31 posts categorized "July 2010"

An Unhealthy Burden on Entrepreneurship

It resonated with me, that the first comment to Brad Burnham's recent post about defining a web startup public policy agenda was about healthcare.

The comment was from Lauren Sperber and I'm pretty sure it will be fair use even if I quote it all:

"I think health care reform is the number one policy initiative that could help entrepreneurship. This applies on two fronts:

1) The prospective entrepreneur, who may feel trapped (in 'job lock' as the saying goes) in traditional employment because his/her other options (buying insurance without employer subsidies or paying for health care out of pocket) are so expensive.

2) The new small business owner who needs to hire employees and is faced with the daunting costs of subsidizing their insurance policies."

Isn't it the most bizarre thing that responsibility for healthcare in America rests on private businesses. Talk about a tax on enterprise!

From the perspective of "corporatism," or a perspective that large corporate interests run the policy agenda of the nation, it probably does make sense that individuals are discouraged from leaving their employment, that vestiges of indenture remain in place.

The other thing that is making me think about health care is the following four-minute video from the White House, in which the President shows you how to navigate a site called HealthCare.gov.

I don't know how rich the data is behind the (pretty competent looking) UI of the HealthCare.gov site, but the overall impression I had from the subtext of the President's demo was that, yes, healthcare really should be an individual choice.

If individuals took ownership of their own healthcare and were not dependent upon / indentured to their employers in this way, not only would entrepreneurs have fewer impediments as they created jobs, but maybe more people would think like entrepreneurs. The associative thought would be, if I can be responsible for my own healthcare, then maybe I can be responsible for my own employment. (Okay, so there may be an interim step or two in that stretch.)

Getting to Know You & Daily Blogging

Fred Wilson has an extemporaneous post this morning, bristling with attitude:

"I second Ron Conway's hope that 'any entrepreneur that has "the guts" to start a company gets funded.' That is my kind of thinking. We need more entrepreneurship, not less."

He's talking about seed funding, "enough funding to actually build something and see if the idea and the team has the right stuff to build a company."

Here's another quote:

"[Y]ou just don't know what is a crazy idea and what is a brilliant idea. And you don't know what is a great team and what is a weak team. Of course, we have our opinions on that. We make those judgment calls every day. But we are often wrong."

No hard news in these statements, but the energy comes from their currency: Fred is parachuting (self-invited) into a dialogue at a Y Combinator conference that he missed and that he seems to be aware of because Anthony Ha blogged about, some 16 hours ago.

I wish I could remember the quote from the novelist Alison Lurie, something about how we reveal our true character in moments of crisis, not of our choosing. Well, daily blogging is like that even while it is the opposite of that. It's not crisis that peels back the layers of the mental onion, but it is pressure, even if self-imposed.

Here's another way to try to express what I mean: if you show up every day, you're bound to slip up from time to time and reveal parts of who you really are!

Underwater Mortgages & the New "Accredited Investor" Net Worth Test

The SEC has issued guidance on how to deal with an underwater mortgage, in connection with determining whether a person qualifies as an "accredited investor" under Reg D's net worth test.

The net worth test was changed by the Dodd-Frank Act, effective last week. Under Section 413 of that Act, the "value of the primary residence" of an investor is to be excluded from the calculation of whether or not one meets the necessary $1,000,000 net worth threshold. (Note: the other existing tests by which one may qualify as an accredited investor, including the annual income tests, have not changed . . . at least not for now.)

The new net worth test under the Dodd-Frank Act represents a compromise from earlier drafts of the Senate's financial regulatory reform bill, which would have increased both the net worth and income tests based on increases in CPI from 1982; initial proposals would have more than doubled the standards most relevant for angel investors, and eliminated most current angels from startup investing.

Well, the SEC guidance on the new net worth test, now in effect, is helpful . . . except that it isn't precise enough!

Here's the gist of the agency's guidance:

"Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth."

But what about investors who reside in states whose laws may prohibit a mortgage creditor from collecting a judgment for the deficiency? I'm not a real estate lawyer, but I understand that there are a number of such states, including California.

The SEC guidance really only makes sense if applicable law would give the mortgage creditor recourse to the debtor's assets, in addition to the mortgaged residence. Now, I am told that many states, perhaps the majority of them, do permit "recourse" against the mortgage borrower (that is, judgments for the entire mortgage loan, even if the property is underwater). So with respect to investors who reside in such states, an underwater mortgage is going to decrease net worth.

