My last post discussed the issue of brand proximity, by which I mean the co-existence of other identical or similar brand names for other goods or services.  I mentioned that it is not necessary that there be no other users of your name whatsoever.  Rather, there should be no other users of the mark for goods or services so similar to your own that consumers will believe there is a connection between the two products – either that they are made by the same company, or that there is some other connection such as licensing or approval of one use by the other user.

Don't be misled - in real life, she takes off the blindfold and examines your mark and your motives.

This (mistaken) belief that some connection exists between two trademarks is the key to a court’s determination of the issue of trademark infringement.  If the two trademark uses at issue are similar enough that it is reasonably likely that consumers will make such a mistake (a circumstance that is called “a likelihood of consumer confusion” in trademark jargon), then the court will find trademark infringement.  In that case, the court almost always will issue an injunction, ordering the later (or “junior”) trademark user to stop using its mark.  In some cases, the court also will order the infringing later user to pay damages to the earlier (or “senior”) user.

How does the court make this determination?  Does it try to project itself into the minds of the public?  Of course, judges cannot read the minds of the purchasing public and formulate a collective viewpoint.   Instead, the judge considers a list of factors formulated by courts in prior decisions.  The list of factors may vary slightly depending on which U.S. Circuit Court of Appeals rendered the decision applicable in your area, but the similarities greatly outnumber the minor differences.

Generally, the court will consider these factors:

Ÿ  the strength of the senior user’s mark (if the plaintiff’s mark is generic, highly descriptive, or widely used by unrelated parties, the law suit will fail);

Ÿ  the similarity of the marks themselves (often the uses are not identical – so how similar are they?);

Ÿ  the similarity of the respective goods and the trade channels through which they are advertised and sold (e.g., are both products sold through sporting goods stores?);

Ÿ  whether consumers have evidenced any actual confusion between the two uses (“Dear Sony – I bought your SONNY brand HDTV and it’s a piece of junk!  I’ll never buy anything from you again!”); and

Ÿ  what level of care the public is likely to use in buying such goods (generally speaking, cheap goods = little care, while expensive goods = greater care.) 

For obvious reasons, the court will first satisfy itself that the plaintiff’s mark is strong.  The next thing the judge will assess is the degree of similarity of the marks and the goods or services.  If they are not reasonably similar, the court will not look any further. 

Beyond these initial considerations, the most decisive of these factors probably is that of whether any actual consumer confusion has occurred.  Since the test for infringement is whether a likelihood of consumer confusion exists, a court obviously will not need to see much actual confusion before deciding that such a likelihood exists.

Another “super factor” that the court may consider is the defendant/junior user’s intention in selecting the mark.  If the evidence suggests that the defendant chose the mark with the intention that confusion occur (to provide a competitive boost, for instance, by riding on the plaintiff’s brand good will), then in some jurisdictions the court will go as far as to assume that the junior user succeeded in that effort, and find infringement.

Of course, other factors may come into play, and these factors are all indirect ways for the judge to assess the likely consumer reaction to the two brands at issue.  Usually, attorneys on both sides of the law suit will also conduct consumer surveys to try to get a direct read on purchaser understanding.  If properly conducted to avoid leading those surveyed, these surveys can be a potent tool in proving or disproving infringement.

PHOTO COURTESY OF FLICKR USER MIRA66, UNDER THIS CREATIVE COMMONS LICENSE.

When selecting a new brand name, some marketers mistakenly believe they cannot use any mark that anyone else uses.  That is not correct.  It usually is not a requirement that no one else uses the mark, for any product or service.  With some exceptions for “famous” marks, a party’s trademark rights generally are limited to the goods or services on which that party uses the mark, as well as products and services that are so similar that consumers would assume a connection between the uses.

So, for instance, two companies probably could coexist in using the mark CREST if one used it for toothpaste and one used it for windbreaker jackets.  This is because the respective goods are so different that no one would be likely to assume the uses are connected in some way.  The two brands could coexist in the marketplace without any consumer confusion.

"This CHEVROLET brand dental floss is great stuff!"

On the other hand, you would not be well advised to adopt the mark CREST for dental floss, in the face of an existing use of the mark for toothpaste.  In this case, the goods are similar enough that consumers are reasonably likely to mistakenly assume a connection between the goods – either that both products are marketed by the same company, or that the well-known CREST toothpaste brand has licensed or otherwise approved the use of CREST on dental floss.  The case might be less clear if the uses were somewhat less directly related – a CREST cosmetic dentistry office or a CREST body wash product, for instance.

You should take these concepts into account when considering new brand names.  If you have fallen in love with a proposed name, don’t necessarily cross it off your list just because someone else is using the mark on unrelated goods.  Instead, consider whether the other party’s goods are similar enough to your own to cause a likelihood of consumer confusion. 

At the same time, remember that those enmeshed in an industry may have a distorted view of what goods are related or unrelated.  A former colleague of mine once had an opponent in the computer industry assert something to the effect of, “there’s no way consumers would be confused, the products are completely unrelated – yours is a sixteen-pin device and ours is a seventeen-pin device.” 

Try to bear in mind that a court probably will consider the issue from the perspective of a consumer far less aware than yourself of the subtle divisions within your industry.  Hopefully you have hired a seasoned trademark attorney to help you down the brand selection path – this is a very good time to pay close attention to his or her advice.

Earlier I mentioned special treatment for famous marks.  A brand that is “famous” (a legal determination), is given a sort of super-protection under the trademark law, which forbids the use of that mark even for unrelated goods or services.  This is to prevent the dilution of the single meaning of the mark in the minds of the public, by “blurring” that association.  Dilution is a broad enough topic to deserve a separate discussion at a later date.  Suffice it to say, however, that it probably would be a bad idea to choose COCA-COLA as your brand name for any type of goods or services.

PHOTO COURTESY OF FLICKR USER D SHARON PRUITT, UNDER THIS CREATIVE COMMONS LICENSE.

