I'm pretty mixed on patents. I understand that if a company invests huge resources into discovering something, it is unfair for someone else to simply piggyback and copy it (but I think companies should make money from execution and service, not ideas). I understand there is societal benefit to sharing inventions (but I think the current system doesn't accomplish that since it's impossible to keep up with the multitude of patents granted and in-progress).
I believe that many of the lawsuits around software patents are frivolous (and many of the duplicating/overlapping patents shouldn't have been granted in the first place), so the whole situation is a mess.
Too many people still pay attention to "patent portfolios" (with quantity often more important than quality), and that attitude causes difficulties for entrepreneurs wondering if they should spend their time and money collecting [often useless] patents simply to show off.
Also, the recent law change that gives priority for patentability to those who file first instead of those who invent first requires filing patents immediately upon thinking of an idea, which is costly and sort of ridiculous/impossible for everyday people or entrepreneurs to do (and incentivizes patent trolls).
I heard an interesting session last week at UCLA Anderson by an accomplished patent attorney, Todd Miller. It was generally on tips for entrepreneurs (and less on controversial issues like should there be patents or how the system should be reformed). Below are my main notes and takeaways. What do you guys think about the issues I've raised above?
Tip 1: Work backwards.
- First figure out your business goals and strategy.
- Then think about if/how IP fits into that.
- Most money spent on IP is inappropriate.
Tip 2: Be flexible.
- You will have to pivot your business.
- Smart while being lean: Use an omnibus patent application (put all ideas in one application to save money and time).
Tip 3: Basics of IP
- Many patents not valuable because protection is too limited.
- Patent infringement requires each element listed in a claim.
- Use Google Scholar and Google Patents to check before you file.
- Trade secrets protect business info.
- Trademarks protect source of idea.
- Patents protect idea.
- Copyright protects expression of idea.
- Requirements for patent: novelty, usefulness, non-obviousness
- Claims at end are the actual protection.
- Use the USPTO website.
- In trademark, define description of goods as broadly as possible.
- Trick: File patent in Korea (if green tech, it's expedited to 6 months); then file in US and bypass the line.
- Another good search engine: prior-ip.com
- Search for your idea and find clusters of other patents and ideas
Tip 4: Avoid common mistakes
- Public dissemination (and discussion with anyone or public release in talk or website) kills patentability in most of world besides US (like Europe)
- Prior employer: invention might belong technically to prior employer (check your employment contract)
- Licensing terms: don't license out all IP early at bad terms; avoid "most favored nation" clauses in licenses if you can
- Chain of title: anyone who works for you must sign agreement that IP belongs to you
- Good managers can very easily make bad decisions due to several rationalizations: won't get caught, within the realm of law, what's allowed or typically done
- Complexities in the decisions of laying off staff and interplay with affirmative action policies. One approach is a staged strategy where the initial round is according to one criteria like performance and the next is according to a different objective like diversity.
- Building a good board: diversity of perspective, independence, skin in the game
- Analyst recommendations are a contrarian indicator, especially if employees of the underwriter
- IPOs typically underpriced to give kicker to client on sell side and to give profit to preferred clients who buy on asset management side
- In long run, IPOs underperform
- Managers game EPS by manipulating earnings; way more times that EPS comes in a penny above a threshold than a penny below a threshold
- Investors overreact to high-strength, low-weight recommendations and underreact to high-weight, low-strength recommendations
- Can only make money investing if you have some informational advantage or understand sentiment better than others
- Value works better than glamour
- Avoid doing what the herd does
- Stock rising witho good financial backing will not continue to rise for long
- Value stocks: ROE + steady earnings growth + many positive earnings surprises; low debt; healthy or growing profit margins; not a homogeneous product; competitive advantage; public for at least 10 years; low P/B and P/E (P/B < 1); PEG < 1; current assets > current liabilities (can pay current bills)
- Stocks heavily purchased by small investors do badly in following periods
- Find proxies for retail sentiment (naive investors); contrarian indicator
- High asset growth stocks underperform relative to low asset growth (naive extrapolation/overreaction)
- High accounting accruals is bad sign (boosting income artificially)
- Piotroski f-score works well, implies market not efficient; uses 20% of stocks with highest B/M ratios
- f-score: sum of 9 binary signals (not risk related); healthy companies, less risky/non-interesting companies are undervalued but more profitable
- High B/M can mean undervaluation or distress. f-score separates undervaluation from distress, works as investing strategy.
