William Carleton, Counselor @ Law

Making an offer without making an offer

This is interesting: Richard Schulze has this morning sent a letter to the board of Best Buy, memorializing an offer to buy the company.

Except it isn't an offer. Call it a non-binding letter of intent, then?

No, not that either, because "neither Best Buy nor I shall be subject to any binding obligation with respect to any transaction unless and until a definitive agreement is executed and delivered."

Schulze writes that he has put a lot of work into his non-offer, and alludes to legal reasons for not being able to be more definitive about what he is proposing:

"Over the last two months, I have done an extensive amount of work to develop a plan to address the company’s challenges, and I have had conversations with several premier private equity firms with deep experience in retail who are interested in a possible acquisition of Best Buy. In addition, I have had discussions with highly-regarded former Best Buy senior executives, including Brad Anderson and Allen Lenzmeier, who have expressed an interest in rejoining Best Buy in this context. As you are aware, Minnesota law requires that I receive permission from the Board of Directors before I reach any agreement with potential partners in this effort. While I have not yet reached any such agreements, I am confident, based on my discussions to date, that I could in short order if the Board allows me to do so."

Except that he goes on to be pretty precise on what he'd pay for the company: "Based on my analysis of publicly available information, and subject to due diligence, I would propose to acquire all of the common stock of Best Buy for a purchase price in the range of $24.00 to $26.00 per share in cash."

Call it a proposal, then. One without the financing lined up, but credible, given the team of bankers and execs pulled together . . . er, lined up ready to be pulled together.

Photo:  Ron Dauphin / Flickr.

Entrepreneurs, real and fake

This passage from the Isaacson biography of Steve Jobs has been quoted widely:

"I hate it when people call themselves 'entrepreneurs' when what they’re really trying to do is launch a startup and then sell or go public, so they can cash in and move on. They’re unwilling to do the work it takes to build a real company, which is the hardest work in business. That’s how you really make a contribution and add to the legacy of those who went before. You build a company that will still stand for something a generation or two from now. That’s what Walt Disney did, and Hewlett and Packard, and the people who built Intel. They created a company to last, not just to make money. That’s what I want Apple to be."

If the central point is that cashing in, as an end in itself, isn't all that admirable or ambitous, I totally get that.

But when you think of the ways startups serve an economy of innovation, isn't it a bit peculiar to insist or assume that every new venture should look to build a business that lasts for generations?

Apple, of course, has frequently extended its speed to market through acquisitions of technologies. Some of the coolest features of the iPhone were realized from innovations from startups that sold out to Apple (the acquired technologies that come to mind from the Isaacson book are the pinching and swiping features and the voice recognition function). No doubt that in many cases, Apple improved the acquired technology and otherwise further developed it so that it could be marketable; in other cases, too, the talent acquired (the original innovators) ended up taking a leadership role within Apple to teach the bigger company things it may not have learned otherwise.

When a startup is purchased in order to be shuttered - where the aim of the bigger company is to squash a competitive threat by simply taking the upstart out of the game - then I suppose the takeaway for the startup founders and investors is whatever financial gain they may have realized from the deal; but there are usually points of experience gained, too, that surely have some value for the ecosystem.

Isn't it okay for a group of founders to want to see their technologies reach a market? If the terms are right, can't it make sense to leverage the resources or market share of a bigger company, thus mitigating the financing and execution risks of building their own Apple?

Rhetorical questions, I know, but Jobs's statement is making me think that part of building a "real" company may also include the willingness to become part of another company already on its way at a quicker pace or with greater inertia.

Photo: Michael Fleming / Flickr.

Apple Products and the Force of Personality

As fascinating and well paced as Walter Isaacson's biography of the late Steve Jobs is, Jobs's character did not "click" for me until page 486.

The context is Jobs struggling in a hospital near death with pneumonia. Isaacson writes:

"Even when he was barely conscious, his strong personality came through. At one point the pulmonologist tried to put a mask over his face when he was deeply sedated. Jobs ripped it off and mumbled that he hated the design and refused to wear it. Though barely able to speak, he ordered them to bring five different options for the mask and he would pick a design he liked. . . . He also hated the oxygen monitor they put on his finger. He told him it was too ugly and too complex. He suggested ways it could be designed more simply. . . ."

Suddenly Isaacson's thesis fell into place: Jobs was hard-wired to be the person he was; Jobs's life is admirable, because he found a way to engage with and contribute to the world that wholly leveraged his temperament.

Later in the book (page 543) Isaacson quotes Jobs speaking about one of his own children. "She's in the process of learning how to be who she is, but tempers it around the edges so that she can have the friends that she needs." I read into this a self-awareness, too, and a moral philosophy of life, almost as though you should assess your own personality as a resource for which the optimum use should be found.

The book may have implications for the political debates between proponents of open or closed systems. Or, at least, it debunks the idea that all players in the market arrive rationally at the views they have.

You put the book down with the conviction that Apple's strong positions on the side of integration and utility are not reasoned business calculations but rather manifestations of Jobs's own aesthetic of control. It is absolutely eye-opening to pick up and work with an iPhone, having just read Isaacson's work.

Steve Zakuani on Leadership

"Leadership is when you discover your gift, and you serve it."

That, in a nutshell, is Steve Zakuani's view of leadership.

My girlfriend and I went to hear him speak earlier this month at Seattle Central Community College. Helen paraphrased Zakuani's view a bit more fully, this way: No leader went to school to learn how to be a leader. She just recognized a passion, a gift within herself, and served it.

Zakuani traces the cult of celebrity of today's culture to the Romans and Greeks, who believed certain gifted persons were to be singled out and privileged.