I’ve long been fascinated by the meaning of words and their origins. Awful, for example, once meant “deserving of awe” rather than a feeling of disgust or discontent. Guess originally meant to take aim. The word sophisticated used to refer to a form of corruption. What’s more intriguing is not the path these words must have taken on their journey from their origin to their present destination, but rather that they weren’t cemented to the ground in the first place. What inertia must have been around to budge these words into motion? Years, if not decades, of misuse softened their footing until our culture took them for a ride like an unwilling passenger in a mosh pit.

The same sort of word dilution is true for “partnering”. While it’s literal translation remains the same as it has for centuries, the intrinsic value it carries in corporate life has become a shadow of it’s former self. Now, rather than it’s own discipline, the art of alliance development is likened to it’s better understood and easier to grasp relatives: sales and marketing. But alliances are neither sales nor marketing, and yet share commonalities.

Marketing are the steps taken to generate awareness of an offering. Sales are the steps taken to translate that awareness into action; the extra push to get the customer over the buying hump. Alliances, however, is the platform on which both of those activities take place.

franchising can allow your company to grow at a rapid pace and have a presence in new markets. Although there are disadvantages to franchising your business, and while not suitable for all business models, franchising is often an underutilized tool among business owners who are looking to scale their operation. Here are six reasons why you should consider franchising business.

NEWS Crecimiento Turbo Charge Your Business

One of the biggest advantages of franchising is to make things faster and with less labor cost . Youâ € ™ ll be able to focus on the recruitment of retailers and then concentrate on growing your business in your region. You can also sell franchises for an entire country or continent, and allow the franchisee to take their business to the next level.
NEWS
Reducing leverage is growing

you increase the capital base of the franchise, as the grow their businesses. A business that traditionally borrow money, and increase their debt with the growth in new markets. With a model franchise, youâ € ™ ll be able to grow their sales, grow market reach, and youâ € ™ ll also be able to see your capital strengthening, in a moment.

Avoid Equity dilution NEWS

growth of your company may be tempted to give equity to fuel growth. Although in many ways, this can work well, it means that eventually youâ ™ € re left with a small piece of the pie. Your business through franchising, youâ € ™ ll be able to grow with low levels of debt and without diluting their capital position either.

NEWS Galvanize your business against cannibalization

When you do money from each sale franchise, and even make money on operating costs (which are usually calculated as a percentage of revenues) cannibalization longer a problem for the franchisor â € “unless this is something that worries affiliates . The reason: how to gain more affiliates to make more money for licenses, franchisees can damage and even more franchiseeâ € ™ s profitability, the total income does not hurt, and then continue to prosper, even though its affiliates struggle.

limit losses NEWS

In the course of a year bad, itâ € ™ s possible to make less money, but itâ € ™ s not possible to lose money through distributors lose money. This risk is borne by them. We will charge management fees as a percentage of revenue such as income and can not be a negative number will always win a sum that the costs of management. The long-term profitability to the dealers, is essential, but itâ € ™ s good to know that you will be stronger than its competitors during periods of negotiation more difficult.

NEWSwork with a network of entrepreneurs

entrepreneurs are naturally more motivated than employees, there is an incentive to profit. You can benefit from this half of all franchise run by a businessman with a strong incentive to make their free well.

Below is my response to Tim Sykes and other SPNGE skeptics who posted numerous criticisms on another of my blog posts yesterday. You can find their posts here.

——————-

Dear Mr. Sykes and all involved,

Thank you for visiting my blog! I’ve been greatly surprised to see with such a hyped stock there haven’t been more opinion pieces floating around the internet.  Noticing the lack of analysis, I decided to do my own.  You’ve all made some very good points below, and so now it is my turn to reply.  Sorry about the whole new post, but my response wasn’t going to fit down at the bottom of the last post. I will try to be as clear and methodical as possible.

Sykes, I’ll address you first:

I still think you’re wrong. Spongetech has not used paid advertisement online in quite some time now. There are many articles recommending Spongetech, but those are mainly penny stock sites that just want to jump on the bandwagon and the excitement that is SPNG.  Could you by any chance site an example of a penny promoter who was paid say within the past 3 or 4 months? I think what you will notice searching is that either a) they weren’t paid, or b) if they report payment, they are actually reporting payment that happened last year, but hasn’t happened since (i.e. they are simply trying to maintain fiduciary responsibility).  So no, I do not think there have been paid website pumpers recently, and I do not think you have any proof for it (which, unfortunately, is what I use for my analysis).

You say that, “then the stock cracked 50% when stock promoters sold (dump).” Although I appreciate you guessing as to what happened, unless you can verify that promoters sold, as opposed to other options (i.e. panic selling, short manipulation on June 12^th that sparked stop orders), no one has any logical obligation to believe what you have claimed.

Aside from a few other nonsensical, unsupported claims you throw in there like “all the stock promotion and dilution is evidence enough,” as well as a few (admittedly funny) jokes, all you have left to say is that because SPNGE’s auditors have come under suspicion that they are guilty.  I think it goes without saying that every other company that used those auditors also have to redo their financial statements, so it is in no way conclusive that SPNGE’s numbers were cooked.

That isn’t to say that you aren’t right about something: a ton of penny stocks are shells and scams. You have proven that with your research and your results. However, I think you misunderstand where the profit motive lies with management in control of a product and patent that work, provide increased convenience, and are therefore inherently valuable. Most other scams do not have claims to HSN/QVC coverage (which by the way, Spongetech sold out immediately and was featured on the Whitney Report Top 10).  All that to say, the evidence strongly supports Spongetech at least in this way being radically different than the normal penny stock company. You have failed to take this into account.  If you haven’t changed your mind, perhaps you would post logically consistent proof of management dilution?

Now onto some fact-checking for the other posters.

1. Hedge Crusher

Thanks for your posts. Your first claim is that the managements refusal to release the exact share structure on demand proves dilution. It does not. There are many legitimate reasons for an OTCBB company to keep that information close to their chests, as has been detailed tirelessly around the internet. One example can be found here.

