The SG reconciliation, the Oak Hill note's design, Zaplet, and the DC ecosystem

My memory is that the SG termsheet was $15m at a $135m pre-money valuation and (therefore) a $150m post-money valuation. Oak Hill a $5m un-capped convertible note, which (if I recall) gave them the option of retaining it as debt, or converting into any Preferred Equity round at Oak Hill's option - this gave them the option of just staying as debt if they thought some investor was paying an inflated valuation - for example, if a strategic investor invested as part of a partnership deal that included revenue sharing or distribution deals with could allow them to inflate the face valuation of the financing itself. The terms were carefully structured to align incentives - I wanted the freedom to leverage my ecosystem development efforts and pursue deals from diverse sources, and if I did very well, their $5m convertible note would convert at a relatively small percentage, or just stay as debt earning a healthy interest rate. It was more like a private equity or PIPE structure than a traditional venture term sheet, where the venture firm locks in a fixed ownership percentage, and then using their credibility to help the portfolio company do subsequent rounds at a stepped up valuation from mezzanine, cross-over investments (firms that did both growth-stage venture and public equity investing) or strategic investing. Vinod and KPCB had done this for Asera and a firm called FireDrop with a product they called Zaplets, which were superficially similar to Sitelets (self-contained websites that could run in HTML mail, but without the asynchronous protocols and other capabilities that supported long running, cross-organizational, cross-platform operation necessary to support B2B processes in the real world. Zaplet's was more of a consumer facing play on the mainstream web platforms of the time. In Zaplet's case, Vinod and KCPMG led a $5m seed round that gave KCPB a sizable ownership (20% or so), then Series A at a big step-up that included both KPCB and Venrock, and then they led a $90 Series C at $900m valuation, where they "led" by setting the price, but invested less than their pro-rata share. This is one of the value adds of a top tier VC - late stage investors are wliling to invest at a massive step-up in valuation very quickly, as long as the top-tier lead investors are participating and setting the price. The reality is that the lead investors aren't valuation sensitive, so they aren't really setting the price - they make a market in follow-on late stage investors (often strategic investors who can serve as customers or distribution partners) to set the price. The press releases and the major financing with a bunch of recognizable names gives the startup a bunch of funding that offers a long runway to operate in before they need to do another financing, and also great marketing which helps with sales and ecosystem development.

In FireDrops case, it was basically Vinod Khosla driving strategy and fundraising after he locked in a founder-level stake in the seed round. I knew David Roberts and Brian Axe (FireDrop's co-founders) from meeting them at PC Forum a few times, plus I had spent a bunch of time in DC and had connections at all of the major integrators, SAP, Oracle, PeopleSoft Federal, the defense-intel ecosystem, Carahsoft, DoD (Linton Wells, Dick O'Neill (who ran Highland Forum - a regular invite-only meeting that mixed technologists, complex adaptive systems people with Defense and Intelligence community people, which was funded by Linton Wells and the DoD), RAND, MITRE. I was friends with Gilman Louie, who at the time ran In-Q-Tel which was the venture innovations unit of the CIA initially, and later on for NSA, DIA, and other units of the DNI that contributed financing. Gilman Louie sponsored me to meet with In-Q-Tel's technology due-diligence people out in Rossyln Virginia - I had been there many times. Through all of those connections I had heard all about FireDrop - it was described as a cheap knock-off of what Consilient was doing from a technology standpoint. This, along with the similarly impressive financing of Asera (which Vinod actually co-founded with Bunny Weiss), gave me a severe case of KPCB envy, because Oak Hill Venture Partners was a no-name third-tier firm that wasn't seen as a serious venture player - it was just the small venture unit side-business of a $10B hedge fund run by a bunch of Stanford Professors with Michael Spence and Myron Scholes for show. They were respected a investors, but not as venture capitalists. It's a weird dynamic, where both venture and late stage investors simultaneously respect, envy, and lock down at each other, simultaneously. Early stage VC source deals and (in theory) add value - but with small amounts of capital, whereas late stage investors are passive and pay huge step-ups in valuation, but don't need to pay attention to the deals, and just rely on the founders or VCs to drive the deal till it either goes public, gets acquired, or merges with some other company in a stock-based acquisition so they don't need to write down their investments, making their portfolio metrics look good until they get a big hit from some other portfolio company.

Add entries for all the people mentioned, including Alan Baratz, who was hired as CEO of FireDrop / Zaplets. I knew Alan from his days as running JavaSoft for Sun, and we stayed friendly even though we were seen as competitive. Also add an entry for Ray Ozzie (who developed Lotus Notes, and then moved over to Microsoft - I knew him at both Lotus and Microsoft) and Mitch Kapor (founder of Lotus, and very active as a philanthropic investor) - I had known him for years from conferences and mutual friends in Boston, but was re-introduced to him directly by James Joaquin, whose offices of O'Foto were in the same neighborhood as Consilient's in the 4th Street shopping district of Berkeley, near the Marina. The real-estate market was so hot in SF it was impossible to get enough space, and Erik Freed lived in the Berkeley Hills, and most of the serious database talent was in the East Bay, because Sybase (Mark Hoffman and Bob Epstein) were in Emeryville, Michael Stonebreaker (founder of Ingress, inventor of Postgress, Illustra, was where most hard-core database talent came from the UC Berkeley crowd). I had hired Erik Freed at Evolve after he was the distribution archtitect for Sybase's next generation distributed database product that never shipped (it was named for some classical music thing - I forget what), and we hired an incredible team of database gurus, by far the best technical talent pool of any of my companies - Rich Muth, Brian Anderson, Peter Wisnosfky, etc. etc.

[Supplied research, preserved as supplied:] Zaplet, Inc. (originally founded as FireDrop in August 1999) was a highly publicized Silicon Valley software startup that pioneered "living" interactive email technology before ultimately merging with MetricStream in 2004. The company was co-founded by David Roberts—a Harvard MBA and former high-ranking officer in the Central Intelligence Agency (CIA) who previously managed the agency's spy satellite system—and Brian Axe. Backed by legendary venture capitalist Vinod Khosla and prominent firms like Kleiner Perkins Caufield & Byers and Venrock, the company appointed former JavaSoft president Dr. Alan Baratz as its CEO in June 2000. Dynamic emails: an interactive communications platform that turned standard email into a real-time collaborative workspace; a "Zaplet" was an active application embedded in an email thread that updated automatically when reopened; live polls, meeting scheduling, group calendars, threaded discussions inside existing inboxes. The Khosla effect: Khosla originally discovered the team at a houseboat party, became their chief advisor, and injected an initial $5 million seed investment. In October 2000, Zaplet captured a $90 million round backed by Kleiner Perkins, Venrock and other tier-one firms. Early adopters included the Republican National Committee, ZDNet and USAToday.com. Despite its capital and a USA Today label as one of the Valley's most sizzling start-ups, Zaplet suffered under a complex business model and the post-bubble market, and rolled into MetricStream in March 2004. Years later, Xobni acquired Zaplet's foundational patents from MetricStream for a low six-figure sum.