- More evidence for non-efficient market than efficient market
- Psychological biases affecting investors: confirmation bias, hindsight bias, representativeness, anchoring, conservatism, availability bias, overconfidence
- Employment compensation issues
- Say for pay
- Individual benefits
- Cause vs. non-cause termination
- Change of control terms in executive employment contracts
- Restricted stock vs. restricted stock units vs. incentive stock options vs. non-statutory stock options
- Interesting discussions and analyses of when bluffing is ok in business (versus poker). Does it make a difference when everyone knows the rules of the game or expects bluffing to happen?
- How to deal with doing business with someone when you don't agree with their end cause. One possible answer: do the business at cost so that your company and employees don't suffer from refusing the business but don't take profit in order to stay true to morals.
- Glamour stocks (high price to cash flow, price to earnings, price to book) under-perform value stocks (and this has nothing to do with risk factors).
- High monthly trading volume and high variability in trading volume both predict low expected return in the following month. These effects are even stronger than the size and book/market effects.
- Irrational investor optimism causes high volume and is reversed out in the following month.
- Investors can't short sell equities as easily as buying, so negative opinions aren't as easily/quickly traded (priced in) as much as positive opinions.
- Retail Segment Effect (volatility from retail investors makes return reverse itself from overoptimism)
- "Naive Asset Pricing Model": No CAPM. No APT. Naive investors transfer wealth to sophisticated investors.
- It's possible to identify the most important characteristics for predicting returns, and these predictions beat the market considerably and work quite well on out-of-sample tests over a long period of time.
- Best-performing stocks have a relatively low level of risk.
- TV economics: huge land-grab for channels
- All countries have followed the same path in TV adoption as the US did (going to 80-90%)
- To consolidate income, you must own economic majority and have control over management and CEO.
- To bridge gap in valuation negotiations, pay low multiple on initial income and then high multiple on rest, so if able to pull off growth, will pay more.
- Most acquisition failures due to post-merger integration (PMI) problems.
- Corp dev must fit with overall business strategy. What must we buy to succeed? Companies? People? IP?
- Keep a wishlist of companies you’d like to own.
- Track previous deals and how they performed compared to forecast when considering new deals someone brings.
- Companies really good at PMI: Cisco, GE
- Filter for culture meshing well with acquirer to prevent PMI problems
- A good M&A lawyer is a business-enabler; a bad M&A lawyer over-lawyers and puts in way too many clauses.
- LOIs are for the business people, not lawyers.
- In international business, people make deals with you as a whole person. They watch how you interact with their family, how you drink tea, how you spend days just socializing, golfing, and not talking about the business.
- The fewer warranties or hold-backs the seller wants, the more due diligence time will be required.
- Structure non-competes to cover payback period.
- Share Purchase Agreement does the acquisition, but Shareholder Agreement is the most important document after the deal is done.
- Shareholder Agreement determines who will run it post-purchase, what requires majority versus unanimous decisions, etc.
- Standard minority protections: sale of company, issuance of new equity, dissolution of company, related party transactions.
- Must discuss how to get out of the deal/terminate/carve out/divorce
- But divorce procedure rarely followed; so difficult that forces parties to talk and figure out some better plan.
- Clawbacks over 1-2 audit cycles (2 years of holdbacks to discover things not paid or not accounted for right)
- It's usually better to build than to buy.
- Leverage specialists and be an orchestra conductor.
- Have a PMI plan. Be honest with those who will get fired.
- Avoid joint ventures at all costs. If required, focus on the Shareholder Agreement (exit clauses and paths to full ownership)
- Models can be made to say anything.
- Know when to walk away from a deal.
My second year is off to an incredibly busy start. Though my class load is not heavy, working on launching Ridacto, being a career coach, and TAing a class together make life pretty crazy.
Below are some of my biggest takeaways from my classes last week:Ethics
This is a really challenging class that poses way more questions than it answers. In TAing the class, I'm lucky to hear the varying opinions of my classmates and consider my own viewpoint on how to act in various difficult situations.
- Integrity between personal and company values is key.
- Leadership and the Quest for Integrity argues that having prejudices or predispositions to handling various scenarios in specific, predefined ways can help solve many of the most challenging dilemmas.
- Three styles of leadership: political, directive, value-driven
- Ethics, optimization, and public policy (strive to find the intersection)
- Matrix to consider: 3 viewpoints (utilitarian, contractarian, pluralist) and 3 targets (individual, company, society)
This class basically overturns everything taught in traditional finance classes and explains how the "real world" works in terms of actual trading behavior and stock performance results. We're going through the main academic articles in the field over the past 20 years and combining finance with psychology to better understand how people make (and should make) investment decisions.
