I hadn’t heard of Jennifer, but this interview impressed me. She’s really sharp and has already had success building a number of businesses in an unsexy industry. She talks about how she got into the SMB doc/incorp business as a young girl with MyLLC, challenges as a solo founder, and how her current company is different from LegalZoom.

If reading is more your thing, she also did an interview with Andrew Warner from Mixergy.com, which you can listen to or read the transcript from here.

The post starts out:

How are you?

In your head, how did you respond? Did you automatically blurt out “fine”?

My freshman English teacher, Mrs. Carter, once told me that answering the question “How are you?” with anything other than “I’m fine” was a waste of breath.

People don’t really care how you are.

It’s the same with honesty. People don’t want honesty.

Not to get all liberal arts here, but humans are complicated. One of the things that separates us from the blue-green algae, other than the extreme delight we take in captioned pictures of misbehaving cats, is our complex language. And Micah’s lead-in here is an example of one of those manifestations of linguistic nuance that cranky people adduce as evidence of rudeness or selfishness but which are actually just people being people. We make some noises with our mouths and they may sound like other noises, but there are all sorts of other cues we use to figure out whether someone is asking how we are or whether they are essentially saying “Hello.”

The latter use is what is known as “phatic.” Wikipedia, as always, has the authoritative example:

Similarly, the question “how are you?” is usually an automatic component of a social encounter. Although there are times when “how are you?” is asked in a sincere, concerned manner and does in fact anticipate a detailed response regarding the respondent’s present state, this needs to be pragmatically inferred from context and intonation.

So, no, the fact that you say how are you and someone says they’re fine is not sufficient evidence of a bullshit artist at work. Likewise if you ask somebody about their startup and they say “we’re killing it.” Now, that is a dumb thing to say because it has become a meaningless cliche in the startup world. You should probably maim that person. But if you are an investor in or advisor to that startup and that is the beginning and end of their response to your inquiry about how they’re doing, then that startup’s problem is not bullshit but simple interpersonal communication. And that might cause you to second-guess your investment in those people.

I guess if you’re a real hardliner about maximizing every breath you take on this planet, then you may have issues with the entire enterprise of phatic communication. But that strikes me as a different point altogether and also a battle not worth fighting. Don’t be that person who spends their life trying to convince people that we should say we drive on a driveway and park on a parkway.

The post continues:

“How’s it going with your company?”

“We’re killing it.”

Shut up.

I’ve taken to answering that question with “It’s interesting.”

Blank stares and fear that I am eliciting a response flow over faces.

“It’s interesting” is a more honest answer, I guess. But if that person’s intention was not to get into a long conversation—or any conversation—about the health of your company, then that may come across as needlessly aggressive or weird, especially if there’s no elaboration. This kind of communication may look like a question, but it is often our way of marking the beginning of an interaction by eliciting a short and mostly meaningless response. A way of establishing that the other person is listening to you and not still trying to commit to memory the lyrics of Big Rock Candy Mountain.

The more important point is that the people asking this question are not necessarily being insincere. Their blank stares are likely not because they don’t care about you or your company. People who want to have an actual, in-depth conversation will usually, if they’re at all proficient in the interpersonal arts, communicate as much to you.

Micah goes on to suggest that these kinds of answers (“We’re killing it!”) reflect self-deception, and that this contagion of bullshit goes on to infect a person’s relationships. Relationships with friends, family, investors and others who deserve more than a phatic “How are you?”

He ends the post with a call to action:

I challenge you to take a day and care. I dare you to listen actively and when you ask someone “How are you,” that you demand a deeply truthful answer.

When your employees, investors and friends ask about your business that you tell them truthfully whats going well, and areas you need help. It’s amazing. People, especially friends, by default, want to be helpful. It’s a gift to provide them the ability to participate in your happiness.

I think Micah’s right that people often preach but actually abhor honesty. Most people are afraid of being exposed as a fraud. That their companies are houses of cards, that they are less smart or fearless or whatever than they’d like other people to believe. And many of us will engage in pathological amounts of self-deception in order to avoid confronting even the notion that we might be less than we portray ourselves to be.

All of this is a problem in the startup world as well. Because it’s inhabited by humans. And Micah’s right to call attention to the need for honesty and sincerity and a willingness to listen to one’s friends and peers. But if his diagnosis of the problem is correct, and I suspect it is, the symptoms are not to be located in these routine moments of small talk but in the unwillingness to follow that up, at some point, with real substance.

The column makes a valiant attempt to carve out some real estate for his coinage in between “smang it” and “smerd*” in the Gideons Portmanteau Dictionary. But ultimately his Foxworthy-style questionnaire falls short of the comprehensive test that we need for wider adoption. As the unacknowledged hero behind an unsuccessful, decade-long effort to bring back “Opposite Day,” I know well the Sisyphean task he has set for himself.

*Small nerd, e.g., “What up, smerds!”

Francisco, if you’re out there, consider this blog post my offer to help. If catastrophic but edifying failure is also a badge of honor in meme proliferation circles, I am your man. I can also contribute my small but enthusiastic reserve army, the Opposite Day Brigade (ODB). They’ll turn the t-shirts inside out, I promise.

On to his list:

1. If you put your Klout score on your resume, you might be a smanker.
2. If you think having a Tumblr page automatically qualifies you for a press pass, you might be a smanker.
3. If you really believe the economy runs on “thank you’s” and not money, you might be a smanker.
4. If you’re socially inept in real life, but popular on Twitter, you might be a smanker.
5. If you think Mubarak was overthrown by Facebook and not by the blood of Egyptian revolutionaries, you might be a smanker.
6. If your idea of an awesome vacation is going to 140 Conference, you might be a smanker.
7. If you think “Liking” the Facebook page of a charity makes you an activist, you might be a smanker.
8. If you’ve ever thought you could survive on Klout perks and social media schwag, you might be a smanker.
9. If you claim to be an entrepreneur but six months in your “company” is still just a landing page, you might be a smanker.
10.  If you’ve ever given the advice “be authentic and engage in the conversation,” you might be a smanker.

This is a fine list, as far as it goes. But I have some quibbles. Mainly that a few of the ten are strawmen and are also not quite at the level of hilarity required to warrant inclusion. As David Foster Wallace proved in his non-fiction, if your made-up observations are either LOL-inducing or plausibly true, your audience will forgive you.

Re: #2, I don’t know of anybody who feels that merely having a Tumblr entitles them to a press pass. And I am a much bigger loser than Francisco and so keep the company of people who, if this was a possible thing to feel, would be inclined to. Now, if your Tumblr is on the level of Bon Iverotica or Annals of Online Dating, I see no reason why our Founding Fathers wouldn’t have wanted to give you the freedoms and benefits that come with the designation of “press.” Hell, I’d likely rather hear questions from the person behind Kim Jong Il Looking At Things than most of the White House Press Corps.

#4 is rather harsh on the socially inept. Plenty of delightful, smart folks are better in writing than they are in person. That shouldn’t get them branded as a wanker, or even the final 5 letters of the word wanker.

#5 seems to imply that there are people out there who envision Facebook as a giant 800 million person-Transformer. I get up every morning hoping to meet this kind of big dreamer, but I haven’t. If anybody knows of a Colorado-based meetup for these high-octane imagineers, let me know.

