We (Nathan and me) added a new widget to this blog yesterday. It's on the right sidebar above the Flickr photo widget. The purpose of this widget is to answer a few questions about the people who read this blog.

If you wish, you can take the survey right here on this post.

This census/survey is powered by Hunch which is an interesting decision/recommendations service based in NYC. I mentioned the service last week in my post about selecting a hotel to stay in.

We've already got some data coming in about what this readership looks like. Here is a screenshot of the first few data points. Click on that link to see them all.

 
The sample size is still too small to make any conclusions. I'll post again in a week or two when we have some real data.

Should be interesting and relevant to Kid Mercury's thoughts on blog stars and blog communities.

One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, "it's just another way to lower the price".

I'll accept that critique. And take it one step further. The option pool is absolutely a piece of the price negotiation. But it is a very important one as I'll explain.

But first, let me lay out a few things for those who aren't well versed in these matters. The pre-money valuation is the value of the company before the money comes in. Let's say we call it $4mm. And let's say the financing is $1mm. Then the post-money valuation is $5mm and the $1mm round is 20% dilutive ($1mm/$5mm).

But to the entrepreneur it might be a lot more dilutive due to the inclusion of the option pool in the pre-money valuation. Let's say that the VC's term sheet says that a 15% "fully diluted post money" option pool needs to be in the pre-money valuation. What that means is that the investor wants 15% of the company, after the financing is closed, to be in an option pool that has not been granted to anyone.

In the case of the $5mm post money valuation, that means there needs to be $750,000 worth of options in the pre-money valuation. If the pre-money valuation is $4mm, then that means the true pre-money valuation to the entreprenuer is $3.25mm. And therein lies Mark's critique that the option pool is just another way to lower the price.

I am sure I lost a few of you on all of that math. If you want to drill down on it, please leave a comment and we'll help you figure this out. It is very important you understand all of this if you are or want to be an entrepreneur who raises venture capital.

The bottom line is the deal I described leaves the entrepreneur and his/her shareholders with 65% of the company after the financing, the VC investor will own 20%, and there will be an option pool representing 15% of the company that has not been issued yet. The $1mm financing was not 20% dilutive, it was 35% dilutive.

So it is not surprising that entrepreneurs hate this provision and fight about it every time. And like most terms, VCs have been abusing it for years by asking for excessive option pools making the provision hated more than it needs to be.

The first point I'll make is that VCs should be upfront about this provision and the fact that it is simply about price. In the example above, I'd be happy to pay $3.25mm pre-money with no option pool. Or I'll pay $4mm pre-money with one. They are the same thing to me. What an entrepreneur needs to do is find out what the market price for their company is with and without an option pool in the number. Once they do that, the negotiation over this point is a lot less contentious.

The second point I'll make is that the option pool request needs to be reasonable and based on some kind of budget. I generally ask the entrepreneur to put enough options into the "pre-money pool" to fund the hiring and retention needs of the company until the next financing. My thinking on this is that I don't want to get diluted between financings. So I like to see a headcount based hiring plan with expected options against each hire combined with a retention plan for all current employees who will need additional option grants.

In most of the early stage financings I've done in the past few years this work on the option pool has shown a need for around 10% in unissued options. I've seen it as big as 15% but that is rare. I've also seen it as low as 5%, but that is even more rare. But the point is this; don't guess or negotiate this number. Do the work, figure it out, and put it in the pre-money and then negotiate price.

I'll wrap with a true story about this provision. When Mark and I were negotiating the first round of financing for Zynga, we got into a real tussle about this provision. He did not want an option pool in the pre-money valuation. I did. Once we agreed that it was just a fight about price, the conversation got easier. I got him to give me an estimate of the pool he would need. We added it to the valuation we had agreed to. He got an increase in price, I got an option pool. And I got one of the best investments I've ever made.

About a hundred readers of this blog gathered last night in the cafeteria of Washington Irving High School just off of Union Square in Manhattan to meet each other and celebrate the generosity of this community in the recent Donors Choose Bloggers Challenge.

It was a great moment for me. I got to meet many readers who I know by name but not in person. Putting a face to a name is a wonderful thing. I also got to meet Sarah Bunting, whose blog, Tomato Nation, raised $315,000 for Donors Choose in October. Talk about "blog stars". I've got a lot to learn from Sarah.

And I got to meet a bunch of teachers. One woman teaches middle schoolers in the Bronx with special needs. A couple others teach music in a middle school in southern brooklyn. A third teaches pre-K in the East Village. I met several others as well. 

I am telling you that these people (all women) are doing god's work. And it made my day to meet them and know that we all did something to help them.

It may have been the first meetup I've done with all of you, but it won't be the last. Thanks to everyone who showed up. I know we were competing with the Yankees but I got home in time to see them put the Phils away and I suspect most everyone else did too.

I drove out to the middle of New Jersey yesterday morning to attend a board meeting. Everywhere I went, I saw "dump corzine" messages. It was clear the governor was in trouble.

And this morning, we wake up to the news that Corzine has indeed been dumped and Mayor Bloomberg barely got 50% of the voters in NYC to pull the lever for him

Both of these men are wealthy. Both of these men grew up on wall street in the 1970s. Both of these men moved from wall street to public service about a decade ago. Both of these men spent heavily to get re-elected. Bloomberg made it, Corzine did not.

It's worth spending a minute thinking about the message the voters sent here in one of the most liberal parts of the country. The voters aren't happy. The voters aren't comfortable with rich guys who can spend their personal fortunes getting elected. And most of all, the voters want change.

This may well be a referendum on Obama, but I see it more as a referendum on the status quo. It's a throw the bums out moment in this country. It's too bad that Nancy Pelosi, Harry Reid, Barney Frank, Chris Dodd, Mitch McConnell, and John Boehner didn't run for re-election yesterday. Maybe they would have been sent home as well.

It is not a positive to be an incumbent right now. And that's a good thing because the track record of our government sucks. I hope the anti incumbent mood continues to be honest. We could use a good house cleaning throughout our government.

I send emails like that a lot. I might send a half a dozen or more every day.

I get even more emails like that. Sometimes dozens a day.

And I'd like to propose some email intro etiquette which I follow almost religiously myself:

When introducing two people who don't know each other, ask each of them to opt-in to the introduction before making it.

Last night I got talking about this with some friends who also get a lot of email intros. All of us get email intros that we don't want to follow up on. Some just ignore them. Others reply with something like "I'm really busy now and will get back to you in a month." And then never do.

I don't really like either of those two solutions and I also don't like responding to an introduction email with something like "I'm sorry but I don't really want to meet you".

So I often take meetings in these situations that I don't really want to take. And that means I'm less available to meet with people I do want to meet.

My friends said that I should simply keep track of who is giving me bad intros and let them know about it. I'm sure that I should be doing that and probably am at some level.

But I think asking for permission to make an email intro before making it is good form. I try to do it as a matter of practice. And I wish more people would.