- CAPM and APT are blatantly wrong (they aren't good theories for explaining or predicting reality).
- Market does not have any level/strength of efficiency.
- Psychology of investors and company fundamentals much better determining factors of performance
- Size and book-to-market ratios much better at explaining why returns vary from stock to stock than beta
- Characteristics of stocks (like fundamental ratios) have much more power to explain returns than risk factors (like beta).
- Value and contrarian investing work.
This class is a very interesting blend between business and law and covers both the theoretical and real-world aspects of "making it rain [not in the club]." We work in teams of 2 business students and 2 law students to dissect unedited deal documents for a different deal each week, varying from financing, to acquisitions, to partnerships in a variety of different industries. I absolutely love being able to see real-world documents and understand how they evolved and see how the negotiations progressed. It's also really neat to hear from the principals of the transactions in each class what it was like from their perspective and what lessons they learned.
- Key elements in every deal: risk, reward, control, duration, trust
- View of the firm as a nexus of contracts
- Deals/acquisitions often purely to thwart competitor moves (one of us will buy, so it should be me)
- Structure returns based on performance hurdles.
- Ethics of pulling out of deals (it's interesting how this class ties in with my ethics class)
- Ethics of full disclosure
- Establish trust first. Trust is often the most important factor in determining who does deals with whom.
- Desperation hurts. Should your vacation rush your deal close?
- Keep backup deals in place through closing.
- Don't shortcut the documents (pay your lawyer a little now or a lot later).
- Time and lifestyle can't be recovered, so those are often more important than negotiating the best possible deal.
I recently got through listening to Anonymous Lawyer
by Jeremy Blachman. It was a hilarious chronological collection of blog
posts and emails by a (hopefully) fictional corporate attorney. I read it at the recommendation of some friends who swore by its accuracy, which certainly makes me quite worried about the state of the world. I really hope they're wrong.
What I liked about the story was just how insanely true to character the entire personal account is. It was like an actor who never got out of character.
The blog posts and emails paint the picture of a burned-out, highly elitist, highly racist, highly sexist, and highly egotistical hiring partner at a corporate law firm. His only goal in life is to become chairman of his law firm and gain power over others and prestige. In the story, he goes to all ends to do this, not stopping at lying, cheating, insulting, plotting a coup, or punishing others for anything and everything. The character's voice comes out so true in such ridiculous moments that it's a testament to the author's talents as a writer and imagination (I really hope it's all fiction). The story's strong voice continues even to the fake "anonymous" law firm website
they set up for the book. I love the attention to detail and follow-through on the story. At certain moments it seems like the author is beating a dead horse, but mostly, it's funny (and disturbing).
In Russian, there is a saying that every joke has a sliver of truth. Therefore, I'm sure that while the story is exaggerated, there must be some semblance of truth in the character portrayed and the vividness of the power struggle. I wonder how much of this is generational. Will the new generation of attorneys (who grew up with social networking, care for world peace, volunteerism, organic food, importance of exercise, life balance, etc.) be different? Will there be a new, more high-tech, forward-thinking, human-friendly model for law firms in the near future? I certainly hope so.
Here are the perils and disturbing things I noted from this book:
- Extreme power hunger
- Extreme power hierarchy (paralegals, summer associates not treated like humans)
- Extreme racism (little room for minorities and fake shows of caring about diversity)
- Extreme wastefulness just for the sake of show (showy lunches and parties for recruiting or executive committee)
- Culture caring only about winning and beating competition
- Lying recruiters
- Zero respect for family
- Zero time for family
- Zero sense of cooperation as a team and no mention of trying to legitimately help clients
- Extreme incentive issues with hourly billing (funny story about billing 2 clients simultaneously for doing work on one client's case while flying on a trip to visit another; another funny story about taking very expensive restroom breaks for clients while doing some "thinking" about their case on the toilet)
I'm curious what young attorneys think about all this. My gut tells me our generation will be different. I believe no place or person out there is as bad as this story pretends, but I'm sure bits and pieces of this happen every day everywhere. It's our job (in law and outside it) to fix this and put in place a better culture.
I recently attended a useful talk by Scott Walker
on the biggest legal mistakes start-ups make. I had been exposed to many of these concepts before, and it was useful to hear someone talk about them in depth. This was part one of a two-part series of talks. The following is not meant as legal advice; it's just notes I took on Scott's talk.
