clients than the optics of needless document revisions.

So what’s the resolution here? It’s a much longer answer than I can provide today. I’ve been working on a thesis for quite some time that the entire business model of law firms is going to have to change, or it’s going to get uglier. Eventually, venture-backed companies are going to have to move away from the traditional law firms that service them these days. In any event, law firms are going to need to realize that the fees charged to startups versus public companies and what fees are reasonable in litigation versus corporate contexts are all different and that “one size fits all pricing” will not work in the long run. If I ever finish my “Law Firm 2.0 business plan,” I’ll be happy to blog about it.

Frustration rant #1 over. Friends and colleagues, fire away…

Interesting summary of how Hollywood has changed as a business as a result of globalization. I tend to think in pretty simplistic terms when it comes to this subject, quality. Anyone who has hung out in the bar at Mantra and watched the Bollywood channel can attest to the quality of films being produced outside Hollywood.

In terms of the film biz, the U.S. used to be the engine that drove every decision. Now, it seems, the U.S. is becoming just one of the key territories in the congloms’ global gameplan as the film biz grows new muscles in other points around the globe.

[From World tips Hollywood on its axis - Entertainment News, Weekly, Media - Variety]

Posted by mobile phone:
Respected research firm Enders are predicting the UK online ad market will be £3.6bn - coming in just ahead of TV which will be £3.4bn.

They have online growing at 26% and TV declining 2.5%.

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