PART I

While I'm not an old man just yet -- even though some might say that I have my curmudgeonly tendencies, not to mention liking to get to bed hours before Letterman comes on -- I have been around the provider side of the Spend Management world long enough to see dozens of vendors move from writing their initial business plans into their formative years and later into additional stages of maturation. Such is the case with what used to be a small provider I always enjoyed talking to and catching up with, Iasta. I've known the founders of Iasta since before they knew me. When I was at FreeMarkets, Iasta initially set out to copy our full-service sourcing model (and they did succeed in undercutting us on price and winning deals from time to time, as various salespeople reminded me when asking: "Who the heck are these guys from Indianapolis.")

Back in those years Iasta's three founders were heck-bent -- that's Bible Belt / Indy speak for hell-bent -- on creating a viable business model. And while they weren't sourcing guys, they knew a good business model when they saw it. As I got to know Iasta's three founders and became friends with David Bush at the time, it became clear that the Iasta business model was evolving from one of full-service capabilities into a self-service sourcing platform (along the lines of Procuri, Bay Builder and others). Early on in this migration, Iasta competed primarily on price, but as its features and capabilities grew, they started to win deals on more than just their willingness to undercut FreeMarkets, Ariba, Emptoris, Procuri and others. In fact today, they're often among the pricier options in certain deals. But they continue to win more than their fair share of deals in the areas in which they compete (primarily e-sourcing, spend analysis and optimization).

Last week, I had the chance to catch up with Iasta at their reSource event roadshow, as it swung through Chicago. In a series of posts this week and next, I'll dig into how Iasta continues to morph as it grows at one of the fastest rates in the overall market. In this first post today, I'll tackle some of the basics regarding their history and growth, sticking to the facts and figures. But perhaps most important, as a first question to tackle, is how did three guys from Indy create a thriving business in the Spend Management world without outside investment and with little or no initial knowledge of how the sector worked?

They listened to customers, that's how. And this remains a strategy they continue to employ to this day. In fact, starting out in 2000 through 2002, they followed their customer's requests to focus on fully managed auctions. Then in 2003-2006, they rode the SaaS e-sourcing wave. And more recently, they've grown through both customer and solution diversification, in addition to pushing a core sourcing platform that continues to garner accolades from users.

Today, Iasta has approximately 100 customers using their applications. Most of these are typically Global 1000 companies. They also have 50 services clients today (with a strong overlap between the two areas). These numbers not only represent what's been a strong level of customer acquisition in recent years, but also strong revenue growth overall (which is a signal that e-sourcing and related markets aren't seeing the type of pricing pressure that many initially hypothesized they would).

In fact, Iasta has realized a trailing three-year growth rate of 256%. This includes 77% growth in 2008. In Q2 alone, they saw 121% growth between the 2008 and 2009. And they've signed 32 new clients year to date. Moreover, 27% of the recent quarterly growth has come from software license sales (which represent what over 90% of the time amounts to a perpetual annuity).

Compare these numbers with Iasta's competitors and you'll quickly realize this is a company that is on the move. Moreover, the growth is all the more impressive if you consider they've done it without any outside cash infusions. Iasta remains 100% owned by the management team. They've also not yet hit a commercial inflection point, needing to bring in a truly heavy hitter in the sales area. So in other words, not only is all of this growth truly organic and real, it's evolved without the typical investments in sales, marketing and other areas that often require millions of dollars in a Series B financing round.

Stay tuned for the rest of this series looking at Iasta's growth. Next-up: a quick-hit investigation of Iasta's platform and related sourcing services.

 

4. Lawyer's blogging backfires

A California lawyer learned the hard way to watch what you say on your blog. His posts helped earn him a suspension from law practice. But the case has an unusual twist. The lawyer in the felony trial was there not as an advocate, but as a juror. Not only that, but he had not disclosed to anyone that he was a lawyer.

