Sunday, October 15, 2006

The human capital VC

I was recently introduced to Brian Tsuchiya, the founder of FirstWheel Venture Group. FirstWheel is a unique venture firm that, rather than providing capital in the form of cash, helps you raise human capital, essentially employees that work only for equity (sometimes called angel employees).

While angel employees are pretty common in early startups, the FirstWheel model is much bigger. Brian developed this model for his own company, Walking Orbit, which hired almost 100 people working for equity only. These people were located around the world (I think they were mostly software developers), and he spent many dollars and hours assembling the legal, financial, and technical systems to implement the business.

The issues that Brian had to resolve are very complex. For example, if the equity is distributed based on the employees' ongoing contribution, then the IRS is going to view that as income and want to tax it, which is a big problem for employees. Also, the company's equity structure can become exceedingly complex with so many shareholders with dynamically changing ownership. The systems Brian had to put in place must have been very robust.

He has now taken these systems and started FirstWheel as a new alternative to a traditional venture firm. He was recently written about in the Denver Business Journal. I spoke with him on the phone the other day, and he mentioned that he's pursuing patents on some of the technology he developed, and that he has a 41-page contract that angel employees sign that defines their participation and compensation. More broadly, his intent is to help companies like ours to implement this model, rather than seeking cash only. In exchange, we would pay his firm fees and equity.

I haven't yet met with Brian, but am planning to do so within the next week or so. I'm not yet convinced that this makes sense, either overall or for SharedPlan.

For instance, we coincidentally met a woman who had worked as a project manager at Walking Orbit. Her comments on the model were pretty mixed. On the negative side, she said that some potential employees either balked at the 41-page contract, or at least were concerned enough about it to feel the need to pay an attorney to review it for them. She also described the challenge of trying to manage projects to completion when her human resources all had other jobs and were working on her stuff when they could. Their availability was never very predictable.

I'll be interested in learning more when I meet with Brian.
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