Friday, March 16, 2007


Geni is this brand new family tree engine that allows you, in one screen, to see all the people you have to buy gifts for. Basically it allows you to create your family tree and has just received $10 million in funding, for a total valuation of $100 million. From The Founders Fund. Which I had referred to in an earlier post, about how they are ok with partially paying founders when investing.

In this case, the founders of Geni are perhaps not quite in the need of money - they're all ex-Pay Pal, Tribe and such companies that, if venture funding was a religion, would be senior Gods worshipped in every household.

TFF, to its credit, is not the one giving the $100 million valuation. They only gave it a piddly 10 million dollar value and stuffed them with $1.5 million. The $100 million value was provided by Charles River Ventures, which, albeit the valuation, involves more venturing by the Charles River.

But you may be thinking: Is this company worth a $100 million? I must be honest: Even with my exposure to large sums of money flashing on all TV channels in the forms of scams, frauds, bribes, ransoms etc. this sum seems ludicrously large. $100 million is about Rs. 440 crores. This is the kind of money that will buy you a two bedroom house in Bangalore nowadays, and should not be considered a trifle. This house has a real garden.

Some of you may think I exaggerate needlessly. But I think if we were not intended to needlessly exaggerate Darwin's law would have eliminated all writing anyhow. I originally intended to put god in the last sentence but after my baby boy's colic attacks I have finally understood there is no god. But I digress.

Now the question is: Is Geni worth Rs. 440 crores? Is this 18 person company a proposition that, if exchanged for currency, would yield a 100 million greenbacks? The last time such a question was posed, they all laughed at you. This was February 2000.

But we will assume this is not February 2000, because we haven't yet invented the time machine. So is Geni worth so much because it is unique and can't be copied?

Geni is perhaps easily copiable, and is definitely not the first family tree representation on the planet. Unfortunately it has also not taken into consideration the probability that someone could have 13 siblings, like in my father's family and therefore it will not work unless I have a dual monitor machine. (Which I do, incidentally) What actually worked, when I had to explain the 126 "close" family members to my wife, was pen and paper and lots of arrows. Actually it's better represented left to right rather than up to down - all family trees are, IMHO.

But they have a business model for sure. Have you seen the most popular serials on television? What are they about? Some of the biggest blockbusters in the hindi film industry were: Maine Pyar Kiya, Dilwale Dulhaniya Le Jayenge, Hum Saath Saath hain, etc. Think of the basis of all of them. Everyone's related. And now, look at Geni's logo.

Soon, you may see Geni sprouting the capability of saying "I don't like this person" and you will see strange music in the background when you drag and drop people near each other. Perhaps even red colors as you move across the evil people who try to murder their mothers-in-law using faulty fans (don't ask me, I saw this on TV, I swear).

Then there will be mock fights and in comes the revenue from online betting on who will win. And you can SMS to a four digit number who you like the least so that person's icon will be relegated to a corner of the screen. The SMS revenue itself, shared 50:50 with Airtel, will yield millions.

And there will be people who will pay to see who is having whose baby in the Bold and the Beautiful and to unravel how, through a series of bad marriages, a person has become his own step-aunt.

Finally of course, look at the ease of understanding large family battles. If Geni were to host the discussion of the Bajaj family and their various holdings in various group companies that hold stakes in various other companies, it would be so much simpler to understand. After all you hear that Shishir Bajaj said Niraj Bajaj was siding with Rahuj Bajaj and his sons against Kushagra Bajaj. THe reader's band is baja(j).

Take all the business battles: Bajaj, Ambani (whose battles don't even have the same last name), Birla, Tata, Rin, Surf Excel etc. All these battles look so much better explained in a flash videos marked by respective family trees, and I'm sure stockholders will pay to see the darn thing unravelled. Eventually, though, they may be pissed off that the real owner is a pair of underwear or something. Still, that's information that someone is willing to pay for, either to know or to ensure others don't know.

I have now come to the understanding how this can soon become a billion dollar company. Maybe even a trillion dollars. Yes, success is an absolute, but you will see how it can be a relative.

P.S. Maybe there can be a Geni for India that gets there before they do -

Monday, March 12, 2007

The ESOP workaround

For entrepreneurs this budget - Budget 2007 - has one dissapointing element. Employee Stock Option Plans (ESOPs) are now classified as a Fringe Benefit, and one needs to pay Fringe Benefit Tax (FBT) on them. In essense, this means 33.99% of the difference between the price at exercise and price of grant is borne by the company.

A startup usually offers part compensation in stock, and the grant price will be abysmally low, like Rs. 10 or so. The employee can't buy stock at grant, because the options will vest over a few years. Even at vesting, the employee needn't buy stock - indeed, buying it will be of no use when the company is not public. And if the company goes public or gets sold, the company has to pay a ton of money as FBT for the options exercised.

Even if an option is exercised before the company goes public, the Income tax department will value the shares at the time of exercise (based on a valuation method that involves net worth per share) and tax the company on the difference.

Now a company may choose to recover this tax from the employee. I don't know how, though - what will the accounting entry say? "Received money to pay FBT"? Will that not classify as "other income" and get taxed in the company's hands? But that's a petty problem which I'm sure smart accountants will solve using fantastic words and phrases that will light up the room with their very presence. I'm not too worried about that.

What I'm worried about is that the government takes away a chunk of your employees' profits when it comes to a liquidity event (IPO or sale). I think I have a workaround to this, though I'm not yet sure it's totally fool proof.

If you're starting a company, start a "trust" which will hold shares that you have allocated for ESOPs. This trust is a separate entity (you could even have a different "not for profit" company) unrelated to the company, and will own the pool of shares you have set aside for employees. Ensure that the company does not own the trust - though promoters may do so.

Run your ESOPs the usual way, X shares every month for N months etc. But if the employee wishes to exercise, have the trust sell her the shares instead of issuing fresh stock (which is what happens with stock options).

The difference here is that the company is not involved - there is a third party transaction that transfers stock from the trust to the employee. If the "market value" of the share is much higher than the value it has been sold at, the trust takes the loss. The trust is a not-for-profit entity anyhow, and does not have a tax liability, so the loss is neutral for the income tax department.

The Income tax department may of course take a different view and disallow the loss. It could term the transaction a "deemed profit" for the employee and add it to the income of the employee. The idea here being that the trust intentionally sold the shares at a loss so that the employee must profit. But this can be fought in court, if you have an agreement between the employee and the trust on an earlier date that fixes the price of the share for later purchase. Such "call" options are common and legal, and in fact the very basis for convertible debentures.

Problem: If you get Venture capital and they want you to augment the number of shares given as ESOPs, you will need to issue more shares to the trust. Obviously this is going to be at a lower price than the VC price, which means the tax department will say it's a "deemed profit". That phrase again. But if the trust is created as a non-profit, you can avoid tax liability on such deemed profits too.

But such an arrangement will have to be stopped after the company goes public. Obviously, ESOP grants can't be transferred to a trust at a lower price after a company is subject to pricing laws when it is public. But as a public company, it may simply be better to use RSUs (Restricted Stock Units) instead.

What do you think?