Even though the judge warned jurors not to discuss the case, the lawyer wrote about it on his blog. His posts identified the judge by name and described her as "a stern attentive woman with thin red hair and long, spidery fingers that as a grandkid you probably wouldn't want snapped at you." He gave the first name of the defendant and described his alleged crimes, referring to him as "a stout, unhappy man."

If the defendant was unhappy at trial, he later had reason to smile. When the lawyer's blogging came to light, the defendant's conviction was lifted and he was given a new trial. As for the blogging lawyer, he earned an 18-month suspension from the practice of law.

3. Blogging makes bad medicine

When a doctor decided to blog his own med-mal trial, it was a prescription for trouble. The doctor, known to his readers only as Flea, was already writing his blog when he was served with a lawsuit. As the case progressed, he periodically posted about it, describing his feelings when he was served with the complaint and reported on his own deposition.

When the trial finally got underway, he continued to blog, relaying his impressions of the plaintiffs' lawyer (whom he nicknamed "Carissa Lunt"), describing his "dress rehearsal," and accusing jurors of dozing off. While he may have thought his blogging had gone unnoticed by others in the courtroom, that was anything but the case.

During cross-examination of the physician, the plaintiff's attorney – the very one the doctor had described on his blog – surprised him with the question, "Are you Flea?" Yes, he sheepishly admitted. It was, according to one news account, a "Perry Mason moment."

The next morning, the parties entered into a confidential settlement reported to be "substantial." Ironically, jurors probably had no sense of the import of the question. But it was enough to signal that the plaintiffs' lawyer was prepared to delve into the blog in open court. Given some of what Flea had written there, settlement no doubt seemed the wiser course.

2. MySpace, my downfall

When an attractive New York model sued a high-profile billionaire claiming he had pressured her into sex when she was only 16, the tabloids were in a tizzy. Soon, the story was all over the gossip pages.

But it did not take long before reporters at one newspaper discovered the model's MySpace page. Based on what they found there, the newspaper reported that she was in fact a he. It also reported a graphic description taken from the MySpace page of the model's sexual fantasy involving multiple men and women. Further snooping revealed evidence that the model may have been much older than 16 at the time of the alleged affair.

After the MySpace page came to light, the model's lawsuit against the billionaire seems to have fizzled. But the model filed a second lawsuit, this time against the newspaper that discovered the page. She alleged that the newspaper's description of her fantasy defamed her by portraying her as a "promiscuous slut."

An appellate court disagreed. Because the newspaper reported only that the model had a fantasy – not that she actually engaged in the conduct – it did not defame her, the court reasoned. "The references to the Myspace pages merely served to highlight the ambiguity regarding the sexual identity of the person who sued the billionaire," the court said.

1. YouTube, Your Honor

Nothing, it seemed, could derail the nomination of Sonia Sotomayor to be the first Hispanic on the Supreme Court. Nothing, that is, but the resurrection online of her own long-forgotten words.

First it was that now-famous YouTube video. It showed a 2005 speech by Sotomayor to law students interested in becoming law clerks. The difference between serving in a trial court and in an appellate court, she told them, is that a "court of appeals is where policy is made." Conservatives jumped on the comment, saying it showed her to be a judicial activist.

As if that was not enough of a blow, next came the resurfacing of her 2001 speech, published by Berkeley's La Raza Law Journal, in which she said, "I would hope that a wise Latina woman with the richness of her experiences would more often than not reach a better conclusion than a white male who hasn’t lived that life."

Fortunately for now-Justice Sotomayor, neither her comment about judicial activism nor her "wise Latina" remark was enough to derail her track to the nation's highest court. But both serve as reminders that no matter what might be at stake, in the age of social media, the shadow of one's past is never far behind.

7. When jurors tweet

After jurors in an Arkansas case awarded a verdict of $12.6 million against a building materials company, one juror boasted on Twitter, "I just gave away TWELVE MILLION DOLLARS of somebody else's money." And that was only one of at least eight tweets he posted from his cell phone during the trial. Another said that the company would "probably cease to Exist, now that their wallet is 12m lighter."