1. Your employer has ownership to your IP
-If you're using your employer's facilities
-If your outsourced development company keeps your IP and doesn't properly transfer it to you
2. Choosing the wrong entity
-If you need venture funding, you really should be a corporation in Delaware.
-S or C corp is the only decision to make.
-"Qualified small business stock": if you start as a C corp, you get a big tax break (0 capital gains up to $10M if hold the stock for 5 years). You can't get this if you convert to a C corp. This is from IRS Sec. 1202.
-Use an S corp if want to put in your own money for a while and want to take tax losses early on.
-If you're bootstrapping, an LLC can be fine.
-Sec 1244 gives $50K of deductions for C corps.
3. Splitting equity foolishly
-Equal split is the most common and biggest mistake.
-It should depend on levels of involvement in past and future and value each person brings.
-Biggest business decision you'll ever make: who is your co-founder (Scott said 2 is the best number of founders; he said YC and TechStars require it)
4. Not setting up a vesting schedule
-Done through a Restricted Stock Purchase Agreement
-Typically vest shares over 4 years on a monthly basis
-1 year cliff: nothing vests if fired or leave in the first year
-Can sometimes pre-vest or accelerate in certain circumstances
-VCs will always set up vesting schedules for the team
-Your accountant needs to file an 83b election with the IRS.
5. Not complying with securities laws
-You can't raise money on social media.
-You can't advertise or solicit.
-You must build relationships directly.
-Investors want to see resourcefulness and tenacity of an entrepreneur in networking.
-You must get "accredited investors."
A while ago I finished reading The End of Lawyers?
by Richard Susskind
, at the recommendation of a friend.
The author has a lot of experience working with and studying attorneys of all types throughout the world, though most of his own experience is in the UK. From the time he was still a student studying the usage of AI to create legal expert systems to his current posts as advisor about legal technology issues to many prominent groups including the UK government, Susskind has established himself as a proponent of using technology to allow lawyers to be more effective and to bring better access to legal service to the masses.
The key piece of the book title is actually the question mark. Susskind does not use the book to argue why lawyers will disappear. He analyzes the legal profession as being affected by 9 major disruptions in technology or process and predicts what types of legal work will disappear (low-value, repetitive, and suitable for automation and outsourcing) and what types will carry on (high-value and based on individuals' unique experiences).
In the book, Susskind does not actually recommend or suggest that people make any specific change or adopt any specific attitude. The book presents a fairly level-headed analysis but does give the author's opinions and predictions as to what he thinks will win out in the end in terms of the major trends affecting the legal industry.
The 9 disruptive technologies studied in depth in the book are the following:
- automated document assembly
- relentless connectivity
- the electronic marketplace
- online legal guidance
- legal open-sourcing
- closed legal communities
- workflow and project management
- embedded legal knowledge
A common theme in the book is the analysis of a pair of related forces that Susskind argues will fundamentally transform legal service in the coming decade and beyond: a market demand for increasing commoditization of legal
services and the widespread uptake of information technology.
Susskind also presents an interesting "schedule" for the process by which he thinks legal services will evolve through (to various degrees or speeds depending on the service):
Susskind suggests to his clients that there are three basic options open to a law
firm and its practice areas (with respect to these changes and adoption of technology). The first is the option to lead the way: to pioneer and play the role of first mover, enjoying the benefits and potential risks. The second option is to invest enough to be ready to respond in the event that a competitor or a new entrant jumps in more strongly later on. The hope is to avoid being left behind or to become a "fast second." The third option is to resist any move in adopting. This third option, Susskind argues, is "commercial suicide."
Susskind also spends time analyzing who is driving innovation in the major areas of legal technology. Some of this is coming from law firms themselves and some from companies creating internal systems for their own use. He points out several times in his book that there are many opportunities for entrepreneurs outside of the industry to really take on the challenges of innovating across the entire spectrum of legal technology.
It's impossible for me to do justice to the book in one relatively short blog post, so I hope you check it out yourself if you're at all interested. I found it a really interesting and well-written text, suitable for people with any level of expertise in the area.
I rarely whine or complain about stuff I don't like, but it's about time I aired some of my frustration.
I think paper, hand signatures in this day and age are stupid and insecure. They can easily be forged/reproduced, and often times people spend little effort in making sure they sign things carefully and the same way every time. In addition, they require using paper (a limited resource) and extra effort and time. I need to print out 2 copies of a contract, sign them both with a pen, put them in an envelope, mail it to the other person, and then wait to get a fully executed copy back in the mail (remembering to follow up if it doesn't come). Faxing gets rid of the envelope and mailing step, but it's often still slow, cumbersome, and low quality (and you're stuck with another paper copy that you then need to scan back into your computer and store in a folder). This just seems so operationally inefficient to me. Using secure e-signatures, for example, seems like so much better of a solution.
