In a Wall Street Journal opinion article published last month, former high-yield corporate bond salesman and trader, Michael Milken, who has his share of detractors, penned an opinion titled Why Capital Structure Matters.  He commented on this theme previously, including in a Forbes cover story titled My Story (March 16, 1992). 

Milken stresses that an appropriate capital structure evolves and corporate leaders must consider various factors in managing it.  Likewise, he provides recent examples (Alcoa and Johnson Controls) that deleveraging the capital structure of companies with uneven revenue streams can positively affect a company’s valuation, contrary to conventional financial theory.

He describes market signals that may prompt a CFO to consider modifying the capital structure.  For instance, when equity market values surpass replacement value of assets, then deleveraging should occur, when practical.

According to the article, there were unwise modifications to the capital structures of AIG, Merrill Lynch, Washington Mutual, Home Depot and CBS, among others.  What was the alleged error?  They borrowed a lot of money to repurchase expensive common equity – some at peak 2007 values – equity that was more valuable than the underlying corporate assets. 

Shoestring Venture and Sramana Mitra provide related articles, among several others.  Nevertheless, as Milken states, “It doesn't matter whether a company is big or small. Capital structure matters. It always has and always will.”

As mentioned in our previous blog, there is an article in today’s New York Times Magazine titled My Personal Credit Crisis, summarized here, which relates to the topics discussed previously.  The subtext of the article touches upon universal themes of human nature, on a personal basis and within a corporate environment.

Given the number of recent business mishaps and mortgage foreclosures, several people might relate to the author’s circumstances.  The experiences he recounts demonstrate psychological elements relating to materialism and insatiability that contributed to the unwise use of liar loans, credit cards, and home equity advances. 

Yahoo! Finance's TechTicker dubbed the story a subprime borrowing nightmare.

Well, perhaps Yogi Berra can best summarize the financial and housing crisis: “We made too many wrong mistakes.”

There is a resounding truth to the cliché “easier said than done,” whether it relates to losing weight, managing a budget, or beating the market.  Most laypersons and professionals understand the actions needed to achieve these goals (consume fewer calories than one burns; spend less money than one generates; buy assets below intrinsic value), but find it exceedingly difficult to master the psychological aspects often required to advance on the path of progress.

To this point, The New Yorker published an interesting article by Jonah Lehrer titled The Secret of Self Control, which highlights a study conducted at Stanford University about children’s ability to exercise self-control.   The study concluded that approximately 30% of participants demonstrated an ability to delay immediate gratification.  The others couldn’t quite control themselves, some even displayed binge behavior and deliberate rule-breaking.

It’s likely the results mirror our own adult self-control abilities, from corporate CEOs perpetuating moral hazards to suburban neighbors “keeping up with the Joneses”…which is a nice prelude to our next blog... 

Entrepreneurs often are known for being self-reliant, so it was not surprising to learn that Wilson, Sonsini, Goodrich & Rosati, a Silicon Valley law firm, released a free, online term-sheet generator for venture financing. 

It is a savvy marketing effort by the law firm, and an instructive exercise for inquiring minds seeking venture funding.  By the way, if you have not heard of WSGR, it is likely you have heard of some of its current and former clients, including Dolby Laboratories, Apple, Google and YouTube.

Essentially, the tool enables a prospective entrepreneur to generate a preferred equity term sheet by answering a series of questions about the amount and tentative terms of a funding. 

As quoted on WSGR's website:

This tool will generate a venture financing term sheet based on your responses to an online questionnaire. It also has an informational component, with basic tutorials and annotations on financing terms.

In addition, the firm provides market data, highlighting private market financing trends for the past two years.  A sample draft term sheet can be viewed on scribd.com, too.

Several bloggers and media have presented overviews, including TechCrunch, Reuters and a related good article by Paul Johnson at StartupSD about 'Participating Preferred' term sheets.