Upon learning of the juror's tweets, the company promptly moved for a new trial. The defense lawyer contended that the juror's tweets showed he "was predisposed toward giving a verdict that would impress his audience."

Surprisingly, the trial judge denied the request for a new trial. The judge conceded that the juror's posts were in bad taste, but he ruled that they did not amount to improper conduct sufficient to warrant a new trial. Given that it is otherwise out $12 million, we have to assume the defendant will appeal the case and ask a higher court to weigh in on the twittering juror.

6. Two-faced on Facebook

You never know who may be watching you online. Remember that the next time you give a judge a made-up excuse for why you need a continuance.

A lawyer learned that lesson when she told Susan Criss, a trial judge in Galveston, Texas, that she needed a continuance because of a death in her family. Criss recounted what happened in a recent speech for the American Bar Association Judicial Division that was reported by the legal newspaper Texas Lawyer.

Having already given the lawyer a one-week continuance, Judge Criss was surprised when the lawyer's partner came into court and said that this time she would need a full month. But as a regular user of Facebook, Judge Criss had a surprise of her own up the sleeve of her judicial robe.

"I knew from her bragging on a Facebook account that she had been partying that same week," Criss said of the supposedly grieving lawyer. The judge told the surprised partner about what she had seen on Facebook. You can guess what she said about the continuance.

5. Careful who you 'friend'

While meeting in chambers with the judge during a North Carolina child-custody trial, the conversation turned briefly to Facebook. The wife's lawyer did not use it, but both the husband's lawyer and the judge did.

That evening, the judge logged on to Facebook and "friended" the husband's lawyer. As the trial proceeded, the judge and the lawyer commented about it to each other through their Facebook pages. At one point, the lawyer posted, "I have a wise Judge."

After the case ended, the wife's lawyer found out about the "friendship." She immediately moved for a new trial and for the judge's disqualification. The judge promptly removed himself from the case and the wife got a new trial.

The judge got something too – a lesson in judicial ethics in the form of a public reprimand from the state's Judicial Standards Commission. It seems his Facebook messages violated that irksome little prohibition against a judge engaging in ex parte communications.

What happens in Vegas stays in Vegas. The same is not true of what happens online. With increasing regularity, litigants, lawyers, witnesses, jurors and even judges are seeing their online activities come back to haunt them in court.

This month, Bullseye brings you the best of the worst – 10 of the most outrageous examples of people caught in the courtroom by what they did on Facebook, Twitter or elsewhere online.

Next month, we will tell you how to participate in social media safely, so that your online activities don't get you in legal hot water.        


10. Counting keystrokes
Mary Mack, corporate technology counsel for the e-discovery company Fios Inc., once worked on a personal injury case in which the plaintiff claimed that his injuries left him unable to use his hands for anything but minimal activities. Searching the Web for information about the plaintiff, the defense team discovered that he was a blogger. Not only was he a blogger, but he was a prolific blogger.

Had the defense counsel simply confronted the plaintiff with his numerous blog posts, that probably would have been sufficient to discredit him. But the defense team went an extra step. It downloaded all his blog posts and calculated precisely how many keystrokes would have been required to write them all.

When the defense confronted the plaintiff with that number at trial, the plaintiff's facial expression no doubt said even more than his well-functioning fingers ever could.       


9. Texting is a no-no
During a video deposition, the deponent, an executive of the company being sued, was in California. Plaintiff and defense counsel were in New Jersey. The deponent's pro hac vice attorney was in Michigan. The video stream showed deponent and his PHV attorney from only the chest up.

Turned out, deponent and his counsel were busy below chest level, texting each other throughout the deposition. No one might ever have been the wiser, had PHV counsel not inadvertently addressed one of these text messages to plaintiff's counsel.

Needless to say, plaintiff's counsel went straight to court, demanding to see the text messages. The defense fought their release, arguing attorney-client privilege protected them. A federal court in New Jersey sided with the plaintiff and ordered the text messages handed over. Texting was no different than passing notes, it ruled, and violated the Federal Rules of Civil Procedure.   