You then claim that RME is bad and seem to imply that RME is the instrument of share dilution. RME’s shares, as has also has been detailed tirelessly on forums everywhere, are restricted by SEC Rule 144. Meaning: shares cannot be sold onto open market without a filing. Even further, as the SEC site states:

“Even if you have met the conditions of Rule 144, you can’t sell your restricted securities to the public until you’ve gotten the legend removed from the certificate.”

So, I don’t think RME shares have been sold onto the market, at least not from the evidence you didn’t give. In fact, it seems the opposite is true. In April of 2009, Spongetech filed a 10Q that states:

“On April 16, 2009, RM Enterprises cancelled 526,585,544 common shares to reduce the common shares issued and outstanding from 1,249,451,605 to 722,866,061 common shares. These common shares were put back into the treasury.”

So the evidence seems to suggest that, instead of diluting on the open market, Spongetech has actually bought back initial share investments in an effort to increase shareholder value. Interesting.

You then go on to say that “investors do not have a quality audit on this company.” You are correct, they do not, which I think is why on August 24^th SPNGE announced in a PR and an 8-K that,

“SpongeTech(R) Delivery Systems, Inc. (“SpongeTech”) “The Smarter Sponge(TM)”, (OTCBB: SPNG – News) today announced and filed a Form 8-K, that the Company has retained Deloitte Touche LLP (“Deloitte”) as the Company’s independent registered public accountants for the May 31, 2010 financial statement audit. Deloitte’s engagement will become effective upon the filing of the Company’s Form 10-K for the year ended May 31, 2009. Deloitte has already begun working with SpongeTech’s management team on the transition from the existing auditing firm that is completing the annual report for FY ‘09 that ended May 31, 2009. This is another step towards securing SpongeTech’s future as a world class organization.”

So interesting for a diluting company to sign on one of the world’s 5 largest and most respected auditing firms! Yet more evidence that doesn’t support your theory.

Lastly, and probably most importantly, you talk about management dilution being the reason for the Fail to Deliver count. Once again, as I’ve shown above management has proven to be concerned with shareholder welfare (buying back and retiring hundreds of millions of shares). I think the biggest problem with your argument though, is that we would all expect to see a very different Reg SHO list if what you say is true.  If penny stocks are diluting scams as often as Sykes says, then we should expect to see hundreds of OTC stocks on the Reg SHO list every day. Yet there are only 31 out of the thousands and thousands of OTC and Nasdaq stocks.

It just doesn’t add up. Once again, observable, verifiable evidence on my side, and not yours.

2. Reaper

Thanks for citing Universal Express. Unfortunately, USXP is not SPNGE. It’s as simple as that.

3. Kawatan Trader

How about you read the rest of the report which states that SPNGE canceled about 500 million shares? OTCBB companies almost always have to increase share structures. It is when that is all they do that your type of skepticism is warranted.

4. NGB

I appreciate your response. Personally, I don’t think I’m naive, but I’m grateful for your thoughts anyway. In any case, we will see who is right soon. I may be wrong, I freely admit that. Sykes may have a lot of other examples of crashed penny stocks, but stock abc does not = stock xyz. It is apples and oranges.

—————

Those are my thoughts and my reply. Feel free to respond. I appreciate everyone posting and hope some may find this beneficial. Good luck to all (even Sykes!).

Every week I read thousands of blog posts. Here, for your weekend enjoyment, are some highlights from my recent reading, for you.

	On Starting Up… http://www.markpeterdavis.com/getventure/2009/09/common-antidilution-structures.html Understanding anti-dilution structures.
	On Design & Product Experience… http://www.epikone.com/blog/2009/09/08/tracking-ero-result-searches-in-google-analytics/ Finding value in tracking the experience of Zero Search Results.
	On Modular Innovation… http://mashable.com/2009/09/10/openbox-mobile/ Box.net’s contribution to Modular Innovation with cross-platform clouds.

Have a great weekend!

Jeremy Horn
The Product Guy

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Ever wonder why entrepreneurs are so sensitive about the valuation question… Don’t get me wrong; I used to worry about this quite a lot, way too much actually. For one, the problem begins with the fact that founders start with 100% of the Company and keep on “giving” away pieces to the investors. As no investor will ever give you money without a piece of the action, you will have to let go as much as you need money to accomplish your plan. I find that valuation is a problem because entrepreneurs calculate how much this will give them in personal value – but to begin, they need to know what is their fair share of the pie …

One exercise that can be helpful is to build a cap table for the next 5 years and measure how much money you will need. Split that number into three rounds:

• A round: roughly 10-15% of the total amount (with an expected 10x ROI)
• B round: 25-30% of the total (5-7x ROI)
• C round: the balance of the funds (3-5x ROI)

Out of this, you can actually calculate on much of the company stock will be allocated to investors. Add to this 10% of employee stock option plans and another 10-15% for senior management and the balance is really the share that belongs to an entrepreneur (as a rule of thumb will be in the 20-25% range give or take). Of course, this is a lot of theory and numbers can line up differently in a specific case; but this is just my general quick measurement on splitting things up.

In reality, you can only know about your valuation when you get a formal term sheet. Don’t spend too much time in your basement building hundreds of scenarios. Present your business case to VCs and once they give you a term sheet, then you can discuss if you feel that your view of the valuation is way different than theirs (don’t forget to remove your optimist hat in doing so…). If you don’t like the valuations you are getting, you can keep shopping for another term sheet – but if the offer is close enough, you should take the money and go run your business (being on the road to meet VCs and get funding is not creating value)

But be careful about getting the valuation you think you deserve. If you push for a higher valuation than what the investor feels comfortable, you might get it – but it will be a poisoned gift. Be careful of any structures such as double dips (or triple), ratchets, vetoes, and privileged shares just to name a few. The simpler the conditions in the shareholder agreement are, the better off you will be – even if you get a smaller valuation.

