VentureBlog

Just Say No To Capped Convertible Notes!

Speaking at an angel investors conference last week I took a bold stand and begged the attendees to say no to capped convertible notes. It may seem an odd thing to take a stand against. Sure, take a stand against racism, homophobia, cilantro, but uncapped notes? What's the big deal? That may well be the very attitude that has gotten us into this mess. Capped convertible notes are a lazy solution for people who don't want to choose between debt and equity. They are the worst of both worlds. So I am taking a stand. Just say no to capped convertible notes!

Let's start with the fact that the vast majority of investors would prefer a priced equity round over a convertible note. (I'm leaving open the possibility that there are investors out there who, when given the choice, would prefer a convertible note -- but, frankly, I can't imagine who they are or why they would prefer debt to equity in an early stage startup). Equity takes the guesswork out of a financing -- X dollars invested will buy you Y percent of the company. Period. Better yet, once an angel has made an equity investment, her incentives are perfectly aligned with the entrepreneur in whom she has just invested. Entrepreneur and investor alike will strive to make the company as valuable as possible and to raise future money at a price that is significantly higher than that of the last round of financing.

Despite the certainty of equity financings, entrepreneurs often prefer to raise money with convertible notes. In a convertible note financing, the investment an angel makes in the company (technically a loan) will convert to equity in the next round of financing at the price of that round (usually minus some discount). With any luck, the entrepreneur is then able to use that money to grow his business, increasing the value of the company, and thereby decreasing the percentage of the company that the angel investor will ultimately own. Therein lies the appeal of an uncapped note to an entrepreneur -- the more progress the entrepreneur makes, the less of the company he has sold in the angel round of financing.

In light of the the disparate incentives built into these two financing vehicles, it is not surprising that entrepreneurs and investors are often at odds over how to structure an investment. But rather than debate the merits of the respective approaches and choose the vehicle that makes the most sense in the context of that particular financing, entrepreneurs and angels often "compromise" and use a hybrid of the two, the capped convertible note. The capped note converts in a future round of financing at the price of that future round, so long as that price is no higher than the specified cap. In the event that the round of financing gets done at a price higher than the cap, however, the note converts as if the financing had been priced at the established cap.

The capped note may seem reasonable enough at first blush, but the end result can have meaningful disadvantages, particularly for the entrepreneur. Capped notes are the financing equivalent of "heads you win, tails I lose." By capping a convertible note, you are saying that a financing will get done at no greater price than X. So if the company does well, the maximum price that an angel investor will pay is set. However, if the company stumbles, the investor will get the advantage of a financing price below the established cap. Given that, the entrepreneur might as well have done an equity round in the first place. At least the equity round would not have carried with it the downside risk of a capped note.

The capped note also has negative consequences in the event that a company raises money at a price significantly higher than the cap. Imagine an entrepreneur raises an angel round of $1M at a $5M cap. The least that the angel investors will ever end up owning of the company is 20% ($1M/$5M). In the event that the Series A round gets done at, say, a $20M valuation (4 times the cap), the angel investment will convert into the equivalent of $4M in Series A Preferred Stock. While that was the bargain in the angel round, it has an unintended consequence -- rather than getting $1M in liquidation preference, the angels now get $4M in preference. Again, the end product is worse for the entrepreneur than if he had simply priced the round in the first place. [1]

None of this is intended to argue the relative merits of priced rounds or uncapped convertible notes (although I am a firm believer in priced rounds). It is simply intended to point out the clear disadvantages of capped notes. Next time you are negotiating an investment in an angel round -- whether you are the financier or the entrepreneur -- don't fall back to the capped note as a supposed middle ground. It is the worst of all worlds. Just say no to capped convertible notes!

[1] There is a temptation to argue that caps on convertible notes are higher than the price at which an equity round might get done. Therefore, there is still economic advantage to a capped round over a priced round. But there is no empirical evidence to that effect. I would argue that the price an angel would pay in an equity round is indistinguishable from the price at which an entrepreneur is willing to cap a convertible note round. If that is the case, entrepreneurs should prefer equity rounds to capped notes 100% of the time.