8. Twittering from the bench
A magistrate in England found himself steeped in hot water after it was discovered that he was "tweeting" about his cases. It all came to a boil after another magistrate discovered the tweets and complained.

The tweets came after the magistrate was called in on a Saturday to hear bail applications for defendants arrested the night before. "Called into Court today to deal with those arrested last night and held in custody," he tweeted. "I guess they will be mostly drunks but you never know."

He continued to tweet as he heard the cases of three men accused of robbery. For example, one tweet said, "1st defendant. Conspiricy to rob TSB of £500,000. Good start - wrong previous convictions presented." He later concluded with this tweet: "Finished hearing bail. 3 refused for planning robbery of £480,000 from Tsb in Dawley, Telford."

When the magistrate learned that his tweets were to be investigated by a judicial advisory committee, he chose instead to resign from the bench. But even as he resigned, he maintained he did nothing wrong. Where better to defend himself but on Twitter, where he posted this explanation: "I didn't tweet whilst sitting in court but in the retiring room during the break and at the end of the hearing."

 

TechPoint promotes technology-based enterprise and economic development through lobbying and government advocacy, educational and networking programs, and strategic economic development initiatives. TechPoint seeks growth in Indiana's emerging technology clusters, including advanced manufacturing, logistics, health and life sciences, and information technology.

The entire summit will be a great event.  Many of the topics of the summit are going to be those that I have addressed with my business law / SaaS law clients.  Check out the website and the agenda and consider attending.



 

Most entrepreneurs believe a bunch of myths about financing new companies that hinder their efforts to raise money. Here are a few:

Myth 1: It takes a lot of money to finance a new business. Not true. The typical start-up only requires about $25,000 to get going. The successful entrepreneurs who don’t believe the myth design their businesses to work with little cash. They borrow instead of paying for things. They rent instead of buy. And they turn fixed costs into variable costs by, say, paying people commissions instead of salaries.

Myth 2: Venture capitalists are a good place to go for start-up money. Not unless you start a computer or biotech company. Computer hardware and software, semiconductors, communication, and biotechnology account for 81 percent of all venture capital dollars, and 72 percent of the companies that got VC money over the past 15 or so years. VCs only fund about 3,000 companies per year and only about one quarter of those companies are in the seed or start-up stage. In fact, the odds that a start-up company will get VC money are about 1 in 4,000. That’s worse than the odds that you will die from a fall in the shower.

Myth 3: Most business angels are rich. If rich means being an accredited investor — a person with a net worth of more than $1 million or an annual income of $200,000 per year if single and $300,000 if married — then the answer is “no”. Almost three quarters of the people who provide capital to fund the start-ups of other people who are not friends, neighbors, co-workers, or family don’t meet SEC accreditation requirements. In fact, 32 percent have a household income of $40,000 per year or less and 17 percent have a negative net worth.

Myth 4: Start-ups can’t be financed with debt. Actually, debt is more common than equity. According to the Federal Reserve’s Survey of Small Business Finances, 53 percent of the financing of companies that are two years old or younger comes from debt and only 47 percent comes from equity. So a lot of entrepreneurs out there are using debt rather than equity to fund their companies.

Myth 5: Banks don’t lend money to start-ups. This is another myth. Again, the Federal Reserve data shows that banks account for 16 percent of all the financing provided to companies that are two years old or younger. While 16 percent might not seem that high, it is 3 percent higher than the amount of money provided by the next highest source — trade creditors — and is higher than a bunch of other sources that everyone talks about going to: friends and family, business angels, venture capitalists, strategic investors, and government agencies.

Insights On SaaS Startups

1.  You are financing your customers.  Most SaaS businesses are subscription-based (there’s usually no big upfront payment).  As a result, sales and marketing costs are front-loaded, but revenue comes in over time.  This can create cash-flow issues.  The higher your sales growth, the larger the gap in cash-flows.  This is why fast-growing SaaS companies often raise large amounts of capital.  My marketing software company is an example.

