This week marks the return of Silicon Valley, HBO’s hilariously off-color but poignant take on Palo Alto, startup culture, and all things tech. Silicon Valley is one of cable’s hottest shows, but its success was not at all guaranteed – its subject matter is rather niche (what percent of people nationwide actually work at a startup?).
But just as he did with 1999’s cult classic Office Space, creator Mike Judge knows how to make the material connect with people on a broad level. However, Silicon Valley still has plenty of humorous moments that are easy to miss if you aren’t well versed in coding, MBA lingo, or even cap tables.
Yes, cap tables. You may have missed them upon first viewing, but Silicon Valley is filled with great quotes that pertain to the cap table (Season 1 Episode 2 is a goldmine – it’s even titled “The Cap Table”). And so, in honor of the Season 3 premiere, here are my 5 favorite cap table related quotes from the first two seasons of Silicon Valley (in no particular order):
1. Fighting over “points” in Season 1 Episode 2
If you jump to 15:58 in the episode, you will come across one of the most brutal but real conversations a founding team can have. At some point, every team must decide how much equity each team member will receive. This is often referred to as “getting points” where each “point” equates to 1% of the company’s stock.
In this gem of a conversation, Bachman learns the great Orwellian lesson that everybody is equal, but some people are more equal than others.
Erlich Bachman: Wait, Richard’s getting rid of Big Head? Why
Dinesh Chugtai: Listen, we all love Big Head. But, the truth is he’s not as good of a coder as I am, not as good at system architecture as Gilfoyle, not as good at being a prick as you, no offense.
Bertram Gilfoyle: He’s a lightweight at everything. Brings nothing to the table.
Dinesh Chugtai: Him getting points would be a big “f*** you” to all of us. But he’s a great guy.
Bertram Gilfoyle: Great guy. But useless.
2. “Reverse Vesting with No Triggers” in Season 2 Episode 1
Okay, if I had to pick a favorite cap table quote – it would be the one that starts at 3:20 in the season 2 opener. Our protagonist, CEO Richard Hendrick, ended Season 1 with a presentation at TechCrunch Disrupt that got the whole valley talking. In this exchange, Richard is speaking with Javeed, the former CEO of Goolybib, another hot startup that just sold for beaucoups of dollars:
Javeed: Well, well, well, look who’s the big swinging d***.
Richard Hendricks: Hey, Javeed, everything okay at Goolybib?
Javeed: You gotta ask them. They canned me.
Richard Hendricks: What?
Javeed: Yeah, our investors got spooked by a possible down round, so they shoved an acquisition down my throat.
Richard Hendricks: Yeah, an acquisition of $200 million, right?
Javeed: Yeah, they all made out. I had a reverse vest with no triggers, then I lost all my shares when they fired me. I blew my whole signing bonus renting that house. I’m looking into suing ’em.
Richard Hendricks: Jeez.
Javeed: Look, all I can say is, don’t get f***ed, all right? You take money from the wrong dudes, and you’ll get smoked as bad as I did. Just be careful. Everyone is watching you now.
What’s so great about this exchange? Simply put, the writer’s understanding of a technical matter such as reverse vesting is quite impressive; it shows that they really did their homework.
In case you don’t know, vesting is the process where you earn your shares over time, often over a three or four year period. It’s akin to how you don’t get your annual salary on your first day of work – vesting ensures that you stick around!
Reverse vesting is what happens when your vesting starts all over again. You still own your shares, but the clock goes back to zero – if you had vested 2 of 4 years worth, it would all be undone. Reverse vesting of founders’ stock can be a condition set by investors before they put in their money. Again, the purpose is to ensure the founders are going to stick with the company for the long haul.
Now, vesting often comes with “triggers” that accelerate all or some of the vesting upon certain events. A common trigger would be the sale of the company – less frequently you may see termination of employment as a trigger.
In the case of Goolybib, Javeed got a raw deal – because his stock was unvested and he had no acceleration triggers upon termination, he didn’t retain his shares when fired. So when the company sold, he didn’t get a penny.
This scenario is DEFINITELY not the norm, but you do see cases where founders end up making next to nothing upon sale of the company.
3. Giving out “points” to a street artist in Season 1 Episode 5
Every startup has been there; you need to hire someone for something, and you have a whopping $37 in the bank account (and that money is reserved for next few weeks of Friday Lunches consisting solely of Dr. Fizz and Costco supreme pizzas). Your only alternative is to give out some points. Jump to 0:58 in the episode:
Erlich Bachman: Chuy Ramirez? Erlich Bachman [pointing to self]. We spoke on the phone?
Chuy Ramirez: What’s up, man?