And Francisco, let’s also workshop “smanker” a bit. I have some suggestions for punchier Portamanteaus that might really blow this whole thing open. What do you think of “smoser” (pron.: /’smuzər/ (IPA), SMOO-zer)? Or how about “smassclown”?

Finally, in the interest of being constructive, here are a few off-the-cuff additions I would make to the original list:

1.) If you earnestly use the hashtag “#startuplife,” you might be a smanker.

2.) If your total number of tweets is less than 2x the number of times you’ve retweeted the pithy startup wisdom from Aaron Levie and Shervin Pishevar, you might be a smanker.

3.) If you enthusiastically post and endorse every single infographic that you see, you might be a smanker.

4.) If you don’t currently have a job and don’t actually have any experience doing much of anything besides tweeting in your undies but maintain that you are looking for a job in social media, you might be the textbook definition of a smanker.

5.) If you love George Takei and it’s not because of Star Trek, you might be a smanker.

6.) If, on any social media profile, you self-apply any or all of the following labels (guru, maven, visionary, intellectual, rock star, thinker), you might be a smanker.

Like most people who think they’re good writers but don’t actually submit a ton of stuff for evaluation by professionals, I probably have an inflated sense of how good non-parental humans think my writing is. And it was with this naive but not entirely baseless confidence that, in the winter of 2011, I submitted an application to be a member of the zany brotherhood of Groupon writers.

At the time, I was pretty strapped for cash. And I had spent enough time groaning and rolling my eyes at Groupon’s schlocky Dad-humor that I finally decided to demonstrate I could do better or just shut up about it. I can’t remember precisely, but I’m sure there were elaborate fantasies of being the Groupon equivalent of Michael Clayton. I would get called in at inflated rates to pen 4 coruscating paragraphs selling a Brazilian Wax to a community of genetically hairless Iowans or some such.

As a second job, it was close to ideal. I could work remotely and do as much as I had time for. And because I tend to write quickly, I was fairly certain I’d be making a mint in no time. Step 3: Profit!

I even had relevant blurb-writing experience. Back when I worked at The Prague Post (The World’s Most Respected Czech Republic-based, English-language newspaper), I spent a few hours each day surveying the Czech newswire and writing 50-word briefs. I also have photographic evidence of having, on at least one occasion, uttered a sentence amusing enough to make another person laugh with their whole face. And while Groupon insists that “[a]chieving Groupon Voice [ed: incidentally, how creepy and corporate is "Groupon Voice," all capitalized and without articles] is not about being inherently funny,” it seems that their writers use most of the real estate not dedicated to boring deal details for swing-for-the-fences attempts at being funny or quirky.

The Groupon application consists of a mock write-up for a deal and an online quiz that has both fill-in-the-blank and multiple choice sections. The quiz, which you can find online here, comprises both grammar/style/diction questions and questions designed to ferret out if you can determine what is funny and what is not. Or, more accurately, which choice conforms to the “Groupon Voice” and which does not.

A sample question (and answer key) from the NYT article linked above:

The kitchen is statistically the most dangerous room in a home because it contains the highest concentration of knives, open flames and …

A. cereal killers

B. spoiled fruit

C. mothers-in-law

D. pots of semi-living lobsters

Nearly half the writers pick A, but the correct answer is D. Puns are not allowed, spoiled fruit isn’t even remotely funny, and defaming mothers-in-law could irk mothers-in-law.

This question, like many of the questions, can cause problems for applicants that either haven’t adequately internalized the Groupon Voice or are actually funny and as a consequence lack imaginative access to the elusive GV. On the quiz, as with my sample deal write-up, I tried to put myself in the headspace of someone writing the reviews I’d been reading in my inbox for months. I thought I could achieve the appropriate tone by submerging my head in ice water for 7 minutes and then composing my response by trying to conjure Woody Allen on his worst day.

At the risk of sounding like that high school classmate that maintained he did poorly on certain SAT questions because “there were no good answers,” those answers all suck. And it’s not even close to obvious why one sucks less than the others. “Cereal killers” is an atrocious pun; “spoiled fruit” is wimpy and dumb and yet may be so wimpy and dumb that it’s actually funny; “mothers-in-law” is hackneyed, and mean without any payoff; and “pots of semi-living lobsters,” the supposed right answer, is aggressively stupid. And not because lobsters aren’t funny, or because the idea that pots of lobsters already submerged in boiling water would be dangerous is nonsensical and also unfunny. It is actually, I think, a candidate for the worst answer because of “semi-living.”

Maybe this is a personal bugaboo, but I see a lot of writing—mostly from folks under 40—in which people use  ”semi-” and “quasi-” carelessly and with really lame results. These modifiers usually just make the intended thought less precise and/or more confusing. Here it just makes me want to poke my eyes out. It sounds like a lazy teenager describing lobster-zombies. Except less funny than that.

The idea behind D being the correct answer is presumably, if you’ve read that NYT piece by now, that it is “incongruous” that “semi-living” lobsters would be dangerous. And so even if it’s not funny, this is the correct answer because of the incongruity. Or something.

Here are a few other questions from the actual quiz I took. See if you can pick the right answer. I actually can’t help you out here since I don’t have my responses to the multiple choice. I scored an 82, for whatever that’s worth. I believe that’s out of 100? Which strikes me as not terrible but also was not enough to get me the job.

Select the most compelling, verifiable descriptor.

A. state-of-the-art
B. top-notch
C. phenomenal
D. licensed and certified

Which is the most interesting way to describe a 4,700 pound chandelier?

A. blinged out
B. more brilliant than a studious Christmas tree
C. a death trap
D. really big and shiny

Select the most enticing descriptor for a devil’s food cupcake.

A. delicious
B. sure to go straight to your hips
C. ooey-gooey
D. velvety

And here are the questions and my answers to the fill-in-the-blank section, followed by my mock write-up for a kayaking tour. I tried to ape the Groupon Voice while demonstrating a bit of originality as well. I was actually pretty pleased with how the deal write-up turned out, and especially so given that I wrote it in under 30 minutes. It seemed slightly stupid, mildly and occasionally funny, and it contained all the relevant details for the deal I was asked to sell.

18. Complete the sentence with an engaging verb:

[titillate] taste buds with the tangy ceviche.

19. Complete the sentence with an engaging verb:

The soft caramel light of two fireplaces [radiates] across the oak dining area.

20. Add an adjective:

The lights on the dance floor are set to a/an [subterranean] dim.

21. What are three synonyms for ‘customer’ that you might use when describing a boating tour?

passenger, client, Gilligan-wannabe

22. In one sentence, describe the décor and ambiance of this restaurant’s dining room:

ed: My answer here gave me douchechills, but I bravely submitted it anyways. [With lush brown drapery, elegant overhead lighting, and a regal burnished wood table, [X restaurant]‘s interior is so nice one would be forgiven for not taking in the beautiful floor-to-ceiling views of the city at dusk.]

23. Humorously complete the sentence:

A hand-written note has the capacity to change minds, break hearts, or [elicit a sizable ransom]. 

ed: Full post-mortem disclosure: I thought “elicit a sizable ransom” alone was going to get me the job.

24. Humorously complete the sentence:

Black Magic Salon treats toes with the respect normally reserved for fingers and fingers with the respect normally reserved for [Oprah].

