Month: December 2009

it takes two

~ ginsu ~ Leave a comment

p. 63:

‘It takes two to make an accident.’

Here is the page where we really get to know Jordan Baker, the other woman at the center of the novel.  Daisy is the one who has become legend, the unforgettable golden girl for whom all was dreamt and all was lost.  But I always liked Jordan better, not least because she is revealed here to be an incurable liar.

When Nick scolds her for being a careless driver, she first lies that she is careful, then lightly insists that she doesn’t have to be careful since other people are.  Nick points out that she’ll be in trouble if she meets someone as careless as herself, and she deftly turns the conversation to their relationship, declaring her affection for solid, careful Nick.

Nick knows this lovely girl is a liar, but ‘Dishonesty in a woman is a thing you never blame deeply – I was casually sorry, and then I forgot.’ Is a thing truly forgotten if it’s remembered well enough to write down later?  Jordan’s not the only one with a loose concept of the truth.  It takes two.

the way we were

~ ginsu ~ 3 Comments

“The Streisand Effect” refers to an attempt to censor a piece of information that backfires because it brings more attention to the information than would have occurred without the attempted censorship.

At the risk of Streisanding the hell out a minor comment, I’ll talk about something I’d rather censor.  Noting the rather dated news of my departure from my prior company, an anonymous commenter to an anonymous and erroneous blog post recently said:

Thank goodness they finally got rid of this guy. He was the worst hire the company ever made.

Here’s what I have to say about that:  I like to think it could very well be true.

I like the idea that there are some people who took a good hard look at the history and said, ‘Yep, this guy was terrible, he almost destroyed the place, good bye and good riddance!’ Because that would mean that I was in a position to make some important decisions, and that I made decisions at the risk of being unpopular – that I did much more with the opportunity than just quietly collect a paycheck.

Now, please don’t misunderstand this:  I’m not saying that the critics are wrong, that they don’t understand, that I was both righteous and right.  Even my own review of my Linden tenure welcomes ambiguous judgment.  Obviously, I think and I hope that I did good things, but I could certainly be wrong, I could certainly be delusional.

But the one thing I don’t want to be is simply in the middle.  I don’t want anyone’s assessment to be, ‘Well, he was neither among the worst nor among the best, he was just there and he didn’t do a damn thing.’ To me, that’s a lot worse than being the worst.

So, if you had any opportunity to think about my work, and you thought I was the worst, then I thank you.  Let me give you my special gift in return:

I hereby waive any right I may have to sue you for libel for any statements you make about my work at Linden Lab, so long as:

  • your statements are posted exclusively by you on a blog open to anyone with Internet access; and
  • you post with your real name; and
  • the blog accepts comments from anyone; and
  • the post in question prominently links back to this blog post.

Simple enough, yes?  Forget Streisand, I call this the Safety Dance.

And you can act real rude and totally removed
And I can act like an imbecile

the price they paid

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Cue the background music [link to a streaming music play].

Watching the gyrating reports on the price paid for Apple’s purchase of music streaming service LaLa reminds me that acquisition prices are widely misreported and often misunderstood even when correctly reported.  Some people only want to know one number – the price paid – without caring about the many other numbers that are relevant to understanding who got what:  the company’s cash on hand, outstanding debt, financing history, and other numbers relevant to the capitalization of the company.

Even the best reporting often misses one important element of the analysis:  newly issued options (or other equity) shortly before the deal.  I like to call this the “options icing” – and it’s a very important concept for understanding what really happened.  For company founders, management and especially employees, it can mean the difference between a happy and tragic outcome for their startup.  The “icing” is both icing on the cake for employees, and also a good way to ice a bad cap table.

The options icing doesn’t come into play very often, but it is more common when the acquiror is a large, sophisticated tech company that historically rewards employees with equity incentive.  This kind of acquiror understands that the future success of the acquired product is less about the technology and more about the personnel continuing to prosper in the big company environment.

Let me make up an example.  A big company has got a problem if the market value of a 50-person company they want to acquire is only $20 million, while the investors have already put in $35 million into the company.  Typically, the investors have to be paid back first before anyone else gets paid, which means that employees would get nothing, which means that the big company would spend $20 million and get a bunch of seriously disgruntled employees, who will probably leave the company pretty soon after the deal. Even if the investors agree to restructure their liquidation preference, say by half, you still have very little left over:  $17.5 million to investors, $2.5 million for employees.  Let’s say that 1/2 of the employee stake is owned by 2 founders, and then you’re down to only $1.25 million for 48 other employees.  Nobody is happy with that outcome.

Here’s where the options icing comes in.  The company could issue a huge pool of options to employees who would be critical to carrying the product forward (in any scenario, whether acquired or not).  Say they issue $10 million worth of new options.  The magic here is that a smart acquiror will be willing to pay for some or all of those new options.  Even though the company is still only worth $20 million, the acquiror could be happy to pay $30 million if the options are issued to the right folks with the right terms.

The “right terms” include typical vesting terms, so the employees receiving options are incented to do great work for the acquiror.  From the employee’s perspective, this is fair because it is a whole lot better than the stick in the eye they would have been getting under the $20 million scenario.  From the acquiror’s perspective, this is a good deal because rather than flushing $20 million down the toilet, they are making a rational $20 million purchase, with a nice $10 million compensation package that addresses the compensation disadvantage that big companies face in competing with startups.