In conclusion:

• The valuation will be as good as the investors believe in their expected return on their investment
• Be realistic about how much money you need over the next 5 years (and the investors expected ROI)
• Always take more money. Be over subscribed. Rarely people spend less than what they get or think they need
• Keep your shareholder agreement as simple as possible – even if it means getting a smaller valuation
• Ultimately, if you are really successfully, there will be enough wealth to share across the table and valuation will not be an issue

By Columnist Harry Trunckles

My friends are always debating back and forth about whether or not/how to reform healthcare. Pssh! If you guys want your time and money to go to quacks and butchers, you go ahead.  I will stick to:

Homeopathy!

Samuel Hahnemann initially put forward the idea of homeopathy as an alternative to “allopathy” which is a word he created which means, “people who are a bunch of assholes.” He described how water has a “memory” of what is applied to it and has its molecules restructured.
Once I found out that water had memory, I felt such shame. Oh the things I’ve done in the water! I only hope God can forgive me, even if the unforgiving sea can’t.

Sammy boy, outsmarting allopaths without even trying.

Homeopathy can be a bit confusing to newcomers and seen as counter-intuitive. Homeopaths believe that if you have a malady (like insomnia) you can treat it with something that causes that malady (like caffeine) but in a small and heavily diluted form.  This makes it have the opposite effect.  See, makes perfect sense now, right?  Its all based on the Law of Similars and the Law of Infinities, which are true since they aren’t mere theory.  But you don’t actually have to understand any of this, just understand that your humors are being balanced. My black bile was always acting up but no longer!

It makes a lot of sense to me anyway. I mean, if water gets its molecular structure reformed in this manner, that finally explains why my wife left me. I did everything right but in small doses. Therefore it was diluted and became very bad! I was such a tiny amount of a good husband that it made me the worst husband imaginable. Anna! You can come home now, I understand homeopathy!

It’s really simple, if we poison the ocean a little like we have been doing, it gets shaken by the tides and diluted. Therefore, it’ll make you healthy! This is why I drink a gallon of the Atlantic ocean every day.

Pure Medicine.

You have to be careful when buying homeopathic medicine though. Some of it might actually have an active ingredient like zinc or magnesium.  These are clearly inferior products that only dream of being diluted beyond detection.  Don’t waste your money on statistically significant amounts of chemicals.  Let us not forget, zinc and magnesium are chemicals. And all chemicals are bad for you. Why not stick to something all-natural, like raw scorpions?  The venom takes some getting used to but boy is it tasty!

The mainstream, science-based (allopathic) medical practitioners will scoff and tell you that homeopathy is “just water” but these people are either a) in the pocket of Big Active Ingredient, b) closed minded from a life of skepticism or c) have their minds clouded by a lack of homeopathic brain medicine.

One of the things I love about homeopathy, is that it doesn’t need to go through all that annoying testing that allopathic medicine does. Seriously, hurry up, I gotta treat this case of herpes! Don’t have time to wait for no science.

Ultimately, this goes beyond the realm of reductionist medicine. This is about spiritual well-being as well. Science-based medicine has never been able to explain why my life is so empty and devoid of meaning and happiness.  Alternative medicine can though. It can explain whatever you want.  Alternative medicine: 1 Geology: 0

People dislike share buybacks because they often feel as though there are more productive uses for the company’s cash or they would prefer their capital back in the form of a dividend.  This is an argument that is open to debate as their are proponents on either side (cash payouts versus shrinking the float) with legitimate points.

But what about when a corporation is not merely pissing away cash by doing an ill-conceived buyback, but is actually using a repurchase plan to mask stock option dilution?

What happens when management pays itself a boatload in stock options at low issuance prices and then buys them higher as a matter of course?

How about a management team that uses obfuscatory statements about the timing of stock buybacks to manage their earnings growth and hide the natural dilution that should be apparent to investors?

I haven’t crunched the numbers here myself, but if Baruch and Bento are on the money, Cisco (CSCO) should be ashamed of itself and it’s shareholders should call for a stock option moratorium until Chambers et al come clean.

And just where is that $600 million?

We’re all aware that this stuff goes on, but I’ve yet to have seen such a succinct breakdown of this anti-shareholder practice until now.  Cisco is just one example of a company engaging in this, but it’s a good example because of it’s size.

Ultimi Barbarorum’s resident Spinoza scholars/ fund managers absolutely nail it with this post…so perfect I won’t even print an excerpt here just to make sure you click over and read the whole thing.

If you’ve ever owned a share of a stock (especially a tech stock), check it out:

Cisco earnings wildly overstated: management milks shareholders for fun and profit (Ultimi Barbarorum)

Full Disclosure:  Nothing on this site should be construed as investment advice or an invitation to buy or sell any securities.  Please see my Terms & Conditions page for a full disclaimer.

Photo Credit: HBO

So I was definitely one of those few who had to see the “Sex and the City” movie a few times before I could appreciate it for what it was: a sub par-yet-somewhat-entertaining version of a really awesome small-screen masterpiece.

I am not sure what took me so long to come around.  It could have been the utter over-hype;  the plot leaks;  maybe the swerving and endless theater lines full of New York’s faux glitterati; the bigger-than-life and ultimate dilution (to a degree) of a show that could have been just left alone;  or maybe it was just the incessant rabid fans who in their bargain-basement garb,  swore they were some incarnation of Carrie.  Whatever it was, I did eventually watch the movie a number of times at home (with a cosmo and my Vogue) and for what is was worth found the storyline a feasible transition for the main characters.

Well, for those who can’t get enough of these getting-up-there hipsters, there definitely seems to be a sequel on the horizon.  The secret script seems to have gotten some sort of green light.   As early as yesterday there was an open cast call for extras for the movie.  I am sure the gays were out in drones!

There is no doubt I am very interested in what direction they will take this movie.  Carrie pregnant?  Miranda divorced and a lesbian?  I don’t know the possibilities seem endless and I am not sure if I truly care that much.  We’ll see.

I am not one for brutal punishment a second time around so I think I may have to wait for this one to come on DVD or at least wait for a month after its release to see it in the theaters.

