409A Valuations

Don Dodge wrote about a very dry but critically important issue facing private companies that issue equity to employees… 409A valuations:

IPO bump? – If private investors have already bid up the valuation, will there be an IPO jump in the stock price? Doubtful. This breaks the conventional wisdom about pre-IPO stock options. Companies are required to price their employee stock options close to the “market valuation”. It is called the 409A Valuation requirement from the IRS.

We are in a really interesting period where tech IPOs are few and far between and the effect has been for a secondary market to develop for employees of high growth companies to tap into in order to realize actual value from their stock options. This isn’t shocking or new, investment banks have schemed with stock option holders for years and there is nothing wrong with this practice, legal or otherwise.

You may recall that back in the 1999-2001 timeframe it was popular practice for option holders who were in a lock-up period following an IPO to use a short process to borrow their company’s stock from other investors and sell it with the promise that they would forfeit their locked up stock when the lock up expired. Good deal for employees and a good deal for investors. The secondary market that has emerged in our current period is simply a response to market conditions that frustrate liquidity.

The big change between then and now is that the Federal government in it’s infinite wisdom has created an encyclopedia of processes under the rubric of transparency and fairness that ultimately ends up being neither transparent nor fair. 409A is just one of those processes and I agree with Don (and Brad before him) that this will have dramatic consequences for private companies aspiring to tap the public markets.

I say 409A isn’t fair or transparent and the reason it is not fair is precisely because it isn’t transparent… in order to get a 409A valuation you have to hire someone else to do it and as any private equity investor will tell you, valuing a company is more art than science. The unfairness of 409A is a result of the costs, real and opportunity, that it imposes on a company because these valuations always come in much higher than expected and the negotiated valuation still ends up depriving wealth opportunity for  new employees who find their newly acquired options much less attractive financially and from an AMT standpoint.

2010 Election – How I’ll Vote

Every 2 years I publish my personal voter guide, here’s the 2010 edition.

12th Congressional District (my district)

The only choice is Jackie Speier and all I can say is that she is no Tom Lantos (RIP). I’ll leave the box unchecked.

Proposition 19: Legalize marijuana possession

How I’ll Vote: NO


I really don’t care about legalizing marijuana… while we are at it we should lower the legal drinking age to 18 in an effort to deal with binge drinking. My opposition to this proposition is not ideologically based on opposition to marijuana… I oppose this measure because of the cynical way it’s being sold, which is that the financial rewards of taxing it will be a boon for the state. I disagree.

First and foremost, this proposition specifically restricts the state from taxing and regulating marijuana transactions, instead giving this power exclusively to local counties and cities. However, in exchange for the power to tax, local agencies must establish a regulatory regime that goes well beyond the transactional aspect, for example enforcing THC limits, and when revenue from taxes does not meet the expenses incurred by regulatory enforcement then the taxpayers must cover the deficit.

If you want to get high that’s your business but when I am on the financial hook for making sure you get the “good stuff” then it’s my business and no thanks.

Prop 20: Remove redistricting responsibilities from the Legislature

How I’ll Vote: YES


Gerrymandering of districts has been a disaster for California, it’s the primary reason why even in a historically anti-incumbent election season fewer than 20% of California’s seats will turn over. The legislature has disregarded what is good for a democracy in favor of what is good for them.

Prop 21: Vehicle surcharge for state parks

How I’ll Vote: NO


Have you registered a car in California lately? It’s already massively expensive when you add the registration fee, the license fee, surcharges, and all the other nickel-and-dime attachments. Sales tax and registration costs add over 12% to the cost of a new vehicle and it needs to stop.

I love CA parks and frequent them often but the park system in California is an example of what happens when a bureaucracy becomes entrenched… it becomes entitled. Do with less, I say.

Prop 22: Prohibits the State from taking transportation funds for other purposes

How I’ll Vote: NO


I get it… gas tax money and transportation money should be used for the intended purposes. The fact that the Legislature can channel that money into other budget priorities and not be held accountable is a problem, ’nuff said.

As much as I love the intent of this proposition the fact remains that we, the voters, send people to Sacramento to do a job and increasingly we, the voters, are micromanaging the process. It’s not helpful. Don’t like what the Legislature is doing, then I say vote out your local Assembly representative and State Senator. That will send a far more pointed message to Sacramento than putting locks (that will end up being circumvented anyways) on the piggy bank.