It gets more complicated, even within a "non-recourse" state, because lines of credit secured by the residence may be "recourse." That is, "non-recourse" protections may be restricted to "purchase money" mortgages. In addition, the rules in in a given state may depend on whether or not a creditor pursues judicial or non-judicial foreclosure. 

Point being, whether or not one's net worth is "dinged" by an underwater mortgage is a matter of state law.

This real world state-of-affairs might be recognized when the SEC proceeds to formally amend the language of Reg D to conform it to the Dodd-Frank Act. (All agree, however, that the change is now in effect, and the currently incorrect regulation will simply have to catch up to the law as stated in the statute.)

So much for simplicity!

Thanks to Broc Romanek and Joe Wallin for their respective posts earlier this week about the new SEC guidance.

Corporations and Speech

Here are some notes, by way of approaching the subject of what Congress might do to reign in the Citizens United decision.

In the hands of entrepreneurs, the corporate form is a legal innovation that vitalizes society and amplifies individual freedom.

  • The corporate form encourages innovation primarily because it socializes individual interests by creating a common currency for corporate participants.
  • The corporate form encourages innovation in part because it shrewdly promises that any losses, over and above the paid in capital, will be imposed on the rest of society; a participant may at any time withdraw and leave the mess for others.
  • Corporations serve to shield participants from the economic harm of their actions, to reward (or promise reward) for corporate output that the market may value (often at another corporation's expense), to encourage participants to keep trying.
  • Newly formed corporations, in the hands engaged owners, are agents of disruption.
  • For corporations to yield these benefits, it is necessary that they have legal standing, that they be able to own assets, that they have capacity to enter contracts, that they be permitted to bring suit and to answer for the acts of their agents.

For corporations to yield the benefits outlined above, it is not necessary that they have the right to speak, to vote or to participate in political discussions.

  • Corporations need not stand in for the individual voices of its participants to accomplish its purposes; its agents can speak, lobby and vote in their personal capacities to advance the corporate interests, if they so choose.
  • By limiting political speech to natural persons, by denying corporations the rights of citizenship, society reminds government that natural persons are sovereign, and requests that citizens own their own voices.
  • In a democracy, it is necessary that the least important citizen have a more effective voice than the largest corporation.

In the hands of professional managers, indifferent directors and balkanized shareholders, corporations with the power of political speech can wreak havoc by:

  • Bribing politicians to impose policies that thwart competition, accountability, the free market, the free flow of ideas, and entrepreneurialism.
  • Preempting the voices of its own employees and shareholders.
  • Turning the purpose of the corporate form against itself, making it an agent of conservatism, corporatism, rent-seeking and the status quo.
  • Thwarting the formation and growth of new corporations.

Mad Men & Startup Management

This post is not likely to make sense unless you watch the Mad Men TV show. If you're a casual follower of the show but can't keep the character names straight, this Wikipedia post names them all and summarizes their parts in the narrative.


Is management of Don Draper's new firm top-heavy? Crowded with unnecessary co-founders?

The startup is named "Sterling Cooper Draper Pryce," but what do co-founders and name-partners Bert Cooper and Roger Sterling do all day? As for a third, Lane Pryce, he may perform the day to day tasks of a narrowly empowered controller, but surely his job would be better performed by office-manager Joan Harris.

Bert Cooper has the smallest footprint, but the weightiest. At the start of Season 4, Cooper reprimands Draper for blowing an interview with a trade magazine. The published article reflects poorly on the new firm and causes a client to leave. "Turning creative success into business is your work, and you've failed," Cooper intones. (He delivers this reproof, moreover, in front of everyone; this was appropriate because Draper was making excuses and disclaiming responsibility in front of the team.)

It is vital that the CEO of a new company have someone with the judgment and the moral authority to deliver critiques like that. No doubt Cooper's reproof eats at Draper and is directly responsible for an internal realignment of attitude that sets him up to ace a second interview -- a second chance arranged, naturally, by Cooper.

Roger Sterling shows up everywhere, in client meetings and management briefings, but he's not making or delivering any goods. He's ostensibly managing the firm's clients, but the actual hand holding is done by Pete Campbell. Sterling's like a friendly angel with rich operating experience, someone who drops in frequently and lends perspective. Ultimately, though, his value is also best measured in terms of the support he gives the founder. Sterling is not a father figure like Cooper, but acts more like an indulgent brother. He sees the sharp edges of Draper's character and intervenes to blunt those edges, all the while pretending not to challenge Draper.