Hattip Max from the Brisbane Atheists Meetup.

From the Mitchell & Webb Look, BBC.

This Summer, I’m working with The Capital Factory and helping out a number of young companies here in Austin, Texas.  The purpose of this spreadsheet is to show the effects and calculations for ownership dilution over the course of three rounds of investment for an example company.  There is no rocket science here by any means; that said, the first time I had to figure this stuff out was a real pain in the butt…so hopefully this speeds the process for others.

click to go to Google Docs Spreadsheet

For the sake of simplicity, we will assume there are 3 founders with arbitrary ownership percentages; we will also assume a total of two investors and 3 rounds of funding: seed, series A, and series B. Of course, these assumptions can be changed as necessary to make it match your actual situation if you want to plug in your numbers / facts.

Will will also assume a $5m exit (liquidation) as might happen if the company were acquired. We’ll discuss it further but it’s important to say right up front that you’ll never make this amount of money from such an exit with such ownership. This is a theoretical MAXIMUM because it does not take taxes, legal fees, potential preferences, etc. into account.

In subsequent versions of this spreadsheet, we will consider how the “preferences” of preferred stock can affect the outcome. For now, this spreadsheet assumes everyone participates equally as if everyone owned common stock.  When a company starts, the founders use some means to determine initial ownership: who’s idea it was, amount of personal capital invested, drawing straws, etc. The actual means used to determine initial ownership is immaterial to this analysis.

Option Pool

Many times, founders will not proactively allocate an option pool early in their company’s life.  Whether you do it now or later, most investors will require the creation of an option pool BEFORE they make any investment because, simply, they do not want to be instantly diluted by pool creation immediately after investing. In the case of later rounds, it’s very common for investors to require an expansion of the pool up to 10%-15% ahead of their investment, depending on the situation.

In this example, we will create a 10% option pool at the point of founding. You can see that the Founding Stage total is made up of the three founders and the option pool = 100%

Seed Investment

Here, our example company is taking a $20,000.00 seed-stage investment at a $400k pre-money valuation (value of the company before you take any money).  It is not surprising, then, that the “post-money valuation” is the amount invested PLUS the pre-money valuation. This post-money valuation is exact value of your company immediately after completion of the financing and will be used to price stock options.

For each column / financing: pre-money valuation is on the left; below that is the amount raised; post-money valuation is on the right.

Dilution

In the seed investment, you will be selling 4.76% of your company to Investor #1.  This is simple math you can see in the spreadsheet cell.  You can also say that everyone in the company will be diluting by 4.76%.  You can see that Founder #1 “dilutes” from 37% ownership to 35.2% of the company, and so on.

Series A Investment

in the series A investment, our example company has done well enough to nearly double it’s pre-money valuation to $700k.  The company has determined that it makes sense to raise $250k – usually that means a balance between necessary capital to reach the next set of financeable events and dilution to employees and investors.

This Series A investment represents a sale of 26.3% of the company to Investor #1 again – they must like what they’re seeing in our example company!

Note, however, that Founder #2 has decided to step up and invest $15k themselves. Such an investment is wholly predicated on the founder, the investors, and the current situation – there are no hard and fast rules to founders participating in subsequent financing although most investors would see it as a great show of enthusiasm and more “skin in the game” for the founder (both good).

For $15k, Founder #2 owns 17.7% of the company after Series A versus 16.1% if they had not made their series A investment:  an increase in ownership of 1.6% instead of any dilution.

Investor #1 now owns 28.2% – and in this example – more than any individual founder. This is not an uncommon situation and over time and various fund raising, you should not be surprised to see this happen.

Series B Investment

This round is similar to Series A in terms of mechanics; here, valuation has more than doubled and the amount being raised is $850k. Employees have probably been hired; business model and go-to-market has probably been proven out. In a typical Series B, the money raised goes to scale up the mostly-proven business.

Founders are not investing in this round – and that is common as well. At this point, the price the founders paid for their stock (potentially zero) is significantly less than what Series B investors are paying; that coupled with the fact that the foudners will not materially change their ownership with small investments typically means that founders / early employees will not participate in late rounds of financing.

Dilution is 36.2% overall and investor #1 will typically have “pro rata” rights to invest an amount in a subsequent financing required to maintain their ownership percentage. In this case, Investor #1 must invest another $240k to maintain their 28% ownership in this company.  Investor #2 leaves the Series B investment with 26% of the company that is now worth $2.35m.

Liquidation (acquisition) of the company

Ignoring all tendency to describe the relative rarity of such an event, “liquidation” doesn’t have to mean acquisition as we will see when we discuss term sheet structure; in our example, it does.

As we mentioned before, we’re going to assume a $5m exit (feel free to add some zeros when you’re alone).   This represents another “doubling” of value from our series B investment. Note that it’s an entirely different conversation as to what is “good” versus “bad” from a returns perspective. For now, assume that it’s good enough to allow it to happen.

An Remember:  you’ll never make this amount of money from such an exit with such ownership percentages becuase this spreadsheet does not YET taxes, legal fees and potential investor preferences into account.

In our next version we’ll start looking at the effects of long-term/short-term capital gains, some nominal fees, and investor preferences. This is where you’ll start to see how certain terms can materially affect the outcome of your company; we’ll also use that opportunity to define common term sheet terms.

 If you’ve ever been to a candy store, you’ve seen how the store has tried to make as large and wide variety of candy available to you as possible, and it works, because you walk around the store, over and over, just trying to decide what you want. Eventually, you have chosen a few different types of candy. Many services try to recreate this idea on the web. The goal is that if they provide you with enough options, you’ll spend a lot more time wandering about on their site. This works, too, for some time. We all want to try the different flavors, but as every one knows, too much candy leaves you with a sour stomach and a toothache. Just the same, too many features on a web site leaves users wanting less.