Prop 23: Suspends AB32

How I’ll Vote: YES


AB32 is bad law and as I wrote about at length here, California’s future depends on Californians having jobs. AB32 will have disastrous consequences for the state’s economy and an ongoing series of scandals involving CARB only reinforces my view that this is a rogue agency that is no longer acting in the interests of Californians broadly.

Prop 24: Repeals legislation allowing businesses to lower tax liabilities

How I’ll Vote: NO


The California Teachers Association is behind this proposition… so basically my view is that if the CTA is in favor of something then it’s bad for me.

Prop 25: Majority vote to pass the budget

How I’ll Vote: YES


This is a measure I am voting in favor of for admittedly cynical reasons. The CA budget process is broken but not because of how many vote it takes to get it passed… and it won’t get fixed if legislators stop getting paid their salary until it is passed. The problem, as I see it, is that there is no political penalty that legislators pay as a result of poor performance. With their districts secured and the ability to blame the other side, they keep getting re-elected. If what it takes to achieve real political overhaul in Sacramento is a budgeting process that will most certainly result in more fiscal dysfunction, then maybe that isn’t a bad thing.

Prop 26: 2/3 vote for taxes AND fees

How I’ll Vote: YES


I realize that my position on this may seem at odds with what I just wrote about Prop 25, but hear me out. Basically I am frustrated, as many people are, with state and local governments backdooring tax increases on me by calling them fees. More significantly, by giving state agencies the power to levy fees we have created a system where agencies not directly accountable to voters have the power to tax and that’s not fair or democratic. The power to impose fees on the citizenry needs to be checked, this measure is a step in the right direction.

Prop 27: Eliminate the State Commission on Redistricting

How I’ll Vote: NO


This proposition is a direct assault Prop 20 and if passed will allow politicians in Sacramento to retain the power to draw district boundaries and perpetuate the status quo. If you are in favor of Prop 20 then you are by default against Prop 27.


Someone commented that I neglected to cover the Whitman/Brown and Fiorina/Boxer races. The idea that Brown could become governor again is terrifying to me but Whitman really fails to connect and on top of that she displays the worst political tendencies when it comes to taking a stand on issues… basically she is like Schwarzenegger, she talks a big game but doesn’t seem to have the political will to see it through. Boxer is a truly disappointing Senator having spent 18 years representing California in the U.S. and with nothing to show for it. Fiorina can do better.

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China Complains About Currency Manipulation (really)

It’s always ironic that a country with a fixed exchange rate, which many would argue is a rate set well below what the market would in order to feed their export economy, then levels the charge of currency manipulation against another.

This does shine a spotlight on a serious issue which is the relationship between global commodity prices and the value of the U.S. Dollar. Despite global demand in decline commodity prices have been increasing as a result of the historically low value of the USD. It also doesn’t help that Chinese companies exporting to the U.S. are being paid in dollars.

“Because the United States’ issuance of dollars is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation. The uncertainties of this are causing firms big problems,” Chen was quoted as saying by the official Xinhua news agency.

Gartner: Benioff and the Cloud

Gartner hosted there big client conference this week and it was interesting that they named cloud computing as a key strategic technology for 2011 (yeah, really going out on a limb) while also bringing Marc Benioff on as a keynote.

Benioff is one a very small number of “super founders” who still retain CEO rights for their company, and in most of those cases the individual in question elicits a binary response among the people who follow such things… as in you either hate them or love them, in between is not possible.

Regardless of how you feel about Benioff the fact remains that he has been transformative in enterprise software to a degree that few could ever claim, and his view of traditional on premise enterprise software super vendors sums up what many intuitively believe, that the massive and increasingly bolted together vendors are all about the status quo and resisting inevitable shifts.

Does Paper.li Break Twitter?

I love Paper.li, it’s one of the most innovative and useful services I have seen in a long time. I actually look forward to people I follow coming out with their “The xyz Daily is Out” tweets because they are great information discovery tools. In addition to Techmeme and Feedly various Paper.li editions have become a primary tool for me to find information relevant to my interests and to business markets I cover.

However, I wonder if Paper.li breaks a fundamental aspect of Twitter, which in the idea that you should follow large numbers of people. Paper.li works best when the person who is putting out their Daily has a well curated list of people they follow, in which case the the daily edition has a tight topic focus and high quality links.