——

Kayaking Deal Write-Up

Do you resent the internal combustion engine? Think motor boats are for chumps? By taking advantage of today’s Groupon from Sea Kayak Georgia you can live out your Luddite water transportation fantasies with a half-day, all-levels kayaking tour for $25 (a $55 value). The 3-hour coastal tours are available year round and are offered every day. From March through October you have the option of 9am -12pm or 1:30pm -4:30 ; choose November through February and you’ll be spared the early morning wake-up with an 11am start. Orientations takes place 30 minutes before the posted start time.

Sea Kayak Georgia has been owned and operated by locals Marsha Henson and Ronnie Kemp since 1994. Both are ACA (American Canoe Association) and BCU (British Canoe Union) certified instructors and actually live on Tybee Island, the area you’ll be touring. You can develop your paddling skills, if you have them, or simply get out into what your Eastern European friends may call “The Nature” for a relaxing flatwater jaunt. Most trips go to Little Tybee Island, an undeveloped State Heritage site complete with beautiful, craggy trees and the occasional lighthouse.

Sea Kayak Georgia provides everything you need and no experience is necessary, although they do specify that you must bring your own clothes, shoes and snack/water. You’ve been warned: no showing up naked.

So there you have it. The point of this post was not to dwell on the rejection, which does still feel raw and commensurately stingy. And it was not to try and articulate why Groupon’s writing is actually kind of lame. Because that is both obvious and boring. The main idea was to leave a record of my abject failure so historians and/or Deities can make a fully informed judgment of my worth as a human, and so anonymous Internet commenters can call me a no-talent assclown. Which I quite enjoy.

At some point I may write a longer post with some actual substance that more directly addresses why Groupon’s whole schtick (distinct from their business model) is bad for businesses. Which reason is, in part, because it lacks sincerity, which is the fundamental element of good sales and why I would not want my business associated with the company. Unless I was in the unfunny Ironic T-shirt business. Which I am not. Yet.

I moved to Boulder last August and until recently mostly thought “networking” was so much bullshit business school glad-handing. And it is, kind of. Or it can be. But, fundamentally, it’s a way of talking about building relationships. I don’t know that I’m the paragon of networking success, but I didn’t screw it up badly and in the past year have learned a fair amount about what not to do when you move somewhere new.

Be present

This seems obvious, but you can’t network properly unless you live in the place. There’s a limit to the success you can have on Twitter or on forums or in blog comments sections. And the harder you try to make yourself known remotely, the more likely you are to come across as desperate and overbearing. You can create a real solid foundation using social media, but it’s not a substitute for interacting with people across the full spectrum of neighborly human interactions. Nobody has solved the borrow-the-milk-over-IP problem yet.

Be helpful (more often than not)

I stole this “be helpful” mantra from Chris Sacca’s Foundation interview with Kevin Rose, and I think it’s the hardest but most important piece of advice.

Boulder has a culture of generosity that makes it easy to get undeserved meetings with Important People. The kind of meetings where the idea that you might provide anything of value to the person is nearly laughable. This is OK. But go in with a plan. Have something specific you want to talk about or ask and make it quick. Learn as much as you can about the person, but more importantly learn how to deploy that information. Dave Heal Coffee Meeting Heuristic #1 is if, at any point, it sounds like you’re reciting a Wikipedia page, you’re doing it wrong. Your research should merely inform the discussion, not constitute it.

This is mostly revisionist conceptualizing–I guess some might call it “learning”–but I think of most networking as a pyramid. You need to prove your value to people along the base in order to get referred up the pyramid. Occasionally you’ll get shunted a few levels up because you’ve been particularly impressive or the person is particularly well-connected. In those situations especially it’s important not to be afraid to ask for things.

I’ve talked with a lot of people who assume this stance of preemptively apologizing for wasting someone’s time. No, you will likely not be able to give the local hotshot Ruby developer tips on how to write more elegant code. But maybe he (or she!) also likes rugby, or industrial design, or needs help writing an OK Cupid profile. Worst case scenario is you have nothing to offer immediately but you ask intelligent questions, listen attentively and graciously exit. This is a perfectly fine outcome for some substantial percentage of encounters with people you hope to eventually have a more balanced, reciprocal relationship with.

Be interesting

Have hobbies, pursue them passionately, meet others who do them. Repeat. The best relationships–and this is especially true in a town like Boulder where everybody is doing stuff all the time–don’t emerge from meet-ups or events. Or at least they aren’t sustained by these interactions alone.

You should be into at least one discipline or area of inquiry so intensely that you can communicate a sense of expertise to someone who is merely an enthusiast. And you should participate in one group activity or sport (even if that “group” is just a lonely two-person Turkish Oil Wrestling club) where you can have interactions without the temptation to indulge in shameless careerism.

Be everywhere (but not all the time)

People need to know who you are. But you also need to make other folks do some of the work for you by talking about you when you’re not there. Give people, the scene, etc., some room to breathe. If you are at every event, you better have a very finely tuned sense for how you’re coming across.

Also, make sure to hang out with people who aren’t like you; they are more likely to need you. Community manager meet-ups serve a purpose. But especially early on in your career, you’re much more likely to be valuable to people with complementary not overlapping skills. Mere competence in an area where others are incompetent is often enough to get you into a conversation. When the local hadoop meet-up organizes a frolfing team, you can be their coach. Think The Mighty Ducks, but for data nerds.

At some point you will have to be excellent at something, but you can work into that if you get a foot into the right door. I know more than a handful of lawyers that have floundered through learning the on-the-job nuances of business because they were adequate contract writers or simply just knew who to talk to when an entrepreneur didn’t.

Be humble

Don’t be a dick. And own your place in the ecosystem unapologetically. This includes not talking incessantly about your own “hustle.” Business people and aspiring non-technical co-founders have become obsessed with justifying their existence by referring to the fact that they’re constantly flitting about from one physical location to the next. Just do the thing and let the rest of the world apply the obnoxious buzzword du jour. “Hustler,” to paraphrase The Big Lebowski, is not a name people self-apply where I come from. Everybody knows you can’t code (yet?). That’s why you’re excellent at selling and marketing and talking to customers. It’s fine.

In the end, patience is key. It’s possible to network effectively and efficiently, but the most useful relationships are just that. Relationships. You can’t will somebody into trusting you enough to give you a meaningful referral to their friends and mentors. And most of us aren’t so obviously incandescently talented that one brief encounter is enough to get a meeting with the people that can help you the most.

This post is not an attempt at a comprehensive diagnosis. Instead, I’m aiming to create a resource for folks that want to understand, fundamentally, the terms of the discussion surrounding convertible debt v. equity financings in angel/seed rounds. I’m less interested in whether Paul Graham is right and more interested in what VCs and entrepreneurs are and should be thinking about when deciding how to structure their first round of financing.

World’s Briefest Executive Summary: aka The “tl;dr” Version

Convertible debt is arguably better for the entrepreneur in the short run, much less good in the long run, and often bad for the investor, which badness often redounds upon the entrepreneur thus canceling out some of the benefits.

What are we actually talking about?