 As a website is growing, expanding product offering is a huge driving force to keeping older users entertained, and generally speaking, it’s not a bad idea to move forward from your original idea, as long as you are still true to the reason you made the site. However, it’s far too easy to go over board with your offering. Product dilution can be thought of as a bubble. As we all know, bubbles pop eventually. Each feature needs to have a dedicated team that understands the back end behind the feature, and they need to be ready to search out problems and errors and, as timely as possible, solve any issues before it burdens the end user. And this is just the start of a dangerous cycle.

 Too many options available is the perfect way to meet a stagnation in new user sign ups. If there’s no clear direction for a website, any potential users will turn away for another website that does have a clear direction. Your existing users will start converging into their own niches on your site, where they only really use a certain few features, while ignoring the rest. If you ignore any particular one, especially older features, you alienate the users that are dedicated to it. Of course, if you’ve moved on from developing the existing products, the users are likely to feel they’re being left behind, and what they are going to do is begin migrating to another website that caters specifically to the product they used most at your site. It only takes a few members to say, “I found a better site. Come join me,” before your user base starts dropping.

 So, here’s where we get to more problems. Your user base is dropping, your new sign ups are stagnating, and you’ve got a plethora of employees working on products you’re not sure you can financially support. You have to start cutting employees. The remaining users will notice this cut, too. Why? Because you have less people paying attention to the products you’re offering and the issues the users are having. Why is that significant? A few lines up: if you don’t pay enough attention to a product, your users don’t feel important, and they leave.

 MySpace is one of the most recent victims of product dilution (among other things, but we’ll stay on topic.) Way back when, MySpace was a music oriented social networking site. In the process of competing with other sites in the market, MySpace began developing new features left and right. Taking a look around the site, you’ll find a myriad of wide ranging things to do. Blogging, messaging, forums, groups, karaoke, videos, restaurant reviews, and chat/IM are just a few of the features on the site. MySpace has overwhelmed itself, and, ultimately, its users. The company lost view of its original goals and purposes, so it’s users are flocking to other sites that have clearer intentions, such as Facebook, who, as MG Siegler recently pointed out, has a problem of their own: keeping it simple. Despite this problem, putting MySpace next to Facebook and it’s quite obvious which site is more bloated.

 So remember, don’t attempt to be the site that has every thing. In the end, the one thing you won’t have is success.

Violence à l’école

http://www.dailymotion.com/video/x9f6aa_xavier-raufer-assez-mal-pensant-a-c_news

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Dans la même émission à 7 Mn  (Site France5)  la psychologue clinicienne   :

« On oublie de dire que le vrai problème est l’augmentation de la violence en général, c’est un problème qui concerne toute la société, la violence concerne et commence par les parents qui secouent leur enfant parce qu’ils ne supportent pas de l’entendre pleurer, on a une montée générale de la violence, de comportements d’intolérance, et c’est de cela dont il faut qu’on parle, le problème dans une société est de savoir comment se policer, se policer ce n’est pas mettre un policier derrière chaque citoyen. «

A 13 mn 30 un intervenant :

« Le ministre de l’éducation prétend qu’il va résoudre tous les problèmes à lui tout seul, ce n’est pas vrai, la prévention et la sécurité, c’est l’affaire de tous, c’est une chaîne. »

A 22mn Giraud :

« Il faudrait que les Français soient prêts à faire des efforts de maintien d’une autorité minimale sur leurs propres enfants, de l’acceptation de l’autorité des enseignants. C’est un problème général, tant qu’on accepte pas de frustrer ses enfants qui doivent , les pauvres chéris, être écoutés, aimés et surtout pas frustrés…….c’est un problème général, on a démissionné des responsabilité d’éducation et ce n’est pas seulement l’école, c’est l’ensemble de la population……..”

Et un autre intervenant d’enchaîner  :

« C’est aussi la contrepartie de la société libérale totale…… une société de haine, de ressentiment, de violence »

Le même plus loin :

« C’est la faute à cette société libérale qui a permis moins d’autorité »

Vous avez compris ? :

« C’est un problème qui concerne toute la société. »

« C’est l’affaire de tous »

« C’est un problème général »

« Il faudrait que les Français »

« C’est l’ensemble de la population »

« On a une montée générale de la violence, de comportements d’intolérance »

« La violence concerne et commence par les parents »

« Et nous sommes tous responsables »

Människohandel ligger högt på listan över samhällets värsta brott. Att säljas som en vara och tvingas att prostituera sig, tigga eller att tas ifrån sina organ är bland det mest förnedrande en människa kan utsättas för.

Det har rått – och råder, såvitt jag vet – politisk konsensus om att slavhandeln hör till det civiliserade samhällets vidrigaste kriminalitet. Men det har visat sig svårt att fånga in just vad en människohandel innebär. Centrala komponenter är att offret tvingas in i ett sammanhang hon inte fritt valt att försätta sig och att hon på något vis i den betvingade situationen säljs. Paradigmexemplet är fortfarande trafficking för sexuella ändamål: Människor förslavas och säljs som prostituerade.

Det viktiga är att någon form av definition behövs. Utan ett begrepp så kan samhället inte bekämpa farsoten. Utan en fungerande lagreglering av männniskohandelsbrott kan det bli så att domstolarna dömer slavhandlarna enligt andra regler, t.ex. koppleri som har ett helt annat syfte än människohandelsbrottet.

Efter vissa problem tycks nu lagstiftaren lyckats åstadkomma en rättstekniskt lämplig lagstiftning mot människohandel (vilket inte behöver innebära att den i praktiken kommer att fungera – det krävs ju att man faktiskt får tag i brottslingarna också). Förhoppningsvis kan den nya lagstiftningen användas för att döma brottslingarna för slavhandel och inte bara för att ha hjälpt prostituerade som kopplare.

När det har visat sig varit så svårt att hitta en fungerande formulering av vad människohandel innebär så blir det särskilt tråkigt när politiker utnyttjar ordet människohandel för att driva hem politiska poänger på helt andra områden. Marita Ulvskog, EU-parlamentskandidat för S, har jämfört den europeiska arbetsmarknaden med människohandel. Bakgrunden är Laval-målet och de lettiska arbetare som jobbade i Vaxholm och som möttes av organiserade demonstranter som skrek “Go home!”. 