My paper.li suffers from the fact that I have an interest in 4 distinct content memes: tech, finance, public policy, and odd news. As such, I post about all 4 topics and tend to follow people in each area, however I don’t follow a lot of people and furthermore I actually manage who I follow with an eye to quality. I haven’t decided whether or not my diversity of interests as represented in my Paper.li Edition is a good thing or not… but ultimately it’s not up to me to make that determination but rather the people who follow me.

The process also depends on link sharing so people who share a lot of links, like me, are more likely to show up in Editions and while I am not sure how the links are selected I would imagine there is an analysis of link clicks that drives part of the automatic editing process, which could lead to a law of increasing returns scenario for popular links.

I realize that much of this post is “thinking out loud” speculation however I can’t help but feel that Paper.li achieves something that most applications and services built on Twitter (and Facebook) fail to achieve, which is that it dramatically alters what you, as a user, see as the primary value in the network. Paper.li is transformative, don’t be surprised to if they get acquired by Twitter at some point… such an acquisition rises to the level of being totally obvious.

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What Jobs Said About What TweetDeck Said

Interesting that Steve Jobs went on a tirade about Google in yesterdays earnings call. He mentioned about “Twitterdeck” (apparently referencing Tweetdeck) and their Android app, which they revealed a pretty amazing array of hardware configurations they tested against as part of their beta program.

Jobs was apparently trying to say that the fragmentation of Android (which is a legitimate issue) is bad for developers and users alike.

Here’s the full quote from TweetDeck, it’s a little less damning in their words:

We were really shocked to see the number of custom roms, crazy phones and general level of customization/hackalicious nature of Android. From our perspective it’s pretty cool to have our app work on such a wide variety of devices and Android OS variations.

Sprint Needs to Step Up: Android/Evo Error Messages

Back in July I dumped my iPhone for a new Evo from Sprint. I have enjoyed the phone (yeah the battery life sucks) and services (LOVE the mobile hotspot functionality!) however there has been a single persistent problem that has been causing me grief and it’s time for Sprint to step up and fix it.

When Sprint made the Android 2.2 update available I installed it on my relatively new Evo… I had it just a few weeks. Immediately following the update I started getting “android.process.acore” error messages and a force close message where the app I was using would, well, force close (how very Mac). Sprint replaced the handset 3 times and each time following the upgrade I started getting error messages.

The last time it was replaced I told the Sprint store to just update the software and provision the handset and I would pick it up… still generating the error messages. Clearly this is not a problem with apps I may be running as the last update was done on a virgin handset by Sprint and it’s still happening.

The local Sprint store told me today that a software update that has not been previously disclosed and for which no details are available would resolve this issue, however, not surprisingly I guess, a date has not been made available.

Out of frustration I called Sprint technical support and an indignant support rep told me 2.2 was “defective” and nobody should update to it and if I hard reset my phone it would go back to the old version. Anyone who has done the hard reset knows it does not roll back the ROM to a previous system software update, and to my knowledge the only way to do this would be to root the phone and install the earlier RUU file with the appropriate utility. Irrespective of technical details, an unpublished fix that consists of going back to an earlier version of the software really isn’t a fix at all.

Sprint needs to step up, there are other people having this error messages post 2.2 and it does render the phone impaired, for example if when writing an email you get this message the email app is shut down and your message is gone with it.

PS- Apple hardware/software has problems but the defining aspect of their customer support response is that they take ownership for fixing what isn’t right.

UPDATE: My friend @mmasnick had a Google engineer look at this problem and they determined that the HTC Facebook app is the culprit. I could not remove the app as it is a default app and deleting it requires rooting the handset, however, I removed the Facebook account attached to that app and the android.process.acore error has stopped.

Google, the Wisdom of Crowds and Conventional Wisdom

I’ve been thinking a lot lately about crowdsourcing and whether or not the benefits suggested by proponents are overstated. It’s not that crowdsourcing doesn’t have value, the problem I have with it when applied to generalized questions is that the result often mirrors the conventional wisdom on any given subject. It’s not surprising, we are informed by the information environment that we reside in and with the diversity of media the leads to an ability to self-select information to reinforce previously held beliefs.