Convertible Debt

Convertible debt is a security that involves issuing a promissory note to investors–a loan to the company, essentially–that automatically “converts” to equity in the company after a triggering event. This event is usually what is referred to in the documents as a Qualified Financing, which is normally (but does not have to be) a Series A Preferred Stock issuance. The Note will specify both the amount of money that will trigger the conversion and the amount of stock that the debt has been converted into, expressed in the form of a discount rate. For instance, a discount rate of 20% entitles the holder of the debt instrument to shares at 80% of the per share price. Ryan Roberts, who blogs as The Startup Lawyer, has a good, simple illustration of the process:

Here’s the basic outline of how convertible debt works:

(1) Joe Angel invests $100,000 in Startup.

(2) Startup issues Joe Angel a convertible promissory note for $100,000. The convertible promissory note has an automatic conversion feature at $1,000,000 (the “Qualified Financing”) with a conversion discount equal to 20%.

(3) Startup closes $1,000,000 Series A Preferred Stock round (the “Qualified Securities”) by a VC at a Series A Preferred Stock price of $1.00 per share.

(4) Since the Automatic Conversion feature in Joe Angel’s convertible promissory note is triggered by the Series A round, Joe Angel’s convertible debt will be converted to Series A shares at a per share price of $0.80.

(5) The Startup issues Joe Angel 125,000 shares ($100,000/$0.80 per share) of its Series A Preferred Stock. The convertible promissory note is cancelled.

And boom! Everybody’s rich! Errr…wait.

The other relevant feature of these convertible notes is the price cap. Many (most?) angels (Yuri Milner and some others excepted) will not invest without one, and the debate that Paul Graham ignited I think implicitly carries the assumption that convertible debt rounds contain a cap :

To provide upside protection, angel investors like to put a “price cap” on the convertible note discount. This price cap is expressed in terms of a pre-money valuation and effectively acts as a share price ceiling. Thus, an automatic conversion discount with a price cap might read something like this:

“The conversion discount shall be the lower of (i) a 25% discount to the Series A Preferred Stock share price, or (ii) the price per share if the Series A premoney valuation was set at $[10,000,000].”

The latter valuation figure is typically north of what the valuation would have been had the investor and company agreed on a firm price for the debt financing but lower than the best case Series A valuation. It should be obvious that this can backfire on the entrepreneur depending on how the second round of funding goes. If the investors put in $500k convertible debt at a $4.5 million pre-money valuation, at best they stand to get 10% of the company. But that next round of financing might turn out to be less than that first valuation. Essentially, the lower your pre-money Series A valuation, the larger the share of your company the investor gets.

Example from Ryan Roberts:

EXAMPLE 1: If a VC invests $2,000,000 at a $5,000,000 pre-money valuation ($7,000,000 post money) and an angel investor has a $100,000 convertible note with a 25% discount, the angel investor will own 1.9% of the startup immediately after the Series A round.

EXAMPLE 2: But if the VC invested at a $15,000,000 pre-money, the same angel investor would own 0.78% of the startup right after the Series A.

Because of this quirk, an angel investor may not have much incentive to help increase your pre-money valuation before a Series A…regardless of the conversion discount. Meanwhile, you and your co-founders are doing everything possible to increase the startup’s valuation.

What’s the alternative?

There are obviously quite a few permutations available as an alternative, but the standard equity financing usually referred to in the debate is a priced Series A preferred stock financing. Preferred stock comes with rights that are senior to the company’s common stock (usually what is issued to founders and employees) and usually entitles the holder to any number of other attendant benefits. Preferred stock normally comes with, inter alia:

1. Liquidation preference: The LP is generally what is meant by “senior to” above. This gives “preference” to the preferred stockholder in the event of a liquidation event and means that they will get their money before the holders of common stock. This can include a company sale, merger, or, on the opposite side of the emotional spectrum, dissolution of the company. It does not include an IPO, in which all preferred stock converts to common stock. Relatively straightforward stuff at its most basic level. Liquidation preferences can get much more complicated, so if you want the advanced tutorial, check out Yokum Taku’s post.

2. Anti-dilution protection: Like the LP, this is a basic concept with a great potential for complicating nuance. This provision is used to protect the investor in the event that the company raises money at a lower valuation than previous rounds.

Yokum Taku:

Preferred stock is normally convertible at the option of the holder at any time into common stock, usually on a share for share basis, and is typically automatically converted upon the occurrence of a qualified initial public offering. Price-based anti-dilution adjustments involve increasing the number of shares of common stock into which each share of preferred stock is convertible. In addition, an anti-dilution adjustment will affect the voting rights of the company’s stockholders because the preferred stockholder is almost always entitled to vote on an as-converted to common-stock basis. The primary difference between the various anti-dilution formulas to be described in upcoming posts is the magnitude of the adjustment under different circumstances.

For a brief course in Intermediate Anti-Dilution, check out Brad Feld’s Term Sheet Series post [covering weighted-average and ratchet-based anti-dilution provisions].

Preferred stock comes in a “participating” flavor as well. Whereas generic preferred stock gives the investor the choice between getting their money back or taking the equity share of the company they purchased with that money, participating preferred stock essentially gives the investor both.

Brad Feld:

A PP is the right of an investor, as long as they hold preferred stock, to get their money back before anyone else (the “preference” part of PP), and then participate as though they owned common stock in the business (or, more technically, on an “as converted basis” – the “participation” part of PP). It takes a preferred investment, which acts as either debt or equity (where the investor has to make a choice of either getting their money back or converting their preferred shares to common), and turns it into something that acts both as debt and equity (where the investor both gets their money back and participates as if they had converted to common shares).

To illustrate, let’s take a simple case – a $5m Series A investment at $5m pre-money where the company is sold for $20m without any additional investments being made. In this case, the Series A investor owns 50% of the company. If they did not have a PP, they would get 50% of the return, or $10m. With the PP they get their $5m back and then get 50% of the remaining $15m ($7.5m), resulting in $12.5m to the Series A investor and $7.5m to everyone else. In this case, the Series A investor gets the equivalent of 62.5% of the return (rather than the 50% which is equivalent to their ownership stake). The PP results in a re-allocation of 12.5% of the exit value to the Series A investor.

Preferred stock, while it almost always comes with anti-dilution protection & liquidation preferences, can also include rights to block or compel certain actions (company sale/IPO, increase the option pool, appointing senior executives, etc.)

Who likes what and why?

Why do entrepreneurs and/or VCs like convertible debt?

In summary, the conventional wisdom (which is increasingly superannuated) is that a convertible debt financing is faster and cheaper and likely to provide more favorable terms financial terms to the entrepreneur. It’s also (dubiously, some might say) attractive because it allows the entrepreneur to punt on a firm valuation until their next round and who doesn’t like procrastinating!

• Keeps legal costs down (reality: increasingly less so)

This is often repeated as a reason to do debt instead of equity. But most observers recognize that while this may be true up front, all this does is frequently defer the legal fees until a later round/spreads the fees out over a longer period of time. And with the emergence of a variety of streamlined seed documents, a priced equity round can be done for about the same price (~$5k with these non-negotiated “light” docs according to Fred Wilson, ~$15k with Series Seed according to Yokum Taku). For smaller rounds (

• Faster/more expedient (reality: true but increasingly less so)

In a convertible debt financing, the entrepreneur and the VC don’t have to sit down and wrangle over what the company is worth now. The common refrain is that while the pricing conversation around the cap may be similar to a true valuation, the cap discussion takes place at a level of abstraction that reduces the potential for contention. This often results in the entrepreneur getting a better deal, but as we’ll see below that “better deal” often results in misalignment with the interests of their investors, which ultimately creates its own set of problems.