Ulvskog jämställer lettisk arbetskraft med de förslavade prostituerade och barn som säljs för att tas ifrån sina inre organ. Den som köper arbetskraften jämställs med den vidrigaste organiserade brottslighet som idag plågar världen. Det är ett destruktivt exploaterande av en viktig terminologi. Och det sker i ett tillstånd när terminologin skulle må bra av att få sätta sig.

Om min arbetsgivare köper mina tjänster så handlar man i och för sig upp en del av min tid, en del av mig kanske man kan säga. Men det är inte människohandel. Och när man börjar kalla det för människohandel urholkas begreppet. Dilution, kallas det ibland. Förlorarna är de offer för riktig människohandel som därmed placeras i ett fack av vanliga arbetstagare som uppbär lön för att göra sitt jobb.

***

Se även Klambergs kommentarer. Och de intressanta kommentarerna från det lettiska bolaget självt i DN. Om bolagets uppgifter stämmer blir Ulvskogs kommentarer än konstigare. Enligt bolaget så erhåller de letttiska arbetarna 75 kronor i timmen efter skatt plus traktamente med en femhundring per dag och betald bostad. Det innebär att en person som arbetar i Sverige en månad om 20 arbetsdagar får ut 25000 netto. Det skulle vara bra betalt för de flesta arbetare. Och för arbetare från ett Lettland i kris måste det vara väldigt bra betalt.

Okay. Take a hamburger, turn it inside-out.. burger sandwiched between the ham, add cheese on the outside, generous helping of mayo on the.. that’s right.. outside, bite off one half and chew for all you’re worth, spit it out, pop in the other half and yes, chew and spit it out, pop in the hapless-looking first half and down it, now go for the other and finish off your culinary orgy with gusto.

That’s what the proposed Bharti Airtel-MTN merger is looking like at first go. The complete dope:

http://online.wsj.com/article/SB124322759183950993.html

So here is what Tyra Banks looks like minus the gloss: Leg 1 – pay MTN $7 bil cash plus $6.24 bil worth shares and pick up 36% stake with MTN picking up 15% stake in Bharti in the process, Leg 2 – swap 25% of expanded share base of Bharti for $2.89 bil cash plus 25% of the 1.9 bil share base of MTN thereby increasing Bharti’s stake in MTN to 48.8% and MTN in turn holding little over 32% in Bharti. Oh, by the way, Bharti would owe MTN just under $4 bil ($3.95 bil) after this little circus.

Now, here’s the fly in the burger. Bharti is currently sitting on just $0.24 bil of cash and near-cash. Let’s keep it simple for the moment and ignore the rest of their current assets. In any case, they are already saddled with a negative net working capital over-running to the tune of 50%. So where does the $4 bil payout to MTN come from? Debt? How about this – Bharti Airtel is already over-levered, their MRQ debt-equity at 0.39 being twice the industry average. To put that in perspective, Bharti’s leverage has historically hovered between 0.40 to 1.03 during the five years between 2004 and 2008. So 0.39 has been their best showing in years and any further debt is just going to make bad things look worse.

Let’s come to what’s really eating me. Or why we’re trying to eat that burger all wrong. Why not a plain vanilla cash-for-stock? Tax gains and no/lower transaction costs from stock deals, you say? So how about a cash-plus-stock deal in one go? Why not just pay MTN the $4 bil in one shot, dilute your balance sheet by 32%, pick up that 49% stake in MTN and everyone’s home and dry? Try doing that with negative Treasury Stock. Oh yes.. Bharti’s sitting on $2.27 mil negative treasury stock as on Mar 31, 2009! Well then how about digging into capitalized retained earnings? Knowing the Bhartis, they wouldn’t dream of that, since they have a more than fabulous record of reinvesting retained surplus productively. Their Return on Retained Earnings has been an enviable 40% on EPS basis and a stupendous 834% on market-value or capital gains basis over the same five year period! So you can’t touch the retained earnings. Short-term convertible notes? Convertible preference shares? Expensive and never done that before.

What’s left is pulling the proverbial rabbit out of the hat. So here’s what you do. Pay MTN $7 bil cash plus $6.24 bil worth Bharti stock for 36% MTN stock worth only $7.07 bil. The balance ($6.17 bil) goes into MTN’s Share Premium Account. Since you own 36% of MTN’s balance sheet, you own 36% of this $6.17 bil, coming to around $2.22 bil which you roll up into your balance sheet and voila! your treasury stock can now be positive. You’re still left with a deficit of $4 bil ($6.24 bil worth of Bharti stock which you need to hand out minus this $2.22 bil of treasury stock) which you carry over to end of the transaction. End of leg 1. Leg 2 is pretty straightforward.. you just have to complete the remainder of the transaction in order to achieve the target stake of 49%. So you end up owing the $4b worth stock from leg 1 to MTN, which becomes a cash deficit due to the convoluted deal structure and which now would need external funding.

So what did this achieve? Despite the negative treasury stock, you’re able to carry out a share swap deal for the tax gains and transaction cost savings and you’re able to fund the deficit by cash which you don’t have. Share swap on paper, cash deal on ground. Simple? Definitely not. Ingenious? Maybe. Feeling hungry.. maybe I’ll go get myself a burger.

The Reformed Broker, AKA Professor Plum, here with today’s Market Recap…

Today’s won’t be a legit recap as I am out of the office early today on a secret Golfing assignment.

The big news today was the post-stress test avalanche of secondary offerings from the banks.

Shareholders can Salute their Dilution while jamming to The Raconteur’s video above.

From the San Fran Chronicle:
Wells Fargo & Co., Bank of America Corp. and other major financial companies that came up short in government stress tests took quick steps Thursday to shore up capital and confidence, most notably announcing plans to raise billions of dollars through common stock offerings.