Great Lawyers Are Worth More Than $5,000

If you want people to leave lots of comments agreeing with you, write a blog post saying that something is too expensive. And if you read the comments to Fred Wilson's latest post -- "A Challenge to Startup Lawyers" -- you'll see a whole lot of agreement. Fred argues that it should cost less than $5,000 in legal fees to close a straight forward seed transaction and asks, "[w]hat do we need to do to get there?"

Ordinarily I wouldn't jump into the fray here. What's the upside in defending attorneys? Everyone thinks that lawyers are a "transaction cost" and an impediment to getting real business done. Everyone thinks that they're getting overcharged for their legal bills. Everyone loves hating attorneys. That is, everyone but me.

So why jump in here? Because I think Fred's challenge misses the point. These "simple transactions" are the very foundation on which the companies in which we invest are built. They may involve uncontroversial terms (although, I don't think that is really true either -- look at Fred's own comment in which he objects to Ted Wang's "standard" financing docs as "missing a few things"), but they are not trivial by any means.

The contents of a company's Delaware charter will control the long-term governance of that company (and should it really be a Delaware company? a New York company? a California company? a Nevada company?). The terms of a company's "standard" stock option plan will have a huge impact upon how those shares are treated and traded (anyone who's watching what is happening with Facebook stock on the "private" secondary market today knows that something has to be done to fix these broken plans). The protection of intellectual property from day one is critical for a startup. And the failure to understand and comply with mundane tax laws can cost founders and companies millions down the road. These aren't exciting topics and they won't make a startup successful, but they are critical to the long term success of a company.

I am sure that the mere process of closing a seed financing could be achieved for less than $5,000. Fred's post essentially describes a situation in which the lawyers are merely the scribes of a pre-determined, uncontroversial and standard financing deal. In that case, the lawyers are really acting as overpaid secretarial staff -- do a search and replace for company name and send the docs off to Delaware. There's little question that a lawyer can get that done for five thousand bucks.

But even if such a simplified financing actually existed, the lawyers wouldn't be done. No two companies are alike. The founders all come from different places (did they start the company while working at another company? did they start the company at school? did they start the company alone or with a pair of megalomaniacal twins? etc.). They are all attacking different markets with different competitive landscapes and different competitors. They all rely upon marketing, business development and relationships differently. And they all have different histories (has the company been around for a day or a year or a decade?).

All of these things have a big impact upon not only how you set up your company but how much work it takes to get the company in shape. I have certainly seen some daunting legal bills when I first put money into a company, but in those cases it was not driven by wasteful attorneys, it was driven by real messes that needed to be cleaned up. If your assumption is that you are investing in a company for the long haul and are hoping to build a big and valuable business, every penny spent getting your house in order before moving forward is money well spent.

Sure, you could close an angel round for $5,000. But it would be penny wise and pound foolish. Establishing the foundation for a great company matters more than a few thousand dollars. Anyone who's worked with outstanding attorneys knows that they are more than overpaid scribes -- they are invaluable business partners. Maybe its just the former lawyer in me speaking, but I think a better challenge than getting your financing done for $5,000, would be to get your financing done right.

Four Square Fatigue and the Evolution of Privacy

Over the last few weeks I've started to suffer from Four Square fatigue. After all, Four Square is a lot of work. To get the benefits of Four Square, you need to proactively check in wherever you go. And, while each checkin requires a relatively small amount of work, in the aggregate, it takes real effort to make the most of the Four Square experience. Would it be better if Four Square just checked you in automatically any time you lingered at a location for more than 15 or 20 minutes? Or does that cross the privacy line for most of us?

The challenges of Four Square have gotten me thinking more broadly about privacy on the web. On the one hand, the less proactive input a service requires, the less friction there is in maintaining its usefulness. Automatic Four Square naturally will produce more data, on average, than does a Four Square that requires proactive behavior. And, for many, the Four Square experience would be greatly enhanced. On the other hand, when data is being passively collected by a service, there are natural privacy concerns that come with that data collection. How many of us want our every daily stop published to the Web? So perhaps automatic Four Square would turn away more users than it would attract.