One of the key reasons that people work in startups is that you can really move the needle for the company’s value.  In financial terms, if you are part of a startup that creates, say, $100 million in value, then it’s a pretty neat feeling to have made nothing into $100 million, and you can get rewarded handsomely for that.  But if you are in a big company that is worth $100 billion, nobody will really notice, or even be able to tell, that you added $100 million in value – it certainly won’t make much of a difference in the stock price.  And that creates a compensation disadvantage for big companies that are trying to motivate their employees with equity grants.

But in the scenario above, the big company can pay for $10 million in stock grants to motivate a relatively small number of employees to execute on a product they clearly understand.  If these employees can turn that $20 million business into a $100 million business, they will be rewarded for it in a manner comparable to their rewards if they had remained an independent company.  That kind of compensation is generally not possible to award in a big company other than in this scenario because of internal “fairness” issues.

The beauty of all of this is that it is one of the few situations in this rotten ol’ world that deal dynamics favor the rank-and-file employees.  Most corporate dynamics, especially in big deals, have a tendency to screw the little guy.  But in order for this situation to be a good outcome for everybody, the rank-and-file employees have to be rewarded in a fair manner.  Coming back to my example above, the options icing can be win-win-win all around:  The investors can get a little tip for agreeing to the restructuring and the new equity; let’s say they get $18 million, just a bit more than they would have made otherwise.  That leaves $12 million for the employees – say the two founders take $3 million, more than twice as much as they would have made under the $20 million deal.  The other employees get $9 million, more than 7 times as they would have made.  The acquiror paid $10 million more, but as described above, this is money that really makes sense to spend, and it’s more like incentive compensation than it is acquisition consideration.

And this deal gets reported as a $30 million price paid.  But really from the right perspective it should be regarded as a $20 million deal.  Now, I am not saying that anything like this is what happened in the Apple-LaLa deal – actually the discrepancy in the reported numbers is too large to be explained by options icing alone.

most affectations

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p. 62:

most affectations conceal something eventually, even though they don’t in the beginning

Here’s another casually sharp insight into human nature.  From time to time, everyone pretends to be something they’re not.  And sometimes this pretense is just a costume, worn as if for a holiday party, to be discarded and forgotten after the festivities of the moment expire.  But sometimes the pretense is aspiration in disguise; the costume turns out to be not a drapery over skin, but a layer emerging from underneath.

privacy matters

~ ginsu ~ 3 Comments

What is going on with Facebook’s constant gyrations about privacy policy?  Does anyone really care?

A little while ago I suggested that online privacy concerns are best addressed by free market solutions, not governmental regulation.  I’ve discussed the topic with quite a few entrepreneurs, investors and professional marketers, and the overwhelming view in that group is that regular consumers just don’t care about online privacy.  “They” say:

  • privacy is too complicated a topic for consumers to understand
  • no one reads privacy policies
  • consumers can be distracted from privacy concerns with the offer of just about any shiny object

Much of that might be true – but I also took the time to talk to a bunch of “regular” consumers.  And these things are definitely true:

  • consumers know that their privacy is being compromised by many online services
  • consumers do not like being taken for granted
  • consumers will avoid services that abuse their information, and will seek services that use their information properly

These two sets of “truths” are not mutually inconsistent.  To me, they add up to:   Online services can gain a competitive advantage by giving consumers the most sensible default choices along with the right advanced options for privacy – make it simple, but make it right.  I think Facebook believes this, and that’s why they keep tinkering with their policies.  They understand that a lot of their initial attraction was a result of making different privacy assumptions than more open services like FriendFeed and Twitter.  They know that even if no one ever reads their privacy policy, if they make the wrong choices about privacy, they will lose users.  As they saturate their available audience, they have to figure out how to strike the right balance among their different demographic bases, all the while competing with the advantages that more open services have.

These are extremely nuanced choices, but getting them right makes the barrier to competitive threat all the more defensible.  And these are product choices; this is something that many I’ve talked to misunderstand:  people think that this privacy stuff is just legal mumbo jumbo or regulatory mishmash.  That’s plain wrong – laws and regulations are just the cart behind the horse.  In a social product where community is paramount, policy choices are product choices.

a short affair

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p. 61:

I even had a short affair with a girl who lived in Jersey City and worked in the accounting department but her brother began throwing mean looks in my direction so when she went on her vacation in July I let it blow quietly away.

Nick reveals a lot about himself by how little he explains about his life outside his own definition of the story.  On this page, he’s trying to convince us that his summer in New York wasn’t dominated by all things Gatsby.  A short “affair” (whatever that means, in his day) might be cause for several pages or even a chapter in a more conventional account of Nick’s life.  But this sentence is all he says about the girl, because he isn’t here to tell you about himself, the ostensible story is supposed to belong to Gatsby.

But I’m curious.  Just what does an affair mean to Nick?  What sense of honor or cowardice allows a “mean look” to alter his pleasurable pursuits, whether frivolous or serious?  Is the description “blow quietly away” an accurate account from the perspective of our Jersey girl?

None of this gets any exploration.  Instead, later down the page Nick devotes a substantial narrative to an aimless fantasy of following a romantic woman in his mind’s eye.  She’s a New Yorker – he begins his account with a statement familiar to all transplants to the big city:  ‘I began to like New York, the racy, adventurous feel of it at night and the satisfaction that the constant flicker of men and women and machines gives to the restless eye.‘

As he goes on to imagine what it would be like to spot a woman in the crowd on Fifth Avenue and follow her home for nothing more than a smile, we realize that this romantic fantasy captures the essence of what he wants but didn’t get from Ms. Jersey City.  He gave the real “girl” a cursory sentence, and devoted a fulsome paragraph to a fantasy woman – and in that contrast told us more about himself with omission than he could have with description.