2.  You’ve got operating costs.  In the shrinkwrapped software business, you shipped disks/CDs/DVDs (or made the software available to download).  There were very few infrastructure costs.  To deliver software as a service, you need to invest in infrastructure — including people to keep things running.  Services like Amazon’s EC2 help a lot (in terms of having flexible scalability), but it still doesn’t obviate the need to have people that will manage the infrastructure.  For a startup, the people cost to manage the IT stuff can be significant (since the team is very small).  So, even though hardware and infrastrucutre are cheap, managing it can take a significant percentage of the startup’s time.

3.  It Pays To Know Your Funnel:  One of the central drivers in the business will be understanding the shape of your marketing/sales funnel.  What channels are driving prospects into your funnel?  What’s the conversion rate of random web visitors to trial?  Trial to purchase?  Purchase to delighted customer?  As a SaaS startup grows, a lot of leverage can be found by understanding the shape of the funnel and removing the “leaks” (i.e. where are you losing business)?  For example, if a lot of people are signing up for the trial, but very few convert to paying customers, you should dig into what the early usage pattern is.  Are people logging on at all?  If so, where are they getting stuck?  Remove the friction that is keeping customers from getting value and you’ll unlock some revenue.  Do this at all stages of the funnel (focusing on the easy stuff first).

4.  Install Knobs and Dials In The Business:  One of the great things about the SaaS business is you have lots of aspects of the business you can tweak (examples include pricing, packaging/features and trial duration).  It’s often tempting to tweak and optimize the business too early.  In the early days, the key is to install the knobs and dials and build gauges to measure as much as you can (without driving yourself crazy).  Get really good at efficient experimentation (i.e. I can turn this knob and see it have this effect).  As with most experiments, don’t change too much at the same time (even though you think several different things will all have positive effects).  The reason is simple:  If you change more than one thing, you won’t really know what really happened.  Unless you have lots of data points, simple tests are usually better.

5.  Value the Visibility:  One of the big benefits of SaaS businesses is that they often operate on a shorter feedback cycle.  You’re dealing in days/weeks/months not in quarters/years/lifetimes.  What this means is that when bad things start to happen (as many experienced during the start of the current economic downturn), you’ll notice it sooner.  This is a very good thing.  It’s like driving a fast car.  Good breaks allow you to go faster (because you know you can slow down if conditions require).  But, great visibility helps too — you can better see what’s happening around you, and what’s coming.  The net result is that the risk of going faster is mitigated.

Enterprise 1.0 occurred during the great mainframe expansion that began in the early 1950's and ran until the minicomputer revolution in the early to mid 1970's. Enterprise 1.0 was characterized by "Big Iron" mainframe computers with a few thousand dedicated connections to the machine, and once-a-day batch processing. IBM was dominant in this field with several other players that together were referred to as "IBM and the Seven Dwarfs." The dwarfs were Burroughs, UNIVAC, NCR, Control Data, Honeywell, GE and RCA, later after mergers referred to as "IBM and the BUNCH" (Burroughs, UNIVAC, NCR, Control Data, and Honeywell). Operating and application software were initially written in-house by programmers dedicated to their mainframe systems, until mainframe adoption spread into most large enterprises in the late 1950's and early 1960's.

At that time, independent software companies emerged to write specific applications. The Computer Usage Corporation (CUC) was founded by two former IBM employees in 1955, and by 1967, CUC had 700 employees in 12 cities. The Systems Development Corporation (SDC), a division of the RAND Corporation, was formed in 1956 to develop a large air defense system. SDC employed hundreds of programmers and was referred to as "programmer university". The Computer Sciences Corporation was formed with five founders in 1969, and had 68,000 employees by 1990. Most of these early entrants into independent software development were formed by programmers writing custom programs for individual customers. By the mid-1960's, however, independent software companies began developing and marketing software packages that could be used by many different types of customers. One innovator in this era was Informatics, which wrote and sold the hugely popular Mark IV database in the mid-1960's.