Erlich Bachman: Pleasure to meet you.
Chuy Ramirez: All right.
Erlich Bachman: This is great. Look at this. This is what we need, you know what I mean? Something raw. We already have kind of a s***ty name, Pied Piper, but the last thing we want is two lowercase P’s in a square like those motherf***ers across the freeway would make. This is what we want.
Chuy Ramirez: So you gonna give me stock options, or what?
Erlich Bachman: What?
Chuy Ramirez: Yeah. You know Dave Cho? He did the murals over at Facebook.He got a stock option deal, ended up making like a hundred million dollars. I want a deal like that.
Erlich Bachman: You know, I don’t really speak all that Wall Street bulls***. You know what I’m saying? We’re just like five guys hanging out in a house, trying to make cool s***.
Chuy Ramirez: Well, you told me you own ten percent of it, so you must know something about it, right? You could just give me some of your points.
Erlich Bachman: Hey, I’m not an accountant, you know? I don’t even know what that means, a lot of those words. If I could go back in time, I wouldn’t have taken the stock. I would’ve taken cash only.
The story of David Choe is real – you can read about it here. Instead of taking $60k in cash to paint murals at Facebook HQ, he gambled, and went for the stock options, which later became worth an estimated $500 million.
4. Setting up the Pied Piper’s legal docs in Season 1 Episode 4
This short conversation between Richard and his company’s hip, young, and dismissive lawyer at 0:40 seconds into the episode epitomizes the craziness of the founder’s journey. You are building a business from scratch, everything is new, and you are 100% out of your league. You are testing a business model, developing the product, courting investors, and hiring people to fill positions that you have no way of knowing if they are even qualified for.
But this company is your baby, and so you want to be involved in every facet of every detail so that you can ensure all the right decisions are made. Here’s the thing though, you can’t – there simply aren’t enough hours in the day.
And so founders learn to surround themselves with other smart and competent individuals that they can rely on. And for many, that smart, competent person only costs $800 an hour. It hurts the pocketbook, but you absolutely need a good lawyer.
Ron Laflamme: That stuff you’re signing gives you the convertible note for funding and establishes you and Peter Gregory as the board members of Pied Piper, incorporated in the State of Delaware.
Richard Hendricks: Ok, um, why Delaware?
Ron Laflamme: Rich, Rich. Lawyer [pointing to self], not lawyer [pointing to Richard]. I got you.
It’s a succinct but powerful conversation. You are paying your lawyer for a reason – understand the big picture and ask questions to learn, but at some point, you can’t know everything, and that’s okay.
5. Approving the 409A valuation in Season 2 Episode 4
Pied Piper’s board has a lot of interesting things to discuss. And a lot of less than interesting things as well. At 13:40, there is this quick one liner about the 409A valuation.
Without getting too detailed, a 409A valuation is an independent valuation to determine the value of common stock. This valuation is needed in order to stay compliant with IRC 409A which states that a company must issue their stock options with a strike price equal to or above the fair value of its common stock.
A 409A valuation report dissects the company’s financials and cap table, outlines some valuation theory, and includes exhibits of all the valuation models used. It’s essentially an extremely boring 30+ page document that ends with a simple conclusion, “Compay ABC’s common stock has a value of $X.XX per share.”
So without further ado, here is the line:
Monica: Okay, so 409A valuation report and new ESOPs. Is there a motion to approve? Great, it’s unanimous. Approved.
That’s it – less than 20 words. It’s short yet hilarious – but why?
You gotta understand that I get grilled about 409A almost every day. Founders want to know what valuation methods will be used (“It depends”), how low we can get their strike price (“Low!? – I don’t really have any information about your company yet”), what audit firms we have worked with (“The big four, plus a lot of regionals”), and whether or not the IRS has ever come after one of our customers over section 409A (“Seeing as the IRS has never audited a private company over 409A, I guess the answer is ‘No’”).
I don’t blame founders for the hard questions though, as the finished 409A report will likely come under close scrutiny from their auditors. And if a mistake isn’t caught until years later, it can lead to option-repricings and costly tax consequences for employees. The 409A valuation IS important.
But in the end, the countless hours spent by a young founder becoming self-educated on the intricacies of 409A compliance, stressing about the IRS boogieman, shopping around at different valuation firms, collecting docs, signing agreements, and reviewing the finished valuation – well, it all ends in a one-second vote by the board, who probably never even thumbed through the report. And that’s painfully funny – like watching someone get kicked in the balls.
And there they are – my 5 favorite cap table quotes from HBO’s Silicon Valley. There are quite a few I didn’t include, so the next time you binge watch, see how many you can find. And feel free to let me know what your favorite ones are in the comments below.