This privacy vs. utility debate is not a new conversation. You may recall the uproar in the early days of the Web around personalization. There were those (perhaps there still are) who were deeply concerned about the collection and retention of data for the purpose of personalizing the online experience. Yet few of us today find it concerning to receive Amazon's product recommendations or Ticketmaster's concert reminders. In fact, if you are like me, you are more than willing to provide scads of personal data to enhance your online experience.

Personalization has evolved over time. In the early days of the Web, you had to explicitly state a set of preferences. The Internet only thought you liked the things you said you liked. Now services like Amazon and Netflix quietly collect preference data from the things you buy and watch. And, of course, ad networks collect tons of data by watching where you go on the Web, what you click on, where you linger on a page. Using this data, advertisers are increasingly sophisticated about the advertisements they choose to present to you as you wander the Web.

While there are still those who find ad targeting intrusive, if you are like me, you are happy to have ads for things you actually care about (if only spammers were as sophisticated -- or do they know something I don't about my coming erectile disfunction). As with personalization, consumer acceptance of ad targeting has been an evolution. Targeting has grown more precise, more granular and, as a result, more valuable to consumers. [1] As consumers have seen the value of that targeting, they have grown increasingly accepting of the things they had previously feared.

We have all seen that consumers are willing -- often times happy -- to trade privacy for utility. I know that I am. And, while Mark Zuckerburg's statement that privacy is a generational concern was controversial, I think he is absolutely right about that. The coming generations of consumers may not abandon the idea of privacy in its entirety, but they will certainly have very different views of the appropriate balance between privacy and utility. That balance has already clearly shifted in the direction of utility and I believe the trend will continue.

To some this will be viewed as a warning -- a cry of the coming privacy apocalypse. I don't see it that way. As technologies and standards evolve, doors open to new products and services. We are on the verge of an explosion of new ideas.
Automatic Four Square and its progeny are coming. And I, for one, am excited about that.

[1] Obviously there are extremes of everything. It is perhaps too "granular" to start seeing ads for Prozac after buying a book on depression, or ads for funerary services after sending an email about the passing of a family member. But, to my mind, businesses are ill served by crossing those lines. The marketplace will vote loud and clear -- one need look no further than Facebook's beacon program -- and keep non-market behavior in check. The advantage of markets, of course, is that they correct for evolving standards. Perhaps there will come a time when consumers consider it perfectly appropriate to receive advertisements for funerary services upon the passing of a loved one. When that time comes, there will be real utility in the coffin banner ads and consumers will be happy to see them. Why should current standards of appropriateness impede such "progress."

Fueling the IPO Fire? or Burning it Out?

This weekend I was reading a blog post written by Chris Douvos. Chris is an investor in a number of well-known venture firms and writes a blog called Super LP. His commentary always cracks me up, even when he's writing about the finer points of risk curves, financial models and the like.

In his post entitled "Keeping the Window Open," Chris cautions the investor community to not be too overzealous in taking companies public during this time when the gently re-emerging market is so fragile. As he rightfully points out, those companies that go public and then promptly miss their numbers, not only tank their own valuations but also spoil the markets for everyone else. If investors can't trust newly minted public companies to do what they said they were going to do, the markets will simply reject future public offerings as more of the same old head fake.

The conversation reminded me of the good old days when I was an attorney. One of my final acts as a lawyer came at the board meeting of a rapidly-growing but somewhat erratic startup. The venture investors in that startup sat at a board meeting reveling in their growing user-base and began discussing the idea of taking the company public. The VCs were in rousing agreement that we should promptly commence work on the company's S-1.

Lacking a certain self-preservation gene, I pointed out to the VCs that should the company miss its numbers after going on file, it would have to pull the filing and be in a much worse position than when it started. Thus, I strongly recommended that the company wait until it had greater predictability of revenue before filing to go public. Not only were the VCs not wowed by my erudite advice, they promptly fired me and hired another attorney to draft the S-1. Of course, I would not be telling this story if the startup did not ultimately miss its numbers and have to pull the filing. More importantly, this was precisely the sort of company Chris cautions us VCs against taking public this time around -- and I am with him one hundred percent.

