I am reminded of the most egregious use of VC money since boo.com burned 20 quid notes to keep warm in the winter. Worse than anything Webvan did. Probably more stupid than the dog commercials from pets.com. Yes, it is my infamous Xmass party story.

It was near the ugly end of the first tech boom and we’d just sold our company (for stock!) to a Canadian competitor who was buying some plug in revenue on their way to a C Round of $15M or so.

Let me back up and explain some terms.

C Round is the third round of venture or sometimes the fourth if there was a “Friends and Family” or “Angel” round preceding the “professional” A Round.

Plugin revenue is when a funded company buys a less VC sexy company for their revenue. In our case we had a working product (they didn’t) with the right tech (we were on Sun, they were on Windows Server) and a *tight* operations procedure (their back office was chaotic).

Last term: tranche. This is when the VC’s promise you, say, $5M but they give it to you in blocks. You get $1M on signing, another $2M on go-live with four parters, and another $1M when you get a quotable Fortune 500 client.

The tranche is just another way for the VC to totally control your life. It also lets them get bored with you and kill your company during a temporary lull in your essential sexiness. I’ve seen the requirements for the tranche totally change when they swap a supercilious Stanford MBA for a know-it-all Entrepreneur In Residence. There is no way to enforce the contract terms from underneath the saddle.

I don’t like them. I think once you’ve paid the price for VC you should at least get a ride all the way back to Times Square.

Back to the story: The guys who bought were in the beauty contest round for $15M and needed the $1M from the last tranche to carry them through the negotiations.

Sorry, another term: beauty contest. Once you go through all the rigmarole and the VC’s have decided, in a partners meeting, to swap you money for your last remaining equity, they make a pretense of looking at your books and IP. It is really just a way to drag out the process and see if they can get you to your actual last dime before they release the money. If you are a VC this is an excellent way to squeeze the last micron of equity out of a company.

Now, REALLY back to the story.

We’d closed the deal on 20/December and I was up in Toronto with my operations director to complete the new procedures, re-organize the reporting structure, etc. (We’d been bought: guess who reported to who?) There was a BIG bash party planned for the 23 to celebrate the release of the tranche on the 22, plus a HUGE new years party planned for the signing of the new contract on the 29th.

Basically these guys were going to spend well north of $100K Canadian on parties. Xmass Party VC Money.

[more tomorrow ]