Entrepreneur Lateef Johnson of Deckerton adds:

One thing I’d like to add is that delaying pricing not only shifts risk, it also protects the cap table, which may be more important. Angel investors chafe at the idea of getting worse deal terms than earlier investors, so delaying pricing means that all investors convert at the same terms, which reduces due diligence and speeds up the deal. Faster deals are probably more beneficial to some entrepreneurs than shifting risk.

• No control/rights issues to negotiate (reality: an issue, but the non-negotiated seed docs are, like convertible debt docs, mostly about economic structure)

Debt investing typically gives investors economic rights only. You’re loaning the company X amount of dollars. Equity investments, as discussed above, typically come with a variety of control rights written into the documents (board seats, right to block certain actions, etc.), and the laws of the state of incorporation will also prescribe a basic set of shareholder rights.

In a “blubble” environment like we have now, VCs might prefer convertible debt documents because they don’t particularly care about the control rights and simply want in on the deal. In Chris Dixon’s post on the subject he relates a bit of wisdom he learned from Ron Conway:

To the extent that I know anything about seed investing, I learned it from Ron Conway. I remember one deal he showed me where the entire deal was done on a one page fax (not the term sheet – the entire deal). Having learned about venture investing as a junior employee at a VC firm I was shocked. I asked him “what if X or Y happens and the entrepreneur screws you.” Ron said something like “then I lose my money and never do business with that person again.” It turned out he did very well on that company and has funded that entrepreneur repeatedly with great success.

You can hire lawyers to try to cover every situation where founders or follow on investors try to screw you. But the reality is that if the founders want to screw you, you made a bet on bad people and will probably lose your money. You think legal documents will protect you? Imagine investors getting into a lawsuit with a two person early-stage team, or trying to fire and swap out the founders – the very thing they bet on. And follow on investors (normally VCs) have a variety of ways to screw seed investors if they want to, whether the seed deal was a convert of equity. So as a seed investor all you can really do is get economic rights and then make sure you pick good founders and VCs.

Mark Suster chimes in in the comments to talk about a deal that he lost to Sequoia when he had a term sheet all but agreed-upon except for some “niggly founder issues” and Sequoia came in and swiped the deal without any fuss. Especially when it comes to smaller investments, VCs might be inclined to do a debt deal simply in order to avoid negotiating control issues. The “light” non-negotiated documents that Fred Wilson favors, however, look more like your standard debt documents and deal mostly with economic structure.

• Rolling fundings

Angel investor Chris Hobbs notes in a comment on Seth Levine’s post:

Another advantage of a convert is if you are going to fund in dribs and drabs. With a step up over time in the conversion discount, you can do a rolling funding more cheaply with a convert, and still have some accommodation for risk. I personally don’t like rolling fundings, however, as the founders tend not to get any work done when they are focused on raising money.

Why do entrepreneurs and/or VCs like priced equity rounds?

First let’s start with the hard sell from Ted Wang for his Series Seed documents:

· Costs should be roughly the same (if not cheaper) than using industry standard debt documents. There are a number of different convertible debt documents out there and there will likely be some back and forth whereas these are standard documents.

· Same point for speed. If parties agree to Series Seed Documents, should be faster than debt documents since there is some negotiation with debt documents from sophisticated investors.

· Series Seed Documents are transparent: no hidden gotchas can get served up in definitive documents. You can review them right now if you want.

· Equity documents give investors more clear definition around rights, more stability and less potential squabbling in the next round.

· Equity gives investors the opportunity to get long term capital gains tax treatment if early exit.

· With minor manipulation, Series Seed enables multiple board structures without tortured and non-functioning agreements (a real problem for convertible debt documents); and

· Entrepreneurs get price certainty instead of the lower of two different prices as with capped debt.

In sum, Series Seed creates a level playing field between capped debt and equity documents in terms of speed and cost. When one studies the (admittedly highly technical) benefits of Series Seed vs. price debt, Series Seed is a better solution.

• Alignment of interests

As we saw above, your standard convertible debt instrument includes a discount rate with a cap. But when intended as a bridge to a Series A round, something strange happens. This arrangement means that the incentives for the entrepreneur and investor are now at odds. The entrepreneur obviously wants the Series A round to the priced as high as possible, but the investor now wants the Series A round to be priced as low as possible because the conversion price is based on that round.

As Mark Suster puts it:

As an investor when you do convertible debt you’re usually pricing the round when the next money comes in. But as an angel you’re usually not only taking risks but also helping the company succeed (through introductions, social proof, coaching, recruiting). So think about it – why should you be penalized for helping a company to get a higher valuation in the next round and thus your money gets converted at a higher price?

If an entrepreneur wants an angel/seed investor who’s going to actually add value, doing a convertible note (without some pro-investor protection like warrant coverage or a discount rate that gets progressively more investor-favorable over time) might ultimately make less sense. The blogs of all of the prominent VCs I read reflect a unanimous desire to add value and so the choice of a financial instrument that might get in the way of that desire should not be taken lightly. As an entrepreneur you want your VC to want to help you, especially at the angel/seed stage.

Seth Levine’s take on why convertible debt might be bad for entrepreneurs:

Clearly in the short run this trend is positive for entrepreneurs because it has the effect of both deferring an often difficult conversation (around valuation) and ultimately increasing early stage company values and as a result decreasing entrepreneur dilution (by the way it’s also good for Y-Combinator, TechStars and other similar programs since the shares the program gets of each company act as founder shares in this financing equation). And I have no doubt that there will be many entrepreneurs who benefit from this trend. But it’s not clear to me that it’s sustainable (just as it wasn’t a decade ago). Ultimately investors need to be compensated for the risk they take in making their investments. With capital being relatively fluid (and the angel markets being finicky) as companies run into trouble, as valuation caps begin to be disrespected, as overall return profiles decrease because of higher early stage prices, money will flow out of the asset class. And ultimately this doesn’t benefit entrepreneurs either.

Yokum Taku also notes, regarding convertible debt deals:

Investors may request aggressive terms. For example, investors may require the company to grant a security interest in all of the company’s assets, personal guarantees from the founders, drastic measures upon an event of default (i.e. the equivalent of getting your arms broken if you don’t repay), etc. In a Series A financing, there seem to be some established norms on what is typical. In a convertible note bridge financing, creative investors may suggest some unusual terms.

Conclusion

So, in the end, what did we learn?

With the advent of the Series Seed and other “light” documents, a lot of the cost and time associated with equity financing has been reduced to levels that are competitive with a debt deal. There are still good reasons why both entrepreneurs and VCs might want to push the valuation discussion down the road, and protections can be built into the debt documents to make them more equity-like and therefore satisfy the VC. But most entrepreneurs taking seed financing want active, enthusiastic investors. And most investors want to be strategically involved in their portfolio companies. However, a vanilla convertible debt financing can misalign the parties’ interests in a way that will ultimately hurt the entrepreneur more than a low but reasonable valuation might have.