Will Don Draper turn into a successful, long-term founding CEO?

Possibly, if Cooper and Sterling have the staying power and the interest to continue to mentor him.

For the better part of the arc of the show so far, Draper has not shown aptitude or interest in the care and feeding of his team. We saw a flash of capability at the end of Season 3, when Draper deployed a modicum of interpersonal intelligence in (successfully) raiding the talent of his old firm. And his second interview, at the end of the Season 4 premiere episode, shows Draper to be meeting Cooper's challenge, accepting responsibility for being the face of the firm. In this concluding scene, Draper seems (very much unlike the Draper we have known before) to relish the experience.

Draper is more like a founding CTO. The analogy is inexact because an ad agency is the farthest thing possible from a technology company; but it's apt in the sense that Don is responsible for the design and the quality of the company's product. It makes sense to build a company around a CTO, or a creative director. But it's going to be hard work. Cooper and Sterling will have the opportunity to earn their founding stakes.

Below the name-partner level, the firm is rife with talent. Peggy Olson is arguably the better choice as CEO, and could likely succeed from within, if Draper either shrinks from the challenge or finds the imagination to better leverage her talent. Joan Harris should be COO. Lane Pryce is baggage, when you have talent like Harris around.

Dividend and Capital Gains Tax Rates Should Track, Part II

Treasury Secretary Tim Geithner said on Meet the Press yesterday that he would like the capital gains tax rate to stay at 20%, and that he would prefer that taxes on dividends not exceed that rate.

That's good news, and may portend that the President will ask Congress to not let the tax rate on dividends increase. Joe Wallin blogged that the tax rate on dividends will balloon unless Congress acts, and I rejoined with some thoughts on why startups and emerging growth companies -- businesses that do not pay dividends -- should care. Keeping capital gains and dividend tax rates in alignment make it more feasible for a company and its investors to foresee liquid returns on investment without necessarily having to sell the business.  

I don't want to get too partisan here, and I know politicians use the Sunday talk shows to get their talking points out there, but I also found the Geithner interview interesting for other things he said, by way of signaling government policy:

  • Rather than seek and spend more stimulus money, government efforts should now focus on spending the money previously allocated, working on tax cuts and the flow of credit to small businesses, and otherwise facilitating the ongoing transition of responsibility for the economic recovery away from government and back to private investors.
  • Government under the last administration got too big. President Obama wants the size of government, relative to the total economy, to return to its proportion under President Reagan.
  • Financial reforms are essentially about disclosure. Fairer mortgage, consumer credit and savings and investment terms will make it easier for individuals to make choices, but the privilege and the onus are on individuals to make the choices.
  • The size of the financial sector, that portion of the economy that moves money around but does not actually make anything (interviewer David Gregory's thrust), relative to the economy, will be whatever it needs to be; the point is to return it to the important functions it performed well prior to the crisis. 

When Product Innovation Is Not Enough

Sad business, the news Thursday that Michael Dell was settling a complaint brought by the SEC "without admitting or denying the allegations."

Time was, Michael Dell was heralded as a disruptive innovator. He is on Ben Horowitz's list of founders who run "great technology companies . . . for a very long time." Early in my career, he was an upstart and a hero and his company supplied laptops to almost everyone I worked with inside successive startups.

Part of why long-term founding CEOs are so cool is that they possess that uncanny ability -- not often emulated by professional CEOs -- to innovate new product cycles within an established company. (This is a key thesis of the Horowitz post that includes the list referenced above; my riffs on that post are collected here.)

But the SEC complaint tells a sordid story of "innovation" at Dell Inc., whereby Dell management would let Intel know how much of a credit Dell needed from Intel, quarter by quarter, to enable Dell to meet its earnings estimates. For a period of years, like clockwork, Intel would oblige, often issuing an amount so precise that Dell would hit its earnings-per-share estimates to the penny.

Investors were none the wiser, according to the SEC, because Dell management cited declining component costs and other efficiencies, implying that sustainable trends were at work, and hiding the true, non-recurring, ad hoc, possibly illegal and ultimately unsustainable nature of the payments from Intel.

The SEC complaint is interesting reading, but it is not fun. If Michael Dell could not find a way to innovate to maintain his company's growth, if he had to indulge instead in market manipulation to maintain the patina of consistent performance, maybe he should have left the fold of long-term founding CEOs to do something new. Or, if the product magic was simply gone, to get into Wall Street finance.

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