History is replete with spectacular examples of conventional wisdom that turned out to be very wrong and I’m not talking simply about long ago examples like Galileo’s challenge in convincing people the earth was not the center of the universe; anyone who watches Mad Men will know that in the 1960s the conventional wisdom was that smoking was not harmful (interestingly enough, even among doctors).

Today came the perfect example to highlight with regard to conventional wisdom, and from an unlikely place… Google. One of my Enterprise Irregular colleagues points out the supposed absurdity of Google attempting to call growth in display and mobile advertising an example of success in diversifying their business.

Let’s put aside whether or not this is actually diversification (for the record, I believe it is) and consider the criticism that Google receives for not being diversified. More pointedly, why do they need to diversify? They dominate a very large and sustainable marketplace and invest accordingly to remain on the forward edge of the technology curve, advertisers and users alike seem pretty happy with them, and most significantly, they are generating a massive amount of free cash (I’m tempted to say more than any other public company at this point but I’m not sure how financial companies stack up by comparison).

Why diversify if you can claim all those attributes? The answer is conventional wisdom has it that successful companies exist outside of the realm of a single industry or single product focus. This view is very industrial era, when car companies diversified into heavy trucks and chemical companies added plastics to their product portfolio, but it has also been used by some of histories best known technology companies to justify their expansion investments… Microsoft in gaming comes to mind immediately.

I am pretty comfortable with the idea that it isn’t essential to diversify if your market is large and growing at a rate well above the market as an average, and your economics and dominant market position are sustainable. Why would you risk the distraction?

The Leading Fill in the Blank

Perhaps no phrase in modern marketing communications is more used and more maligned at the same time than “the leading company in insert=market-here”. Everyone uses it and everyone snickers at it… so why?

I was thinking about this the other day as I  was writing some draft copy for a marcom piece and it struck me that this is such a natural way to open the lead paragraph while still leaving open the window for describing what it is that we do and why we’re better/different. Let’s take a look at the reason why it is there in the first place.

If you consider the use of this phrase you realize that it’s there for 2 very explicit reasons. The first is to stake your market very clearly to establish a line in the sand which separates you from every other vendors. Some companies will say “a leading vendor” but the majority say “the leading vendor” as if there is just one leader and it’s beyond debate.

The second reason, and ultimately the more important one, is that you are stating that your company is influential. What is influence? Ultimately influence is about being recognized as a leader that others compare themselves against, and in the technology business leadership is fleeting but influence is durable so vying for influence is a big reason why companies invest in outbound marketing altogether.

I will make an effort to not say say we are the leading vendor for anything, instead we’ll let the market decide who is the leader… but I can’t make any promises about those silly logo slides that companies use to suggest that they are substantial as a consequence of all the big name companies who use their products. One battle at a time…

Is Gap’s New Logo a Crowdsourcing Black Ops?

Here’s an interesting argument… that Gap hoodwinked everyone into signing on to crowdsource a new logo by using their decidedly crappy “new” logo as bait:

That’s right. One of the most prominent popular fashion brands is crowdsourcing its new brand logo. So the favorite last-ditch tactic of brands and causes lacking money or new ideas (or both) is apparently the brand strategy for one of the most recognized fashion brands of the last two decades. And the whole logo “redesign” was a meant to drum up media attention so Gap could engage consumers in another PR stunt to redesign its logo? We smell a contest in the near future. Free khakis for life?

It’s a plausible argument and if true means the folks at Gap are overflowing with genius. However, if it is true and they ultimately admit that this was bait-and-switch then the celebration could be shortlived because if there is one thing that consumers hate more than being cheated it is being tricked.

Brand loyalty is a precious thing and should not be traded on like this… which is why I am inclined to think that the new Gap logo is just an example of really bad design making it through a committee on the back of “compromise”.

At Get Satisfaction we recently completed a full overhaul of our brand assets (logo, colors, iconography, etc.) and I wouldn’t want to go through it again. The process is guaranteed to leave some people unhappy, internal and external, but what has to be avoided at all costs is a committee approach to design that attempts to please everyone because the only thing that really happens in that scenario is that you get something that everyone signs on to and nobody likes, and in the worst cases you are left with something as lame as Gap’s new logo.

Crowdsourcing a logo is no solution either… let’s hope that Gap just made a really bad choice.