There are too many great companies lined up and ready to get public for us to jeopardize the IPO window trying to get middling companies out. As Chris rightfully notes, if we can take solid companies public, "[t]heir success should lead to more opportunity for other companies." If, however, we take marginal companies public, their lack of success will spoil the market for even the most solid of performers.

I realize that the lure of liquidity may be too much temptation for some in the venture community, but I would urge patience in the face of uncertainty. The venture business is a long-term business and the more we can do to grow the overall pie by being circumspect about those companies we bring to market, the better off we all will be in the long run.

Entrepreneurship for Lawyers

I was recently reading some old posts on Venture Blog and couldn't believe how short they were. One might call them pithy. Or one might also call them lazy. Either way, they were short. I should really try that again.

I have been teaching a class at Harvard Law School this winter semester called Venture Capital and the Technology Start-up with John Palfrey, the Executive Director of the Berkman Center. It is really fun to be back at the law school and working with John. I have been blown away by the energy that the law students are bringing to the topic of Entrepreneurship and Venture Capital. Sadly, I never had a VC or Entrepreneurship class in law school. Lets see, I had torts, contracts, criminal law, federal courts, administrative law, property, intellectual property, corporations, securities regulation, constitutional law . . . but no entrepreneurship. Then again, I don't know that I would have had the sense to actually take a VC or Entrepreneurship class back then. So its presence would have been wasted on me.

Today my students had to actually pitch business ideas to real live VCs from the Boston area. And they did a great job. As I was discussing with them how to think about company building and pitching, it struck me that much like the law, building great companies is all about applying precedent. Only, instead of the applicable precedent being case law in this instance, the applicable precedent is a business case. Pitching your business is all about finding the right business analogs and describing how they apply to the company you're building (e.g., "we're the Amazon.com of funeral supplies."). That isn't so different from finding the right case analogs and describing how they apply to the lawsuit you're defending. So there may be hope that we lawyers are able to figure out this entrepreneurship stuff yet.

Recovering From FOO Camp

I can't decide what is making it harder for me to write this morning. Is it the fact that I am still completely exhausted after a weekend of too little sleep and too much mental stimulation? Or is it the more mundane fact that God-awful music is blasting out of my speakerphone courtesy of the now 57 minutes I've been on hold with Bank of America credit card services? I'm going to go with mental overload because I refuse to cede the power to communicate to B of A musak.

This weekend I was privileged to attend Tim O'Reilly's FOO Camp. FOO stands for "Friends Of O'Reilly" but the crowd is only a small subsection of those who count Tim as a friend. Tim has long been not just a uncanny predictor of future technology trends but a supporter and promoter of both those technologies and the individuals responsible for inventing them and shepherding them from concept to phenomenon. The individuals present at this year's FOO Camp had played significant rolls in the creation and dissemination of some of the most important technologies over the past decades (from Lotus 1-2-3 to Perl, Python, Ruby, Flash, you name it). But the conversations of FOO Camp were clearly pointed at the future, which leaves one's mind spinning.

One of the things that is striking about FOO Camp is that nearly everything that takes place over the weekend is collaborative. Talks are rarely lectures -- they are conversations. Ad hoc projects at FOO take interesting twists and turns because they are necessarily interdisciplinary, driven by experts in hardware, software, networking, who are encouraged by the environment to think out of the box (a child of FOO's inventive environment was unveiled at this year's gathering -- Chumby is an open source hardware and software platform that truly embodies the collaborative and interdisciplinary nature of FOO). As I wandered around O'Reilly's campus Saturday night I was struck by the incredibly inclusive, social and creative energy everywhere -- in one room a group of folks were singing and strumming Simon and Garfunkel tunes, in another a crowd was engaged in their 5th or 6th hour of Werewolf, on the patio a few pyromaniacs enjoyed a fire sculpture involving propane and a zen sand garden, others gathered 'round the laser in Make Magazine's office engraving their laptops and cell phones with various a sundry images and insignia.