EDIT: Scott Edward Walker of Walker Corporate Law Group has a post that cautions entrepreneurs, especially ones at the helm of “hot startups” against agreeing to the Series Seed documents as-is. Solid advice that hopefully is rather obvious, but read the entire post.

Response to Paul Graham Link Round-up:

Seth Levine (Foundry Group): http://www.sethlevine.com/wp/2010/08/has-convertible-debt-won-and-if-it-has-is-that-a-good-thing

Yokum Taku (Lawyer at Wilson Sonsini): http://www.startupcompanylawyer.com/2011/01/09/is-convertible-debt-with-a-price-cap-really-the-best-financing-structure/

Mark Suster (GRP Partners): http://www.bothsidesofthetable.com/2010/08/30/is-convertible-debt-preferable-to-equity/

Jason Mendelson (Foundry Group): http://www.jasonmendelson.com/wp/archives/2010/08/the-convertible-debt-debate-an-ex-lawyers-twist-on-the-argument.php

Fred Wilson (Union Square Ventures): http://www.avc.com/a_vc/2010/08/some-thoughts-on-convertible-debt.html

Chris Dixon (Hunch): http://cdixon.org/2010/08/31/converts-versus-equity-deals/#comment-73535965

Ben Siscovick (IA Ventures): http://bsiscovick.tumblr.com/post/1043177410/advocating-the-move-from-entrepreneur-friendly-to

Mark Suster, a prominent venture capitalist with GRP out of Los Angeles, runs a fantastic blog and hosts an equally great weekly segment on venture capital as part of Jason Calacanis’s “This Week In” series. Mark’s also been an entrepreneur and his posts are densely packed with excellent advice and cautionary tales for founders of companies at all stages.

Mark’s one of the few interviewers in this growing genre of long, tech-focused programs (Andrew Warner of Mixergy is also worth checking out, but he has a much different style) who also participates in the interviews as an equal with the VCs and entrepreneurs on the other side of the table. His interview with Mike Yavonditte of Hashable was so good I’ve now watched it twice, and the session with Chamillionaire (whose name I will admit to mispronouncing in my head for the past few years–the “ch” sounds like a “k”) was a revelation.

Anyways, in the interest of shortening the ass-kissing windup here a bit, I’ll just say that I’m a huge Mark Suster fan. Which is why I found it boggling that during one of the sponsor breaks in the show–Mark pauses the show briefly to deliver an earnest radioman-style pitch for a product or company that he believes in and often uses–he was pitching for Legal Zoom and recommending that startups use them for their incorporation and patent/trademark filings.

I’d really be interested in hearing from Mark whether he knows any entrepreneurs that have satisfactorily used LegalZoom for their incorporation (with or without a lawyer’s help). But my understanding is that LegalZoom files the forms directly with the Secretary of State and that you can’t have them sent to you for double-checking by a lawyer or anybody else.

Their super deluxe incorporation package comes with a CD with “over 40 business documents,” but I would be very surprised if those documents covered everything that a tech start-up needs (stock purchase agreements, technology assignment, etc.) or gave any guidance on alternative protective provisions. These kinds of concerns may not be important for Joe Briefcase, the aspiring slumlord who’s forming a company for liability shielding purposes, but making the right incorporation choices is incredibly important for startups. Problematically, LegalZoom, although it offers up a phone number for advice, needs to be careful not to hold itself out as a provider of legal services in order to avoid getting yelled at by state bar associations. And moreover, LegalZoom is arguably doing just that simply by choosing the template forms and crafting the questionnaire that auto-populates the documents. They’ve been the target of a few nastygrams from state bars demanding that they stop providing legal services under the guise of not providing legal services.

I can’t imagine the risk of creating a hash of your pet startup’s incorporation documents is worth the cost savings. If your financials are really that dire, I bet you’d be better off just talking with the folks at your local Secretary of State and saving yourself the $300+ bucks. In the end, incorporation of a company is a serious step that is usually the result of a bunch of people wanting to do something quite complicated, whether that’s obtain funding, issue stock, create & manage intellectual property, hiring employees or contractors or any of the above. And I can say this without conflict of interest as a law-talking man who’s not actually an attorney: this should all be done in consultation with a good lawyer. Don’t try and save yourself a grand or two because you think it’ll be fun and cheap to incorporate using a website that features that guy who represented OJ.

And when it comes to patents and trademarks, what happens when the application is rejected or a reply is necessary? Most patent applications aren’t accepted as filed, so there’s almost always more work to be done. Not having much familiarity with patent prosecution, I can’t be sure, but my guess is that amending a patent application or responding to rejected claims often requires the kind of intricate legal argumentation that is probably best handled by a competent, debt-ridden attorney. I suppose the response might be that you can deal with an attorney at that point in the game and gee look you’ve maybe saved yourself some money. But my guess is it’s pretty easy to bungle one of these applications if you don’t know what you’re doing, so why chance it?

In the end, I’d love to hear from entrepreneurs, tech or otherwise, that successfully used LegalZoom for any of their important documentation. But even a few anecdotes probably won’t be enough to convince me that the risk outweighs the cost savings. Maybe there are some VCs out there that routinely advise startups to do this and haven’t had a deal blow up in their face, but I’d be willing to bet a cheeseburger or two that no reputable VC actually does this.

The point of this post, incidentally, is not to call Mark out. But he mentions each show that the sponsors are frequently trusted companies with products that he has experience with (although I suspect this might not be one of those cases). And the endorsement I saw didn’t take the form of a generic product blurb, but instead he specifically mentioned trademark & patent filings (and incorporation, if I remember correctly), which struck me as strange. I’m not here to bang my fist on the table and demand answers, but I am curious whether he really thinks startups using these online services is a good idea.

EDIT: Some good resources. HT: @jakewalker

1. http://www.docstoc.com/documents/legal/
2. http://www.orrick.com/practices/corporate/emergingCompanies/startup/index.asp
3. http://www.orrick.com/practices/corporate/emergingCompanies/startup/forms_corporate_formation.asp
4. http://www.businessinsider.com/legal-documents-for-your-startup-2009 -8

This is a re-post of a law school column I wrote about 2 years ago this week.

Three of the closing paragraphs from a recent New York Times article on the craptastic legal market:

If the downturn is prolonged, law schools will need to keep tuition and other costs in check so students do not graduate with unmanageable debt. More schools may follow the lead of Northwestern, the first top-tier law school to offer a two-year program.

Law schools may also become more serious about curriculum reform. The Carnegie Foundation for the Advancement of Teaching released an influential report that, among other things, urged law schools to make better use of the sometimes-aimless second and third years. If law jobs are scarce, there will be more pressure on schools to make the changes Carnegie suggested, including more focus on practical skills.

They may also need to pay more attention to preparing students for nonlegal careers. Law graduates have always ended up in business, government, journalism and other fields. Law schools could do more to build these subjects into their coursework.

So let’s get this straight. We’re at a professional school that might have the singular distinction of being described by both students and employers as leaving most of us woefully unprepared to do any actual work on our first day in the office. And the remedy for this is somehow to find a way to crowbar more stuff into the curriculum that isn’t the law?