Although minicomputers were developed in the 1960's, their widespread adoption in the 1970's marked the flourishing of Enterprise 1.0. Digital Equipment Company, formed in 1964, was the first successful minicomputer maker, but other companies along Massachusetts route 128 joined in the growth of the minicomputer market during the 1970's: Data General, Wang Laboratories, Apollo Computer, and Prime Computer. Tracy Kidder won a Pulitzer prize for his non-fiction book The Soul of a New Machine, detailing the development of Data General's minicomputer. In 1984, there were 91 minicomputer companies in the United States. By 1990, there were less than 10.

The last hurrah of Enterprise 1.0 was the flourishing of software companies developing products for the minicomputer market. Some names were American Software (1970), Tesseract Systems (1970), Walker Interactive Software (1971), ASK Computer and Ross Systems (1972), Compuware (1973), Cyborg Systems (1974), Computer Associates and SAS Institute (both 1976), and Candle Corporation, J.D. Edwards, Oracle Corporation, Softool (all formed in 1977). The most successful enterprise software at the time was Computer Associates, which acquired dozens of software product companies. A well-known pioneer during this period was John Cullinane who in 1968 founded Cullinane Software, which was the first software product company to go public, in 1978.

The PC platform was the death knell for minicomputers as client-server architecture took over the enterprise in the early to mid-1980's, heralding Enterprise 2.0. Enterprise 2.0 was marked by data continuously available and updated, millions of connections to the network rather than mere thousands, and data available from the network almost anywhere, rather than just at a terminal connected to a mainframe or minicomputer. The client-server architecture required entirely new software at the system level, management level, and at the client level. With decentralization and distribution, the advent of networks, and Marc Andreesen's Mosaic user interface to the Internet (later commercialized at Netscape), Enterprise 2.0 was at its height, and another flourishing of enterprise software companies took place. There were not only Netscape, Microsoft, Oracle, Peoplesoft, Sybase, Informix, Platinum Technology, BMC, BEA, and Red Brick, but also Arbor, Aurum, Broadvision, Scopus, Simware, Sun's Java platform, and hundreds of other companies offering platforms, management software (e.g. Remedy's helpdesk software), security software, enterprise applications, and of course even client-level applications. The industry consolidated again in fits are starts over the next decade, accelerated by the recessions in 1990-91, the mild slowdown in 1994-95, and the tech bust of 2000-2002.

Today, the software industry is at the threshold of Enterprise 3.0, where data is continuously updated and available all the time from multiple devices anywhere in the world, with billions of connections to systems and users through online networks that are not tethered to a specific enterprise's system. Saas and Cloud computing are part of Enterprise 3.0, and cloud vendors are capitalizing on the infrastructure needs of the new paradigm. Enterprise 3.0 is characterized by vendors solving highly specific problems and providing highly customized solutions for customers by bringing together just the resources needed for that solution, and doing so on a model where almost all the infrastructure and development are outsourced in one form or another. The hosting of the data may be outsourced to a hosting company, the software development might be outsourced to a development team, other software might be purchased on a Saas model, and storage might be purchased on a terabyte basis from a cloud vendor. The ability to collaborate and affiliate easily are central to effecting these solutions for customers and making money in Enterprise 3.0.

There is a flourishing of SaaS, cloud, and infrastructure vendors filling market spaces in new Enterprise 3.0 sectors. Companies like Cast Iron Systems, Cloudera, Corticon Technologies, Gridapp Systems, Instantis, Kace, Marketo, Mobclix, Nirvanix, SOA Software, SmartVault, Vkernel, Wize, and Zetta are a few of the companies penetrating the multitude of new segments opened up by the Enterprise 3.0 paradigm. Many of these companies have received venture funding, and the venture capital community is once again very interested in enterprise software, albeit looking for specific niches that each venture group perceives as potentially high growth. Fortunately, Enterprise 3.0 offers a superabundance of these niches for investment capital. Accordingly, venture capital is alive and well in the new enterprise software market, and that is reason for optimism in the enterprise software industry.