Two of my favorite sessions during FOO Camp were further testimony to the collaborative nature of the weekend. One of the "talks" was entitled "Halfbaked.com: entrepreneurial improv theatre." It was organized by Dave McClure, Paul Rademacher and James Levine, who had the great idea of randomly assigning teams of participants two word company names and, with fifteen minutes of preparation time, having them then present their business plans to a panel of VC judges (namely, me and Paul Graham). The results were clever and funny and felt sufficiently close to my day job as to be a little disconcerting. The winning team pitched Bottlecap Porn, fully functional (if somewhat under-featured) website and all. The other session I can't stop talking about was called "That Sucked," which was organized by Joshua Schachter. In Joshua's session, he started off by telling about times he'd been faced with technical challenges that really sucked. He then opened up the floor to the crowd to share their stories. The tales of woe expounded were like a history of computers gone bad, from printers shooting parts across the room to infinite loops to missing source code (the inspiration for SourceForge). They were simultaneously the geekiest and funniest stories I'd heard in some time. And like the "Halfbaked" session, virtually everyone in the room participated, making the session all the more illuminating and entertaining.

I hope that Tim and the entire O'Reilly organization get as much out of FOO Camp as do the participants. We all certainly owe him a debt of gratitude for hosting this incredible event.

Post Script: I hung up on Bank of America after being on hold for 190 minutes! I hope there is less of a wait when I call to cancel my card.

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Who Owns Scobleizer?

Last week I co-hosted an event with the folks from Levensohn Venture Partners on corporate blogging. Our guests were Robert Scoble and Shel Israel, who talked about their book Naked Conversations and about the impact of blogging on the corporate world. We invited entrepreneurs from the August and Levensohn portfolio companies to the event, as well as some friends of our respective firms who were particularly interested in the evolution of blogging as a marketing medium. The conversation was an enjoyable one. And Shel and Robert were incredibly gracious, even when I accused them of being "full of shit" (which, of course, I meant only in the most positive sense of the phrase). But the content of the evening's conversation is not what's presently on my mind. Robert Scoble himself is.

Robert Scoble is a gregarious, affable guy. He enjoys himself and, in return, he makes those around him enjoy themselves as well. He's a voracious reader and a voracious writer. And, as a result of all of those traits, has become one of the first celebrities of the blogsphere. Robert's blog, Scobleizer, is read by hundreds of thousands of people. It has the capacity to drive huge traffic to the web properties he cites. But, more importantly, for the longest time, Robert Scoble's blog has been synonymous with "The Microsoft Blog." In fact, search Google for "Scobleizer" and what comes up is "Scobleizer: Microsoft Geek Blogger." Robert Scoble was, for all intents and purposes, the Microsoft blogger.

About a week ago that all changed. Robert Scoble left Microsoft and joined a new media startup called PodTech. He took with him his celebrity. He took with him his authority. And he took with him Scobleizer, his blog.

Ever since Scoble left Microsoft, I've been thinking about the question of who owns Scobleizer. After all, didn't Robert write Scobleizer during work hours, using Microsoft's computers? In fact, wasn't it Robert's job at Microsoft to write Scobleizer? Didn't Microsoft pay him thousands of dollars in salary, and thousands more in travel expenses, to represent Microsoft in the blogging world and to do so, at least in part, by writing Scobleizer?

While I don't have Microsoft's agreement handy, here's some standard language from a form employment agreement with regard to the creation of copyrighted works:

Assignment of Intellectual Property. I agree that I will promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and hereby assign to the Company, or its designee, all my right, title, and interest in and to any original works of authorship, inventions, concepts, improvements or trade secrets, whether or not patentable or registrable under copyright or similar laws, which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the service of the Company (collectively referred to as "Intellectual Property") and which (i) are developed using the equipment, supplies, facilities or Confidential Information of the Company, (ii) result from or are suggested by work performed by me for the Company, or (iii) relate to the business, or to the actual or demonstrably anticipated research or development of the Company. The Intellectual Property will be the sole and exclusive property of the Company. I further acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of and during the period of my Relationship with the Company and which are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act.