Channeling, for a second, the male protagonist in Derrick Comedy’s Blowjob: that is the opposite of what is needed. The reason law graduates have always ended up in other jobs is often because they shouldn’t have gone to law school in the first place. For many students, that dual degree is a step towards gaining expertise in a field that will inform their law practice or catapult them to a teaching career. Those 12 credits of Law & “__” classes are merely satisfying an intellectual curiosity. But for others, this desire to do non-law things with their time at law school represents a lifeline thrown to a vision of themselves that they only wish they had the courage to pursue fully. And for others still it turns out that even if you enjoy the intellectual rigors of publicly sparring with Richard Primus over the finer points of constitutional interpretation, you may, surprisingly, not enjoy interminable electronic discovery or combing through an offer document looking for rogue blobs in brackets.

And I’m not merely talking about the petty but pervasive frustrations of any life that involves more than 55 minutes of sustained concentration and is infrequently punctuated by drunken burrito binges and Guitar Hero marathons. (Although, for those law students who have never held a 9 -5 job, having your introduction to the working world be 60-80 hours a week of document review is understandably sub-optimal.)

No, the heart of the matter lies in the fact that many law students are either uninterested in or ill-suited to being actual lawyers. For many, the practice of law, particularly at its lower, more mechanical levels, elicits the kind of marrow-level boredom that unmistakably means that you’ve failed in choosing a profession. Granted, the law is necessarily pyramidal; there is simply a lot of fairly mundane stuff you have to know in order to get to the ecstatic bull sessions that may characterize certain subfields of law as practiced at the highest levels. But being a lawyer is going to be really boring for a lot of people. In some circumstances being bored at work is OK, but it becomes quite a bit less OK when the boredom is a surprise and you’ve just spent 3 years of your life at law school and are severely undercapitalized as a result.

The idea that a law degree is a versatile one−”it’s the Swiss Army Knife of graduate degrees!,” says your Uncle John−while maybe true to a certain extent, is mostly a pernicious piece of self-deception transmitted from one generation of disaffected lawyers to the next. This is all in the interest of making everybody feel better about having taken out ~150k in loans and effectively wasted 3 years of prime life-living time. The truth is that not only is law school probably too long and expensive for people who actually want to be lawyers (unless we decide to make some or all of the third year a mandatory externship/apprenticeship), but it’s certainly too long and expensive for people whose ultimate goal is to do something else. The fact that some journalists are lawyers does not mean that law school is a good idea if you want to be a journalist. More than a handful of novelists and hand models are lawyers, too. These days, lots of hobos are lawyers. In fact, hobodom may in fact be the most likely alternative career path for some of today’s law students.

Current students find themselves entering the contracting legal market in medias res, where “res” equals a giant shitmist of uncertainty and plummeting job prospects. This means that a lot of people who viewed the law as camouflage for their indecision or as a cash-lined waystation en route to a career in competitive log rolling are finding themselves repeatedly kicked in their sensitive bits. And seriously in debt. Lots of debt.

So there’s a related question of don’t we think that there’s going to be something fundamentally wrong with a profession when applicants are discouraged from demonstrating an actual interest in the profession? And that once in law school students aren’t required to have any exposure to the sorts of things they’re going to be expected to do on the job.

Anna Ivey, a former Dean of Admissions at the University of Chicago and now The Authority on applying to law school, gives the traditional advice against turning your personal statement into anything resembling what she calls a “statement of purpose.” But why don’t law schools actually require or solicit something like this? While it might make Sarah Zearfoss’s job more tedious, having an additional essay expressing what people hope to get out of law school and fewer essays about manually masturbating wallabees on the Isle of Man might be a good thing. Maybe if applicants were evaluated, in part, on having thought a little bit about why they’re about to spend 150k of money they don’t have to get a legal education, we’d be one small step closer towards not producing lawyers who hate their jobs.

Because of the barriers to entry in the legal world, law school applicants are unable to get a real up-the-butcher’s-ass view of what being a lawyer actually entails. So, every year, thousands of post-graduates try to get as close as possible by being paralegals at large firms, an experience that miraculously doesn’t dissuade them from going to law school.

Business school students, on the other hand, almost always have prior experience doing something similar to what they hope to do upon graduation and are therefore more than eager to pay for two years of beer bonging, hand shaking lessons, and supervised business card exchanges, content in the knowledge that they’re going to enjoy their job upon graduation.

So, to circle back to the possibility offered up by NY Times piece: the last thing law school needs is less law. Our Law School in particular hasn’t shown any signs of mandating juggling or TV/VCR repair classes, and this is clearly a good thing. And while undeniably shitty for current students, the demise of the idea that law school is a risk-free path to riches for bored humanities majors might not be the end of the world.

HT: Prettier Than Napoleon

[...]

What’s the big deal about EDF v. Duke Energy, you say? Well, telling that story requires a bit of background on The Clean Air Act (1970), the law that heralded the beginning of America’s Golden Age of environmental regulation, which is a thing I actually didn’t make up and runs broadly from the 1970s to the late 80s/early 90s (the 1990 amendments to the CAA were the last major environmental legislation enacted in the US).

The Clean Air Act is important because it is arguably the first environmental law with the express goal of protecting human, not merely environmental, health. Its declared purpose is to “protect and enhance the quality of the Nation’s air resources so as to promote the public health and welfare [...]” In 1977, Congress amended the CAA to attempt to give the EPA greater authority to maintain air quality. The amendments required newly constructed sources of pollution to obtain permits that would ensure compliance with the national air quality standards (NAAQs!) promulgated in Title I of the original Act. This New Source Review (NSR) was the subject of the case brought by the EDF, EPA and others against Duke Energy.

From the opening paragraph of the opinion by Justice Souter:

In the 1970s, Congress added two air pollution control schemes to the Clean Air Act: New Source Performance Standards (NSPS) and Prevention of Significant Deterioration (PSD), each of them covering modified, as well as new, stationary sources of air pollution. The NSPS provisions define the term “modification,” 42 U.S.C. § 7411(a)(4), while the PSD provisions use that word “as defined in” NSPS [emphasis added], § 7479(2)(C).

Wait, don’t fall asleep, this is actually kind of interesting! So the US sued Duke Energy, accusing them of, inter alia, violating the PSD scheme/provision of the CAA. Between 1988 and 2000 Duke had made 29 modifications to its coal-fired electricity-generating doohickeys in order to extend the life of the units and allow them to run longer each day. The important point being that the changes did nothing to increase the hourly rate of emissions. But because they allowed the units to run longer each day, this obviously increased the amount of pollution emitted each day, fortnight, year, etc.

But the PSD regulations issued in 1980 by the EPA said that a power company has to obtain a permit (which Duke did not do) every time it makes a physical change that leads to a significant net emissions increase. More from the Court’s opinion:

First, the regulations specified that an operational change consisting merely of “[a]n increase in the hours of operation or in the production rate” would not generally constitute a “physical change or change in the method of operation.” § 51.166(b)(2)(iii)(f). For purposes of a PSD permit, that is, such an operational change would not amount to a “modification” as the Act defines it.

Second, the PSD regulations defined a “net emissions increase” as “[a]ny increase in actual emissions from a particular physical change or change in the method of operation,” net of other contemporaneous “increases and decreases in actual emissions at the source. “Actual emissions” were defined to “equal the average rate, in tons per year, at which the unit actually emitted the pollutant during a two-year period which precedes the particular date and which is representative of normal source operation.” § 51.166(b)(21)(ii). “[A]ctual emissions” were to be “calculated using the unit’s actual operating hours [and] production rates.” Ibid.

