Angelgate

By Felix Salmon
September 22, 2010
Mike Arrington loves nothing more than throwing bombs, so you could be forgiven for dismissing his latest exercise in conspiracy-theorizing as little more than self-promotion. But you'd be wrong

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Mike Arrington loves nothing more than throwing bombs, so you could be forgiven for dismissing his latest exercise in conspiracy-theorizing as little more than self-promotion. But you’d be wrong. It’s an important story, and it’s one which Arrington almost uniquely is able to write. Henry Blodget makes some good points:

It’s this sort of work that makes this new form of journalism so valuable and fun. It’s also the type of work that would make the tech industry barely notice if the mainstream media just rolled over and died.

As Mike observes, many of the folks he calls out for this meeting are friends and sources, some of whom will undoubtedly be furious at him for exposing their little game.

It takes balls to lob a grenade at your friends like that. It also takes finesse and skill (and power) to do it and still have many of those folks rushing to call you after the meeting to preserve their relationships with you.

The only other person who pulls off stunts like this one is Nikki Finke: there’s something fundamentally bloggy about this type of journalism, and it’s very hard to see how bigger, older publications will ever be able to produce anything like it.

As for the substance of the story, nothing backs it up more than Dave McClure’s desperate attempt to knock it down. McClure was one of the investors at the meeting which Arrington crashed, and his description of a meeting where “the agenda was drinks, good food, & shooting the shit” is very telling:

at the dinner, there was a fair amount of kvetching about convertible notes, capped or not, hi/lo valuation, optimal structure of term sheets, where the industry was headed, who was innovating and who wasn’t, and 10 million other things of which 3 were kind of interesting and 9,999,997 weren’t unless you like arguing about 409a stock option pricing.

It seems to me that Arrington is right, and that this dinner was an attempt by some very powerful angel investors, led by Ron Conway, to collude with each other on a number of different fronts. Quite possibly including 409a stock option pricing. Arrington’s a lawyer by training, and if he says this is illegal, then it’s worth investigating the accusation seriously, rather than trying to dismiss it in a blog entry featuring lots of swearing along with multiple font colors and sizes.

Importantly, it doesn’t matter whether the collusion is working or not. Here’s Fred Wilson:

The angel/seed market is really competitive these days, particularly in silicon valley. Valuations have risen and terms are weakening, as I’ve blogged about here recently. This is not a market suffering from collusion. It is a market where the investors wish they could inject some collusion. But they can’t and they won’t. Market dynamics, at least as they exist today and for some time to come, will not allow it.

I daresay he’s right about all of this. But if investors “wish they could inject some collusion”, and meet at Bin38 with the intention of doing just that, then what they’re doing is probably illegal even if it doesn’t work.

Similarly, it’s no defense against accusations of collusion to say that you were “extremely uncomfortable with the direction the conversation was going,0″ in Arrington’s words. Yes, it can be uncomfortable to break the law. Discomfort is a sign you’re doing something wrong, but squirming a little isn’t the right response. Leaving the meeting, and speaking up about it, is the right response.

I think Ryan Tate has got it right here:

Oh, San Francisco. You do not wear dark, evil plots well.

There’s certainly something pretty amateur-hour about this whole meeting. But that doesn’t mean it’s not a genuine conspiracy.

As Arrington says, “I had a quick call with an attorney this morning, and he confirmed that these types of meetings are exactly what these laws were designed to prevent.” If these men worked for public companies, you can be sure the SEC would be setting up meetings with all of them right now. Since they’re private investors, it’s not so obvious whose bailiwick this falls into, and whether anybody really has any incentive to prosecute. Maybe Arrington himself is our best hope for keeping these people at least a little bit accountable.

*Update: Ron Conway denies being at the dinner or even knowing about it. Which now makes it seem less malign. If Conway wasn’t there, then it wasn’t quite the everybody-who’s-anybody meeting that Arrington was making out to be.

Comments
One comment so far

Felix,

Under federal law, criminal investigations would be up to the Department of Justice Antitrust Division. Civil government investigations would be up the FTC’s alley.

Assuming the collusion doesn’t work, the state of California and market participants probably wouldn’t sue under federal law – its not really worth it. There may be state antitrust laws involved as well.

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