In addition to covering the basics of Twitter, this easy-to-understand guide quickly moves on to techniques for incorporating a Twitter strategy into your marketing mix, combining new and old media, building your network, using Twitter tools, and measuring your success.

Nina Yoder was a University of Louisville nursing student. She posted a blog post to MySpace entitled "How I Witnessed the Miracle of Life” that describes her first-hand observations from a school assignment to go watch a patient-mother giving birth.

Even if Yoder’s blog post was intended to be tongue-in-cheek, I can see why the blog post was so controversial. As just one example, the blog post repeatedly refers to newborn babies as "creeps." The court does not have kind words to describe the blog post, calling it "vulgar," "distasteful," "offensive," "crass and uncouth," and an "abject failure" as an attempt at humor. My personal take is that the blog post was, at best, ill-advised. I really can't imagine when I would want to work with a nurse who calls my baby a "creep," even if in jest, and (as discussed below) the amount of detail Yoder disclosed about her patient shows a reckless disregard for the confidentiality we expect from medical professionals.

When University of Louisville nursing school administrators discovered the post, they expelled Yoder from the nursing program on the grounds that she violated two contracts: the student honor code and a confidentiality agreement.
The linked opinion above quotes the entire blog post.

The defendants allege that the blog post disclosed "the following identifying information about the birth mother: the number of her children; the date that she was in labor; her behaviors; the treatment that she underwent (an epidural); her reaction to labor (vomiting); and the reactions of her family." The court says that none of this information was personally identifiable to the patient or her family because the post "does not disclose the birth mother's name, address, social security number, or the like. It does not disclose her age, race, or ethnicity. The Blog Post does not contain ‘financial’ or ‘employment related information’ about the birth mother. It does not disclose where she was in labor."

1. For small-business owners, it’s not worth the time or effort to secure intellectual property rights.

2. Once I get a trademark, my brand is safe.

3. Having a patent gives me the right to produce something.

4. If I have a patent or trademark in the United States, I don’t need to worry about the rest of the world.

5. People who collect patents but don’t actually make anything are “patent trolls,” parasites who can make money only by filing lawsuits against real businesses.

Another term that impacts the price is the size of the option pool.  Most VCs invest in companies that need to hire additional management team members and sales and marketing and technical talent to build the business.  These new hires typically receive stock options, and the issuance of those stock options dilute the other investors.  In anticipation of those hiring needs, many VCs will require that an option pool with unallocated stock options be created prior to the money coming in, thereby forming a stock option budget for new hires that will not require further dilution after the investment.  In our $4 million invested in a $6 million pre-money valuation example above (known in VC-speak shorthand as “4 on 6”), if the VCs insist on an unallocated stock option pool of 20%, then the investors still own 40%, there is a 20% unallocated stock option pool at the discretion of the board, and a 40% stake is owned by the management team.  In other words, the existing management team/founders have given up 20% points of their ownership in order to go towards future hires.

This relationship between option pool size and price isn’t always understood by entrepreneurs, but is well-understood by VCs.  I learned it the hard way in the first term sheet that I put forward to an entrepreneur.  I was competing with another firm.  We put forward a “6 on 7” deal with a 20% option pool.  In other words, we would invest (alongside another VC) $6 million at a $7 million pre-money valuation to own 46% of the company.  The founders would own 34% and we would set aside a stock option pool of 20% for future hires.  One of my competitors put forward a “6 on 9” deal, in other words $6 million invested at a $9 million pre-money valuation to own 40% of the company.  But my competitor inserted a larger option pool than I did – 30% – so the founders would only receive 30% of the company as compared to my deal that gave them 34%.  The entrepreneur chose the competing deal.  When I asked why he looked me in the eye and said, “Jeff – their price was better.  My company is worth more than $7 million”.