Third, the term “significant” was defined as “a rate of emissions that would equal or exceed” one or another enumerated threshold, each expressed in “tons per year.” § 51.166(b)(23)(i).

And the Court’s summary of these three regulations:

(a) The Act defines modification of a stationary source of a pollutant as a physical change to it, or a change in the method of its operation, that increases the amount of a pollutant discharged or emits a new one.

(b) EPA’s NSPS regulations require a source to use the best available pollution-limiting technology only when a modification would increase the rate of discharge of pollutants measured in kilograms per hour.

(c) EPA’s 1980 PSD regulations require a permit for a modification (with the same statutory definition) only when it is a major one and only when it would increase the actual annual emission of a pollutant above the actual average for the two prior years.

So, to review, the NSPS definition of a “modification” requiring a permit refers to hourly emissions, which the Duke Energy upgrades did not change. The PSD definition of “modification” is defined by a cross-reference to the NSPS definition but also, as we saw above, refers to an annual “net emissions increase.” The part of the Clean Air Act at issue, 7411(a)(4), doesn’t refer to time at all. The annual v. hourly debate is/was entirely one of the EPA’s regulatory gloss. Duke Energy, it seems to me, actually had a reasonable case that this is confusing as hell. Certainly it was the kind of case that I would not have predicted would lose unanimously in the Supreme Court.

There is a cross-reference in the definition, so it doesn’t seem entirely clear to me that the EPA can change the definition of what kind of pollution increase makes something a modification without addressing the cross-referenced definition, which the EPA has explicitly said refers to hourly emissions. The Court ruled against Duke on this particular argument by noting that the different regulatory programs involved require or at least permit different interpretations of the same words. They also said that the language of the cross-reference, which says that “construction [...] includes the modification (as defined in 7411(a)) of any source or facility” is inclusive and not exclusive. Essentially, it doesn’t say “shall be limited to.”

Although the Court ultimately skirted the issue of how the EPA should determine whether something is routine maintenance, it did essentially ratify the EPA’s broad power to implement and enforce the New Source Review program, which you may have never heard about but is a rather big weapon in the government’s fight against air pollution.

Now that I’ve saved you the time of having to read the opinion for yourself (unless you’re the kind of person that reads entire legal opinions), head on over to Netflix and watch the movie about Duke Energy’s more evil and cynical side. I promise you it’s more interesting than New Source Review. It’s even more interesting than the Hollywoodized trailer below.

Kelly’s transformative experience notwithstanding, the plentiful linguistic gifts of popular music, it seems, are mainly lexicographic.  That is, it gives us lots of new words. For instance, Steve Miller’s “Space Cowboy” provided the world with the endlessly useful ‘pompatus,’ and hip hop is responsible for the diffusion, if not the generation of, ‘crunk’ and ‘shorty.’  In the case of Snoop Dogg’s ‘-izzle’ language we have a vocabulary so rich that some linguists believe it will soon replace both the dreaded Pig Latin and Oppish, that hideous invention of middle school girls that involved, inter alia, putting ‘Op’ at the ends of words, as the preferred nonsense language of the nation’s young people.

Some of our finest musicians, however, are not content to merely introduce new words.  They aim to influence the architecture underlying interpersonal communication – our grammar.  Bob Dylan’s “Lay Lady Lay,” known to Dylan scholars as one of his most widely popular hits, is actually an extended commentary on the disappearing colloquial distinction between “lie,” which means to recline or be situated, and “lay,” which is generally a transitive verb meaning to put down or arrange.  Moreover, it’s believed that Dylan set the lyrics to such an easy melody in order to sow the seeds of confusion among the hoi polloi while simultaneously increasing the antipathy that the traditionally upper middle class grammarians of the world feel for the untutored masses and thereby ignite the Revolution that so many were working for in the late 60s.

In the past ten years, this tradition of linguistically conscious pop music has been carried on by the warrior poet Ludacris and, most recently, by Stacy Ann Ferguson, better known as Fergie.  And but so whereas Dylan’s song seems deliberately calibrated to foment rebellion and tear our country apart, Fergie approaches her songs with a message of unity. If we all spelled the same way, her music implies, there would be no war.

Now, some of you may know Fergie as the leathery former frontlady of the Black Eyed Peas and the one responsible for one of the worst songs of the last few years, 2005’s “My Humps.” Others as the maxillofacially curious fiancé of Transformers‘ heartthrob Josh Duhamel. All of you waiting for a slightly more sophisticated reason to kneel in front of Fergie and kiss the hem of her daisy dukes can now refer to her subtle foray into the field of linguistics as evidence of her much-deserved celebrity status. I’m actually not talking about the fact that listening to a Fergie song often doubles as an advanced lesson in self-promotional orthography  – e.g., “Fergalicious,” which teaches you how to spell ‘Stacy’, ‘Fergie’, and ‘delicious’ in the same song – but instead about her slightly more controversial embrace of the ’singular they,’ one of the hobbyhorses of prescriptive linguists everywhere.

The ‘singular they’ is the use of the pronoun ‘they’ in a sentence such as “Any girl who dates a fellow law student is dumb; they must have an IQ below 100.”  The powdered wig set would insist you substitute ‘she’ for ‘they’ in the second sentence. There are complicated linguistic arguments about the different semantic work each of those choices does, but it’s safe to say that people have been using ‘they’ in this fashion since before the time of Shakespeare, and that when somebody tries to tell you it’s grammatically incorrect, they’re usually wrong.

By way of illustration, I present a verse from Fergie’s recent (and terrible) “Big Girls Don’t Cry”:

I hope you know, I hope you know

that this has nothing to do with you.

It’s personal, myself and I

we got some straightening out to do.

And I’m gonna miss you like a child misses their blanket.

Stephen Pinker talks extensively about the problem of nominally singular antecedents being associated with plural pronouns (them, they, etc.) in his book “The Language Instinct.” A related excerpt from page 391 of the Harper Perennial Modern Classics Edition:

“Everyone returned to his seat” [ed. What your elementary school teacher would have you substitute for the allegedly ungrammatical 'Everyone returned to their seat.'] makes it sound like Bruce Springsteen was discovered during intermission to be in the audience, and everyone rushed back and converged on his seat to await an autograph [...]

The next time you get corrected for this sin, ask Mr. Smartypants how you should fix the following:

Mary saw everyone before John noticed them.

Now watch him squirm as he mulls over the downright unintelligible “improvement,” Mary saw everyone before John noticed him.

Pinker goes on to explain that the dissonance we intuitively hear in the ‘improvement’ has to do with the linguistic relationship between everyone and they. That is, they are not functioning in this case as ‘pronoun’ and ‘antecedent’ but as the more obscure ‘quantifier’ and ‘bound variable,’ a distinction that while interesting is sufficiently wonky as to be beyond the ambit of this here humble column.

This is all a very long-winded way of encouraging you all to really listen to the music around you, even the stuff you think is garbage.  The music of Fergie and Bob Dylan has important lessons to teach us all about the world we live in, and for those of you who don’t read the Language Log blog on a regular basis, you’ll sleep soundly knowing that you can probably absorb a freshman course in generative grammar by listening to Top 40 radio.