Among the banks ordered to raise capital (and the amounts needed) are: Wells Fargo of San Francisco ($13.7 billion); Bank of America ($33.9 billion); GMAC LLC ($11.5 billion); and Citigroup Inc. ($5.5 billion). Among the companies informed they didn’t need to raise capital were American Express Co., Capital One Financial Corp., Goldman Sachs Group Inc. and JPMorgan Chase & Co.

As of this lunchtime writing, the markets were green, but I suppose anything’s possible, so stay alert out there and have a great weekend.!

Full Disclosure: I currently manage accounts that are long WFC and JPM.  Do not trade based on anything you read here.

Key Terms:

• Solution- a homogenous mixture
• Solvent- the dissolving medium in a solution
• Solute- a substance dissolved in a solvent to form a solution
• Aqueous solution- a solution in which water is the dissolving medium or solvent
• Saturated- a solution that contains as much solute as can be dissolved in that solution
• Unsaturated- a solution in which more solute can be dissolved than is dissolved already
• Concentrated- a solution in which a relatively large amount of solute is dissolved into a solution
• Dilute- a solution where a relatively small amount of solute is dissolved
• Mass percent- the percent by mass of a component of a mixture or of a given element in a compound of elements
• Molarity (M)- moles of solute per volume of solution in liters
• Standard solution- a solution in which the concentration is accurately known
• Dilution- the process of adding solvent to lower the concentration of solute in a solution

Solubility

• To understand the process of dissolving.
• To learn why certain components dissolve in water.
• When an ionic substance (such as salt) dissolves in water, it breaks up into individual cations and anions, which are dispersed in the water.
• For a solute to dissolve in water, a “hole” must be made in the water structure for each solute particle. This will only occur if the lost water-water interactions are replaced by similar water-solute interactions.
  • In the case of sodium chloride, strong interaction occur between the polar water molecules and the Na+ and Cl- ions. This allows the sodium chloride to dissolve.
  • In the case of ethanol or sucrose, hydrogen-bonding interaction can occur between the O-H groups on these molecules and water molecules, making these substances soluble as well.
  • In the case of oil, the molecules are not soluble in water because the many water-water interactions that would have to be broken to make “holes” for these large molecules are not replaced by favorable water-solute interactions.

• “like dissolves like”- a given solvent usually dissolves solutes that have polarities similar to its own.
  • Water dissolves most polar solutes because the solute-solvent interactions form in the solution are similar to the water-water interaction present in the pure solvent.
  • Nonpolar solvents dissolve nonpolar solutes. “Grease” is composed of nonpolar molecules, so a nonpolar solvent is needed to remove a grease stain.

15.2 Solution Composition: An Introduction

• To learn qualitative terms associated with the concentration of a solution.
• Saturated/unsaturated-
  • When a solution contains as much solute as will dissolve at room temperature, we say it is saturated.
  • A solution that has not reached the limit of solute that will dissolve in it is said to be unsaturated.

• Concentrated/dilute-
  • A relatively large amount of solute is dissolved in a concentrated solution.
  • A relatively small amount of solute dissolved in a dilute solution.

Solution Composition: Mass Percent

• To understand the concentration term mass percent and learn how to calculate it.
• Mass percent = ( mass of solute / mass of solution ) x 100%
• Mass percent = grams of solute / ( grams of solute + grams of solvent ) x 100%

Solution Composition: Molarity

• To understand molarity.
• To learn to use molarity to calculate the number of moles of solute present.
• Molarity describes the amount of solute in moles and the volume of the solution in liters.
• M = molarity = ( moles of solute / liters of solution ) = ( mol / L )
• A standard solution is a solution whose concentration is accurately known.

Dilution

• To learn to calculate the concentration of a solution made by diluting a stock solution.
• The process of adding more solvent to a solution is called dilution.
• Moles of solute before dilution = moles of solute after dilution (ONLY WATER IS ADDED IN THE DILUTION!)

• Solutions have variable compositions, so we have various methods of measuring concentration.
• Molarity is one of the more involved methods of measuring concentration.
  • Measures the moles of solute per volume of solution. =mole solute/volume solution
  • Molarity is abbreviated with a capital M.
  • Molarity only refers to things that dissolve in water.

• Dilution- Moles of concentrated equals the moles diluted- the only thing that changes is the amount of the solution.

For a while now I have been saying dilution is going to be the downfall of many brands. As brands and consumers navigate this recession, dilution in any form is pretty much the devil. You can dilute your brand a few different ways:

• Have a huge ass sale. Or employ price as a product strategy.
• Jack up your product portfolio and make shit your brand DNA doesn’t support (Mini USA making bigger cars? WTF).
• Turn to celebrities to make connections (yes, Tiger Woods dilutes your brand).

The list could go on for many more bullet points. The main point is, don’t forget what your brand stands for, and respect the consumers who helped to create your cred and place in the world. It goes something like this: focus on what you do really well, and keep doing it. Just take a gander at the In N Out menu for gods sake. Awesomeness.

Citigroup just announced that it might do a reverse split on the stock if it needs to. This won’t happen anytime soon but they are thinking of doing this before June 2010. IMO, reverse splits are very bad for the shareholders. It might be a good thing for the company because it may “appear” to worth more than it actually is.

Don’t buy any companies that is going to do reverse splits. Most of these companies will go into massive dilution which decreases shareholder values. Historically, these stocks will eventually return back to where they are pre-split level.

Every company is different, but there is a very high chance that this will happen to Citigroup because the company is losing so much money with its exposure to highly toxic assets. Plus, Citigroup is now around 36% owned by the government, which is also a bad thing because in the end, it’s the taxpayers who suffer and have to pay it all. If a profitable company is doing a reverse split, that is another story. The best thing to do is to short Citigroup the day it goes on reverse split.

Last thing, since the stock market has risen too much already for the last few days with lack of good news, I believe profit taking will occur very soon, maybe as early as today and into next week as well. Nothing really had changed much in the past week other than another “hope” of an economic turnaround. Don’t be too greedy, start taking some profit and run.