I know there are various laws that require physical signatures (such as in real estate transactions and consumer home purchases), but I think that needs to change and be modernized.
There are so many better, easier to use technologies in existence that are more secure and more efficient. As I understand, there are 3 ways to authenticate a person: something you know (e.g., password), something you are (e.g., biometrics)/something you do (e.g., signature, voice perhaps), and something you have (e.g., RSA token). At this point, I understand some of these technologies may still be a bit expensive to roll out on a large scale, but I really think this is where things are going in the future.
But that's not all.
For my work on AMA, I had to negotiate and sign a lot of complex legal contracts. I saw so much inefficiency with respect to the work required to revise and collaborate on contracts with multiple counterparties and attorneys. And making sure you don't drop the ball on any important revision or issue is all up to you and your organizational/checklist-tracking abilities.
Managing the contract after execution is similarly manual, requiring calendaring, databasing, scanning, and manually indexing/categorizing the critical terms, references, and dates.
I don't know how many people suffer through these pains, and I'm hoping to learn through any feedback or comments people leave. What do you all think?
I definitely think there's a better way to do things, and that's what I'm hoping to achieve through Redlyne
In the midst of an in-depth lecture on intellectual property and contracts with talent, my entertainment law professor went on an aside about doing business properly and ethically. It was a captivating few minutes that really rang true to me and echoed a lot of the principles that I've written about here before. Below are the suggestions of my prof; let me know what you think.
- Business success is dependent on relationships. So much of the way deals get done and people get hired is through relationships, referrals, and networking, so it's important to make meaningful connections and build a strong reputation.
Two concrete actions my prof recommends towards this end are being nice to your staff and placing your own calls. Your staff and colleagues are the ones who spread information about you and affect how you are perceived, so it's important to keep them happy (among many reasons for doing so). And when people don't place their own calls and instead rely on third parties like assistants, it creates an unnecessary distance, inefficiency, and sense of haughtiness that eventually harms the relationship.
- It's not a negotiation unless you’re willing to walk and have a legitimate Plan B. Otherwise, it's just a robbery. It's critical to have other options and a reasonable BATNA (best alternative to a negotiated agreement) so that the discussion can be a real negotiation and compromise rather than one party clearly taking advantage of the other.
- Don’t do business with lunatics or those who have any reasonable chance of going bankrupt. It's clear that both of these situations cannot perfectly be avoided or are in one's total control, but whatever one can do to prepare through checks and research (due diligence, references, UCC-1 filings, liens, etc.) can save a lot of trouble later. Lunatics can cause immeasurable headaches and immensely expensive lawsuits, and bankruptcy can completely destroy any value through canceling executory contracts.
- Always prefer short, clear, simple, and complete contracts. I wrote about this before, but my professor reiterated the point again. So many problems can be avoided by having clear, direct, and short contracts that avoid misunderstandings and lengthy court proceedings. Don't be afraid to tell your lawyer to cut the agreement in half and remove extra sections, even if they argue they're "standard." In contracts as in speeches and life (and blog posts--though I have trouble following my own advice here), brevity is king.
- The image of your work is critical. Perception is a reality, and every detail affects your reputation. Fix typos, and learn to punctuate correctly. Don't be lazy. (I've written about this before and suggested some good books on grammar and punctuation.)
- Cultivate the bond of trust through thoroughness and taking your time. My professor gave us the example of a client calling and asking for something "tomorrow" when in fact the work would require 2 days. While most people would cave and deliver suboptimal work tomorrow or just be late on their promise (and maybe try to hide from them), the right way to go is to tell them you need a week and deliver excellent work a couple days early.
As a recipient of the "wrong" approach before, I know how annoying this is. I definitely prefer people who set expectations realistically and deliver great results as promised, even if it's slightly slower than I'd want.
In failing a client with the wrong approach, you break the bond of trust that can never be restored (or with great difficulty).
In addition, many people err by saying what they think (with 90% certainty) is the answer rather than expressing uncertainty and expressing a need to research. The right approach is to say that you'll do the research and get back to them and most importantly do as you've promised.
- Happiness is the freedom to leave whatever you're doing or wherever you are and to do what you want. This was sort of a counterintuitive thing to hear, but it made sense after some consideration. If you are in a place where you can leave and say good-bye to your firm or your boss, it means you have a true power and inner freedom to do what you want, and that brings happiness. My professor loves his firm and his work, and hearing him say this sort of message affirmed this in a new way.