I imagine that Microsoft's employment agreement has similar language. It says, in essence (for the non-lawyers out there), that anything an employee writes (1) while employed by the employer, (2) using the employers equipment, supplies and facilities, and (3) related to the business of the employer, is owned by the employer. It makes perfectly good sense and seems pretty squarely to apply to Scobleizer. (For those of you out there saying to yourselves, "isn't there an exception when an employee had developed the intellectual property prior to joining a company?," that is certainly true but would only apply to the portions of Scobleizer written before Robert joined Microsoft.) So doesn't Microsoft own Scobleizer?

I raise the question of who owns Scobleizer, not because I think that Microsoft should enforce its rights in Scobleizer, but because I think that it raises an important question about corporate blogging. If corporate blogging is about allowing employees to express their genuine voices and to attract audiences for the company's products by virtue of that blogger's own voice and message, won't companies continuously face the problem that the "good will" that comes from corporate blogging will attach to the individual bloggers rather than the corporation. I am willing to guess that PodTech paid mightily for the good will that Robert Scoble brought with him to his new company.

The challenge for corporations is that the standard wisdom when it comes to corporate blogging is to empower individuals to speak for your company. Corporations are urged to allow employees and executives alike to speak for the corporation in their own non-scripted way. This is precisely what Robert and Shel promote in Naked Conversations, and reiterated at the August/Levensohn dinner last week. Yet, as can be seen in the "who owns Scobleizer?" quagmire, allowing employees to speak on the company's behalf in a way that promotes the blogger at least as much as it promotes the company, can be perilous. Corporations may spend thousands of dollars to establish credibility, only to see that credibility walk out the door.

So was it really in Microsoft's interest to pay Robert Scoble thousands of dollars to write Scobleizer, only to have him take it with him when he left the company? Probably. Scoble made great strides in humanizing an otherwise reviled corporation. But as we continue to evolve our think about blogging as a corporate marketing medium, it will be important for companies to think carefully about who can blog on the company's behalf and in what manner. Wouldn't Microsoft rather have a Microsoftizer than a Scobleizer next time around? It is time for executives to think more strategically about blogging and its long term effects on their business and competition in the marketplace. In the mean time, it may be time for me to start Hornikizer: August Capital's Freak Blogger.

The Web 2.0 Trademark Controversy: Take Note and Take Care

Over the last several days, I have been reading the "discussion" of trademark law that has been taking place in a blog neighborhood near you. As some of you may know, in a past life I was an Intellectual Property attorney -- as they say, once an IP attorney, always an IP attorney. I actually find the intersection of law and business a really interesting, thorny discipline, with very real world implications. Three things fall out of my background and this interest: 1) I am probably slightly more "helpful" (aka, annoying) than your average VC when it comes to discussing IP issues at board meetings; 2) I have the fun of teaching a class called "Intellectual Property and its Impact on Business" at Stanford Business School (the primary objective of which is to help future entrepreneurs know when they should call a lawyer); and 3) I can't help myself, I have to comment on the controversy brewing over CMP's attempt to protect the "Web 2.0" service mark.

For those of you who haven't been following the controversy, here's the Cliff's Notes version:

In 2003, O'Reilly Media executive Dale Dougherty coined the phrase "Web 2.0" and the O'Reilly organization adopted it as a moniker for stuff that isn't Web 1.0.

In 2003, Tim O'Reilly and John Battelle decided to create a conference to talk about this new web stuff and dubbed it the "Web 2.0 Conference." They partnered with CMP Media, a big conference organization, to run the event.

In 2003, CMP Media filed for a service mark in the name "Web 2.0" with respect to conferences and live events.

In 2004, all this Web 2.0 stuff got big.

In 2005, all this Web 2.0 stuff got bigger.

By 2006, I think it is safe to say that the Web 2.0 Conference had become one of the premier events of the year. It was named Conference of the Year in 2005 by the smart folks at Conferenza. It was packed. It was sold out. It was a great conference.

In February 2006, [email protected], a non-profit technology networking organization in Ireland, announced its "[email protected] Web 2.0 half day Conference" to be held on June 8, 2006. They invited Tim O'Reilly to speak at the conference, which he politely declined.

