John Stockton's Venture Capital Blog
Opinions on high tech Venture Capital Investing
Found: 3 Entries
March 6, 2007 Format for Print
1. IRS Sec. 409A Valuation Reports
  The work of the bureaucrats (aka devils)

During the past two years there has been a lot of discussion about making sure that discounted employee stock options have been properly priced relative to some unknown standard for private companies - and the new IRS penalty for getting the valuation wrong is a 20% excise tax on the misappropriated value. While this might make sense for later stage companies that are cash flow positive and potentially getting close to a liquidity event, IMHO it doesn't make much sense at all for very early stage ventures that might be years away from customer revenues.

The other bothersome aspect about these valuations are that they presume that some outside firm (typically an accounting or legal firm) will know more about how to value early stage private companies than the venture capitalists that make their living doing just that. The goal is to have a definitive source that knows how to plug numbers into a Black-Scholes spreadsheet and interpret the results. The old rule of thumb that common stock, which doesn't have the rights and preferences of preferred stock, is worth about 10% of the value of the preffered stock isn't supposed to hold up anymore in these days of CYA bureaucracy.

One of my companies recently spent about $12.5K on an outside service provider to take in a bunch of documents, answer a bunch of questions and get back a lengthy report which after all of the pain and effort concluded that the common stock price should be 10% of the preferred stock price. The funny thing is the underlying assumption that an accounting firm that has never priced a deal before suddenly can rely on a stock option value model to have a more insightful view of what a company is worth than the investors that put money into the company in an arms-length transaction. All of this defies common sense to me - but it is part of the game going forward thanks to crooks at Enron, WorldCom and many other companies. This bureaucracy amounts to nothing more than a private company tax that will affect all of us. I for one think that it is time for common sense to come back into vogue and such CYA craziness to end.

BTW - this 409A stuff was created as a part of the so called American Jobs Creation Act of 2004 - the one thing they forgot to tell us all was that the jobs they had in mind creating were those of lawyers and accountants - ones that transfer value rather than actually creating original value.

Just an opinion.

BTW - to download the outline and discount ratios of an example 409A valuation: Link

Category: Governance Finance Submitted by: John
January 12, 2007 Format for Print
2. Annual Operating Plans
  An important chore at the beginning of each year

During the past week I've reviewed Annual Operating Plans from a number of my companies, some were better than others. One of them was so good, that I thought I'd create an outline of it and post it here so others might have the benefit of the wisdom of the entrepreneurs that came up with it (LV Sensors, Inc.). The other CEOs that I work with had their own versions of the same document, but not quite as succinct or as well organized as this one. Below is a link to the Rich Text Format (RTF) version of the document, save-as to download to your machine. At some point in the future, I'll try to make Excel versions of the financial charts, but for now, the indent-organized text versions should be enough to get going with.

I also recommend that VC Firms adopt a common AOP format, which they should push down to their investments. This would make life so much easier when managing a portfolio of investments, since there would be a common format for where to find things. Until that Utopian world exists, try doing this on a company-by-company basis.

AOP Outline: Link
Category: Governance Submitted by: John
January 13, 2007 Format for Print
3. 2007 Consumer Electronics Show
  My take aways from a brief visit to Las Vegas

Displays: The race between LCD and Plasma continues at the high-end of the display market. 1080p (actually 1080 horizontal lines per vertical scan) displays were everywhere. TI finally has a version of their DMD, aka DLP, that supports 1080p through a technique they call wobulation : where they physically move the reflective die by a few microns to create the illusion of a second pixel for each mirror (actual array is 960x1080 to get to a 1920x1080 display). These units were everywhere and price points getting down to $599 retail for a full 1080p rear projection unit.

Big flat-panel displays : there were monster displays everywhere with some of the remarkable ones being 102 to 108 inches diagonal (Plasma and LCD). The image quality of these displays has reached a point where the source material is now the limiting factor, not the display.

3D Display: LG had a demonstrator 3D display that provided very good depth viewing without any glasses. I talked to their engineer and he said they did it by taking 25 versions of 2D images and sequentially replaying them through the display with special filters that allowed the image to be demultiplexed. It uses only proprietary content, but it looked great. I'm sure it will be marketed to digital signage applications for the next several years.

Micro-projectors: there were lots of pocket sized LED projectors that could display very small images (like 1 foot square) with low brightness (100 lumens). These looked OK in a dark room, but are not ready for primetime anytime soon. They were driven with LEDs and therefore the technology curve alone will make them viable in 3 to 4 years (~1000 lumens gets them into the game).

LEDs: Both pocket projectors and rear-projection displays are now starting to use LEDs as light sources. These displays have better color range (gamut) than arc lamp based displays and never wear out. In addition to the display applications, there were decorative LED apps such as desk lights, strip lighting and incandescent light replacements everywhere. One company was offering designer desk lamps that used 60 3 candela LEDs in a strip as a desk light replacement. It looked great and used only 8W of power. Unfortunately they are going after premium pricing initially - $95 each!

GPS: There GPS units everywhere : small handheld devices and larger form factor units. The interesting thing I saw was multiple vendors shipping silicon for indoor GPS (-160 dBm sensitivity). In addition to eRide and Global Locate, u-blox and SiRF have shipped silicon.

UWB: There were multiple companies displaying UWB devices of all flavors (proprietary, ISM-band compliant and MBOA). None of the displays that I saw went more than about 2 feet. I asked vendors what kind of range they were able to get and most of them said there was so much RF noise in the convention center that they were lucky to have it work at all.

Software and Content: Microsoft had their usual HUGE booth with several hundred visitors at any one time. The Windows Vista demo was compelling, but they had the usual demo glitches when they guy presenting different features found that some of them didn't work during the demonstration. He found a way to quickly switch to the next topic.

MSDN-Live: It was interesting to see the MSDN-Live products which finally started to look pretty interesting. MSDN-Live is the datacasting service that was started to feed the Spot watches. That never went anywhere, but the killer application for this seems to be integration of real time traffic information into GPS receivers. This allows roads to be color coded according to the average traffic speed and icons added to maps where there are accidents or disruptions. Microsoft charges both an up-front fee and yearly service fees for the data streams.

Sony: they did their usual focus on consumer electronics for about 3/4 of their display, but the other 1/4 was a theater showing previews of Spider Man 3. They made each viewer check their phone and cameras at the door, so there were huge lines to get in and out of the theater. It shows their emphasis on content.

Automotive Electronics: It was amazing to see a whole convention hall devoted to aftermarket automotive accessories. This hall had the best demonstrations with all sorts of custom cars (ranging from a small Lotus Elise all the way to a HUGE jacked up GMC truck). Cars with 24 low profile tires were common. Amplifie

Category: Governance Submitted by: John