If everyone stood behind a set of principles or advice like this, I think business would operate a lot more smoothly.
About one month has flown by since I finished orientation at UCLA Anderson, and it's been an incredibly busy yet productive month. I have been surprised by how little tedious work there has been and how much valuable information and how many useful experiences I have already been lucky to have.I've been meaning to post about each of the lessons below as the month went by (as I learned them), but I just couldn't find the time. Perhaps I will expound on them in future dedicated blog posts.
Some of the lessons below are a lot more technical and narrow than others; some are directly from a specific class and others more from a general business-school team learning experience. The order of the lessons listed below is somewhat random but generally goes from technical/specific to non-technical/general/life lessons. Most of the lessons involve my areas of interest (finance, technology, and entrepreneurship) and highlight new perspectives I've gained through my first month at Anderson. Part of my purpose in writing these down here is to track my progress (and not forget), and the other part is obviously to share it with anyone else interested.Finance
Entertainment and Business Law
- Working capital financing: Through my finance class, I've gained a newfound appreciation for the importance of managing working capital in an organization. By studying cases of manufacturing organizations, I've realized how critical the cash conversion cycle (cash -> inventories -> sales -> receivables -> cash as well as the accounts payable side) is to an organization.
I've also learned that one of the largest reasons for external financing to an organization is sales growth and seasonal sales, and the need for external financing in these scenarios all boils down to working capital (the difference between current assets, like cash, receivables, and inventories, and current liabilities, like payables). Basically, if an organization slows down its rate of selling off inventory (or alternatively speeds up its rate of producing inventory) while not being able to collect money from customers fast enough (as compared to how slowly it can pay off its suppliers), it will need external financing to sustain its operations. In my past business experience and with many software or pure online ventures, working capital, inventories, and suppliers are not the focus of attention, and I never realized how critical this part of an organization's operations can be.
- Working the balance sheet: Along the lines of point #1 above, I've realized that a prominent way that organizations finance their operations (especially in times of stress) is by "working the balance sheet." This generally refers to trying to collect from customers faster and "stretching its payables," or paying its suppliers slower. I always came from a place of thinking that everyone paid their bills on time or before they're due, and apparently that's far from the case in the real world. I'm not really sure how I feel about this, and I admit it makes me uneasy, but if this is the convention by which traditional trade is done, I suppose my task is to just learn more about it and understand it better.
- Organizational goals are a company's priority; financing is just the final step to make the goals possible: This is a lesson taught by my finance professor as well, and hearing this on the first day of a class all about finance was humbling. I learned that finance exists purely to give managers a chance to operate their business and succeed; even though it can sometimes appear sexy or make certain people lots of money, it must come second to the actual business operations and goals.
- Growth needs to be planned for: Loans and financing take a long time to arrange and are driven heavily by relationships. Because financing working capital is critical to sustaining growing or cyclical and seasonal sales, businesses must plan ahead for their cash and working capital needs and think about how to obtain the appropriate financing ahead of time in various scenarios.
- Traditional and lesser-known financing sources are huge: I was shocked to learn that equipment leases represent almost as large a source of financing as public offerings. In addition, bank financing, though providing little, is still widely used and can fulfill important requirements, such as working capital revolving lines of credit. Before taking my current finance class, I was brainwashed in focusing all my attention on sexier financing forms, like IPOs, venture capital, and pure equity investments such as from angels, but my class has opened my eyes to many other forms of financing that have complementary, useful properties as well.
- Entrepreneurs want to use assets, not own them: This was another lesson taught by my finance professor. At Stanford and at UCLA, I learned that the definition of entrepreneurship is the pursuit of opportunity without regard to the resources currently at hand. The key activity in this definition is the pursuit, the chase of the opportunity through business growth. It is not about making good investments and building up sizable holdings of various assets. It is about achieving organizational goals and profits (or other success metrics as defined by the organization), and the best way to start doing that is often through leasing.
- Why preferred stock is issued: I have studied the basics of preferred stock previously through learning about venture capital and taking entrepreneurship classes at Stanford. However, learning about preferred stock in a more traditional company context brought the main points home for me. Preferred stock has many pros and cons (from the perspectives of the entrepreneur and the investor), but the main reason has to do with assuring the investor some guaranteed return and the likelihood of at least their principal being returned to them in case of problems. Preferred stock functions like debt in being paid an interest rate, but it can also function like equity through participations (which entrepreneurs often dislike), and it sometimes can be convertible to equity at a specific price. Entrepreneurs issue preferred stock in order to secure financing that would not be possible without giving the liquidation preference to the outside party who may not have all the same motives as the entrepreneur.