But, Zakuani believes, every person is born with a gift. If a person can identify his gift, surrender himself in service to that gift, he by definition has become a leader.

Leaders don't worry about followers, they just do what they are committed to doing. An apple tree doesn't send out invitations, Zakuani says. It counts on those wanting apples to seek it out.

Part of what Zakuani said makes me think of the perennial discussion within the startup community about mentors and advisors . . . and how much equity to give them. Mentors are very important for Zakuani. In his experience, mentors "never seek to gain from you." They may merit your respect, but fundamentally they are leveraging hard won lessons to give you a jump or leg up. They are spending personal capital on you and are making you the focus.

As a Sounder's fan, I was relieved to hear Zakuani say that he sees himself playing for another 10 years. But as much as he enjoys playing soccer, the game is "too small" to be his purpose in life. He sees soccer as the platform by which he will help others through the Kingdom Hope organization he founded. "I don't play for me. I play for those who are going to need me."

Pioneers of the Commercial Web

Two of my oldest friends, the two serial entrepreneurs I admire most, each a bona fide pioneer of the commercial Web, Dan Fine and Joe Snell, finally met last night.

I'd been looking forward to this for weeks. Among many, many things since, Dan is the Fine in Fine.com, a company that pioneered the idea that businesses might want websites. Among many, many things since, Joe is the startup specialist who, with Daren Tsui of M-Spot, founded Pantheon, a company that pioneered the idea that print newspapers might want to publish other than on paper.

The meeting was the doing of my buddy Randy Price, SVP of ArenaNet, who put Dan, Joe, Jeff Strain of Undead Labs, and me (what was I doing there?) together in a panel for the entrepreneurial law and business MBA class Randy teaches at Seattle University.

How Dan and Joe have not crossed paths or how I have failed to bring them together in the years since Web 1.0, I'm not sure. I guess we've been busy.

They made up for lost time and started comparing notes right away.

And they threaded Jeff Strain, a founder of ArenaNet, into the conversation. And then Randy started the class and the three of them threaded the students into the conversation. Life, the universe, hating working for the Man, being an entrepreneur, caring for a family . . . you have to go to an entrepreneurship class to put all those topics into a thematically integrated discussion.

Many thanks to Randy and the SU students for having us.

Dan's convinced that we haven't seen anything new in 15+ years. Everything - search, bandwidth, interface, experience - is better, but nothing is different.

Miles travelled, still at the starting block.

Pictured, left to right: Jeff Strain, Joe Snell, Dan Fine.

Five Years of Iron Rule

I don't know if the Groupon IPO will come off or not, but I saw a story late last week about their pricing target and I thought I would check back on the S-1.

Interesting development in Groupon's plans for supervoting rights for its founders.

Similar to Zillow, Groupon founders are to hold "supervoting" Class B common stock. This concept was part of the disclosure when Groupon originally filed the S-1 with the SEC back in June.

Since then, some blanks have been filled in. Each share of Groupon Class B common is to have 150x the voting power of a share of Class A common, the security to be offered in the IPO!

Here's how the Groupon S-1, as amended last week, describes the prospective impact of the voting power of Groupon's founders, following the IPO:

"After this offering, our Class B common stock will have 150 votes per share and our Class A common stock, which is the stock we are selling in this offering, will have one vote per share. . . . [F]ollowing this offering, our founders, Eric P. Lefkofsky, Bradley A. Keywell and Andrew D. Mason, will together control 100% of our outstanding Class B common stock and approximately 34.1% of our outstanding Class A common stock, representing approximately 58.1% of the voting power of our outstanding capital stock. Messrs. Lefkofsky, Keywell and Mason will therefore have significant influence over management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future."

But here's the really interesting development, something not contemplated in the Groupon S-1 filed back in June: Cinderella's supervoting shares will turn into pumpkins in 5 years.

"Our Class A common stock and Class B common stock will automatically convert into a single class of common stock five years after the completion of this offering. Following the conversion, each share of common stock will have one vote per share and the rights of the holders of all outstanding common stock will be identical. This provision of our amended and restated certificate of incorporation may be amended only by the affirmative vote of the outstanding shares of the Class A common stock and the outstanding shares of the Class B common stock, each voting as a separate class. As a result of the automatic conversion, our founders will have identical rights as all other stockholders."

Photo by Jonathan_W.

Fixing it Later

Twice in recent weeks I've come across situations where startup founders (not my clients) have uttered something to the effect of, "we can fix it later." Each time in reference to a document discovered at the last minute to have a provision no one really wants.

Exigencies of the moment - the need to close, distress with legal fees - supposedly required signing what was circulated.

But it's not always possible to fix things later.

Check that: depending on when "later" is, the fix that would have been possible in the first instance may be outside the range of what can be accomplished.

Once launched, corporations take on a life of their own. Even if they bypass venture capital, most take on other shareholders. Boards develop and over time assess the landscape independently of founders. As founders have differences, the process of independence accelerates. What had been a "mistake" in a key corporate document can become a valuable corporate asset. The process of "fixing the document" can end up requiring weighing conflicts of interest and approval by independent directors or shareholders. And if the "fix" is not in the interest of the company and all of its shareholders, it probably should be rejected.

Two examples of things that should not be left to "fix later":

• Stock repurchase rights that do not reflect what everyone understands and can live with.
• IP assignments that are too broad.

People conflate "trust" with a mistaken belief that players won't change, that duties won't be owed to others, that "intent" frames and defines legal obligations in some mysterious plane of moral law that trumps what the signed contracts actually say.