May 24, 2006, CMP sent [email protected] a Cease and Desist letter informing them that CMP had a pending service mark application in the name "Web 2.0" with respect to conferences and live events. The letter concluded, "CMP hereby demands that you immediately cease and desist from utilizing Web 2.0 as the title of your event and from making any further use of our mark, or any mark that is confusingly similar to it."

On May 25th, Tom Raftery, one of the organizers of the "[email protected] Web 2.0 half day Conference" blogged about the Cease and Desist letter and asked his readers for advice on how to deal with the demand from CMP.

By mid-day May 25th the CMP assertion of a servicemark in the name "Web 2.0" had spread like wildfire around the blogsphere.

Between May 25th and May 30th, numerous bloggers chimed in on the controversy, many lashing out at Tim O'Reilly personally. The overwhelming tenor of the discussion was extremely negative. Tim, unfortunately, was on vacation and out of touch -- he did not learn of the issue until he returned at the end of the week.

On May 30th, Tim O'Reilly posted a long and thoughtful response to the "Web 2.0 Service Mark Controversy" in which he stated (and I am vastly oversimplifying) that while he believed that the communications with the [email protected] organization had been botched (and he apologized to Tom Raftery for the miscommunication), it was appropriate to assert rights in the service mark "Web 2.0" with respect to conferences and that CMP Media legitimately owned that service mark.

I fear that this post is sounding a little like an exam question (take note future b-school students of mine -- this would make an excellent exam question) and in many ways it is. There are very complicated trademark issues at stake. And, unfortunately, trademark law is a fuzzy discipline. If you were to survey 100 trademark attorneys on this question (and I think I will), you would likely get 100 different answers. There is nothing black and white about trademark law. Some trademarks are stronger than others (e.g., Fandango vs. Tickets.com), different companies can own the same marks in different goods and services (e.g, Monster.com vs. Monster Cable), and some marks gets such wide adoption that they are deemed generic over time and are no longer protected at all (e.g., thermos, aspirin, etc.).

Before I dismiss the trademark question as unanswerable with any certainty -- at least by me, a former-attorney who never specialized in trademark law -- let me just add one more important foundational concept around which all trademark law is built. Trademark law is all about attribution. A trademark is intended to be an identifier of source. In other words, when you go drink a Diet Coke, you can make basic assumptions about the likely taste, quality, safety of the product because you "know" the company that is responsible for producing it (The Coca-Cola Company). And if you were to drink a Lemon Coke, you would make similar assumptions about the taste, quality and safety of the soda because you would assume that it too came from the same source (The Coca-Cola Company). If it turns out that Lemon Coke is not produced by The Coca-Cola Company, that is a breach of Coca-Cola's trademark because 1) Lemon Coke sales are assisted by the false association with Coca-Cola's good reputation, and/or 2) The Coca-Cola Company's reputation is harmed by the assumed association with an inferior product.

Given that trademark law primarily concerns identification of source, the question for me is to what extent the term "Web 2.0" has appropriately become associated with CMP Media or, more specifically, the CMP Media event "The Web 2.0 Conference"? I believe that the answer to that question is that "Web 2.0" when used in the context of a conference or live event is very much associated with Tim O'Reilly and John Battelle's "Web 2.0 Conference" that is run by CMP Media. Given that, and assuming that the "Web 2.0" service mark has been appropriately granted to CMP Media, they certainly have the right to assert their mark against other conferences or live events attempting to use the moniker. Nothing that CMP has done or Tim O'Reilly has said suggests that they are attempting to assert the "Web 2.0" mark more broadly. That would undoubtedly be a different calculus. But, to my mind, there is nothing sinister, nor anti-competitive about registering a service mark for your conference and then attempting to protect that mark and maintain the purity of the association.

Even if my legal analysis is correct, that does not ultimately answer the question of whether or not CMP Media should have sent [email protected] a Cease and Desist letter. The reason my course at Stanford B-School is entitled "Intellectual Property and its Effect on Business" rather than the simpler "Intellectual Property" is that I believe Intellectual Property needs to inform business decisions, not dictate them. Entrepreneurs should never take on risks that they don't understand and appreciate fully. But that is not to say that entrepreneurs should never take on risk -- they should just choose to take on that risk after fully exploring its scope. In some cases that risk is Intellectual Property risk (will my ability to enforce my trademark be diminished by my failure to enforce it in this instance?). In other cases that risk is pure business risk (will my long-time supporters turn on me if I enforce my trademark in this instance?). Or perhaps a mixture of the two.