- Why subordinated debt is issued: This one always stumped me. I thought that companies always issued "senior"/normal debt first and then when that somehow "ran out" (or they were more desperate) they would issue "subordinated debt," or debt which follows senior debt in liquidation/collection order. In my class, I learned that companies can issue subordinated first in order to leave room or flexibility to issue more senior debt in the future if necessary. Because the subordinated debt has a weaker liquidation position than senior debt, the purchasers of subordinated debt must be compensated a higher interest rate, and that's the trade-off for the company to examine.
- Entrepreneurs never take their eyes off the harvest: This is another famous lesson from my finance professor. It has to do with planning ahead and knowing what one is after before one begins and throughout the process. In many ventures, there is very little payout until an exit or harvest, such as a sale to another company. Even IPOs are not true harvests because there are often restrictions on stock sales afterwards, and the value will be driven by the whims of the stock market. There may be similar problems with mergers and acquisitions, but the main point is that the value of privately-held stock is often purely on paper (funny money) until a real harvest occurs.
- Don't make financing decisions with implicit bets on market moves: When choosing a financing vehicle for a certain scenario, it is easy to decide based on one's expectations of future stock price movements. Because no one can predict the market, it is wiser to make decisions that keep future financing options open rather than maximizing some perceived value or timing opportunity and limiting future options.
- Age and industry of study cases don't matter: Though the cases in my finance class have so far been based mostly between 1970-1990, I have seen how the entrepreneurial process is everywhere, and a non-sexy business is still a real business that can provide many lessons applicable to modern companies. I've also understood how leaders grow through experience in different domains and not just from some raw talent they are born with. In some respect, studying the cases of older and more traditional manufacturing/retail organizations has allowed me to get some more diverse perspectives I would not get through another class that would solely focus on high-tech entrepreneurship (my past area of focus).
Communications, Networking, and Time Management
- Most films lose money: My entertainment law/finance professor has probably said this about twenty times this quarter already. It's also the title of one of the chapters of his book. Given his vast experience, I have no option but to trust him. All of the glamor of Hollywood comes from the celebrities and directors that make the blockbusters, but just like start-ups, almost all films actually lose money, and it is the very few that make a ton of money and get the most attention that create all the buzz in the industry. Therefore, I've learned that the only sensible way to view film investments is as entrance passes to fun parties and networking events with elite and charismatic people (and certainly not as economic and monetary investments that require a positive return on capital).
- The budget-sales corollary, though ridiculous to me, is real: Apparently, the higher a film's budget (especially one that hasn't even been started), the higher the sales prices for distribution deals arranged ahead of time to finance the deal. This creates somewhat of a snowball effect which piles more and more onto the budget. No wonder so many actors, studios, and production companies can make so much money when the price at which their work sells for is determined by how much they budget and not by the intrinsic value of their creations. I'm not sure how this system can ever be stopped or changed, and part of it is human nature (to believe that expensive things must inherently be better), but it is the way the industry works apparently (which blows my mind).
- Complex legal structures are there in deals because of so many conflicting and intricate issues: In my entertainment law/finance class, we've looked at actual legal documents and forms from the industry. The deals seem so complex because of many factors that I never thought much about: international film rights pre-sales representing way more of the budget than US film rights, distribution company rights and payment terms, several levels of unions and guilds and their payment terms, carving up IP rights between old and new media, merchandising, etc. The reason my prof says he loves what he does is because there is no such thing as entertainment law: it is just every other area of law combined into one complex morass, which makes his job fun and no two deals the same. The other important reason to remember for complex legal structures around films, of course, is to make sure the investor doesn't make any money.
- Watch out for scams, schemers, and dreamers: Though I'm still new to the entertainment industry per se, my entertainment class has been one of the most valuable to me this quarter through the real-world advice which applies to many other aspects of my life. In this class, we've seen actual emails and contracts which purport to do one thing but actually end up screwing the investor in many subtle ways. I've learned many of the buzz words thrown around by scammers and how to identify various schemes or legal constructs used to gain control or take advantage of an unsuspecting investor. This has truly been eye-opening to me, and I'm sure this happens outside of entertainment as well.