I am quite certain that had CMP fully appreciated the potential business risk of sending a Cease and Desist letter to [email protected], they would not have done so. More importantly, I am certain that if Tim O'Reilly had had the opportunity to consider and comment upon the risks of such aggressive trademark enforcement by CMP, he would have urged them to think better of it. But, alas, whoever ultimately made the decision to crack down on the use of the "Web 2.0" service mark (I suspect it was a lawyer, not a business person) did not fully consider the ramifications of doing so and the result of that action have reverberated throughout the blogsphere.

Despite the incredible vitriol that has been spewed as a result of CMP's actions (and Tim O'Reilly's guilt by association), it is hard for me to believe that this is a hanging offense. Perhaps the communication was handled less delicately than was appropriate, but I believe that CMP Media has every right to enforce its interest in "Web 2.0" when it comes to conferences. In this instance, however, what I believe is less important that what a very vocal community of influencers has to say and they have no doubt spoken. I hope that they will at least take Tim O'Reilly at his word -- those of us who know Tim appreciate him for his unflinching honesty and forthrightness -- and consider his well reasoned apology and response to this controversy. For good or bad, this has been yet another reminder of the incredible power of digital media -- entrepreneurs and VCs alike should take note and take care. I know that I will.

Celebrating Creative Commons

As a long time supporter of Creative Commons, I was thrilled to get an invitation to the Creative Commons reception last week celebrating Jimmy Wales' joining the board of Creative Commons International.

It was only after a couple years of teaching copyright law to business school students that I fully appreciated the power of what they are doing over at Creative Commons. Since the media lobbyists appear to have a solid hold on Capital Hill, thus making copyright reform pretty unlikely, Creative Commons empowers content creators to very simply make their own content freely available for use by others (in such ways as the content owners see fit). Thus, for example, I am able to make all of the content on VentureBlog available to be copied so long as I am appropriately credited as the source by easily adopting a Creative Commons license.

On the way up to the Creative Commons party I recorded the preamble to my most recent VentureCast. I then caught up with a number of interesting folks -- people like Joi Ito, JD Lasica, Mitch Kapor -- and asked them why they supported Creative Commons. I got a number of interesting answers, some of which I have included in my podcast. Give it a listen and see if you find the zealots at the Creative Commons party convincing. I certainly did.

Lawyers Take Hold Of Blogging

After more than our share of public blood lettings in the blogsphere as a result of employee bloggers running afoul of their corporate parents, it is not surprising that companies are starting to issue blogging guidelines. The issue is a real one but until recently it was a small and isolated problem. But if ever there was an indication of the increasing prevalence of corporate blogging, it can be found in the email alert I just received from the Howard Rice law firm. The email alert was entitled "Corporate Blogging: Seize the Opportunity, but Control the Risks" and it laid out both the legal risks raised by corporate bloggers and some "practical guidance" for dealing with those risks. In fact, when I spoke with the Howard Rice lawyers who issued the alert, they said that they were rapidly developing an "expertise" in the law surrounding blogging and would be issuing additional blogging alerts in the future.

Blogging is indeed mainstream when legal practices emerge around it -- which is not to say that the advice Howard Rice gives isn't well taken. As a former lawyer, I couldn't help but spend a bunch of time thinking about the legal implications of blogging on my professional life before we started VentureBlog. As a result, I ended up drafting one of the first blog Terms of Service out there (who knows, maybe it was the first -- I couldn't manage to find anyone else's to plagiarize at the time I was drafting VentureBlog's). More importantly, we also spent a chunk of time talking with the whole August Capital partnership about blogging and how it might implicate the partnership either directly or indirectly. While we obviously concluded that the benefits of blogging greatly outweighed the risks, it was extremely helpful to go into it with eyes wide open and clearly set expectations within my "company."