- Important tips for legal agreements: A shocking number of deals is done verbally or through incomplete "term sheet" agreements. I've learned how extremely important it is to get complete agreements in writing and to use standard/default rules in contracts and skip anything that's not necessary. My professor showed us how an LLC agreement can be effectively written in 5 pages (whereas all of the ones I've ever seen and used previously were 30-50 pages long). I've also learned that using plain English in agreements (and not legalese) is just as valid and often more clear and enforceable in court.
- Anticipate legal problems in every deal: Many simple business transactions involve lots of legal issues, as I saw in my first day of business law class when we discussed a simple scenario of a person purchasing some computer equipment from another person. This heightened my desire to build problem anticipation skills and consider multiple avenues and areas of law that can hurt you in any deal (IP issues, securities, etc.). In the computer equipment example, most of the class never considered the third-party IP infringement issues that could come up or the bankruptcy issues (whether the seller actually had the right to sell the equipment or if it was mortgaged to someone else). I also learned how I could check these aspects of deals myself before entering into agreements in order to protect myself.
- Be transparent with vendors to protect yourself legally: When getting quotes from vendors (such as from a supplier for a new product), telling them the purpose of the quote and why I would depend on it actually matters. If I'm pitching a product to someone and have obtained quotes from suppliers that could produce it for me, if I win the contract and the suppliers want to change their price, if I had told them that I was getting their quotes in order to win a subsequent contract with someone else and would therefore be depending on their offers, I may have a good case against them in getting the originally agreed-upon price. I had otherwise thought that one should keep one's intentions and plans to oneself, but here is a concrete, important way that being honest and transparent can significantly protect you.
Wow, that was a long post, so congratulations if you
- Communications are the most important skill of an interviewee: I learned this from our new communications professor and also from the career center; from many studies conducted by employers, the number one skill that people filter for in most jobs is communication skills. This is an area I have always been working to improve in myself, and I look forward to taking advantage of many resources and opportunities over the next couple of years to make advances in this area for myself.
- Stories are the most persuasive: Whether in career personal marketing, brand building, or just casual conversations, stories are what people end up remembering the most -- the details, not the generalities. Furthermore, by telling stories in the SAR (Situation/Action/Result) format, it can provide many illustrative details and highlight the specific role you played towards a given accomplishment.
- Keep presentations clean, simple, and casual: I had learned the "better" way to use PowerPoint in a communications elective I took at Stanford, and I was happy to see the same type of framework promoted by UCLA, even though it's extremely unpopular in the real world. The most contentious point is to not use word slides in presentations and use visual aids only to communicate a visual (e.g., diagram, colors, shapes, charts) message and not a verbal one. In addition, by keeping presentation structure short, simple, and casual, audiences will be less likely to revert to their default bored/zoned-out state and will stay engaged longer.
- Connections to people are everywhere: I have been shocked how many new people I have been exposed to every single day over the past month -- alumni, old friends, new friends, different industries, countries, etc. I keep thinking to myself that I should add contacts into my address book for each new person I meet and talk to in any medium (in person, phone, email, etc.), and though I'm able to do this on some days, the task just seems so overwhelming to me based on the volume and depth of people I've been meeting. This is a good thing, even though I can't keep up! I'm definitely appreciative to have the opportunity to meet so many new people, all who seem willing to help and have fun together.
- There is huge diversity at UCLA: This is something everyone reads in the glossy brochures and websites everywhere, and maybe it is true everywhere. All I know is that I'm very lucky to be surrounded by people who are motivated differently and come from so many different backgrounds. I expected so many more people to be interested in investment banking and consulting, and while those fields are popular, I see so much more breadth of interest in my colleagues than I expected. This blog post by one of my classmates does it more justice than I can at this time.
I've also been fortunate to work on group assignments with students with much different skills than my own. I have been impressed by some of the accounting wizards and CPAs in my class who have used their past finance experience to shed a lot of real-world perspective on cases. It's been really neat to hear them compare what cases say (which I would take as givens) with what actually happens in industry and how to make the case conditions more realistic. I've also gotten exposure to different workstyles and realized the importance of focusing on goals over details and individual styles.
- Decide what you will focus your energy on and move on: I've quickly realized that I can never have time to do everything I want, and I can't be everywhere at the same time (though I try hard to). I generally try to do as much as I can while remaining sane; I remain sane through other parts of life, like my work, my family, and fun, bonding activities with my classmates. I've had to miss more info sessions and networking events than I've been able to make, and to someone who is completist/perfectionist, this has been stressful. I'm slowly coming to terms with those parts of myself and learning to let go and just enjoy what I am able to do.
made it to the end.