Van Halen, Brown M&Ms, and Venture Finance

Nadia Dugal

Van Halen is a rock band that is famous, or infamous, for many things, including big hair, loud music, and massive concerts.

One infamous Van Halen story is that the band required its concert dressing rooms to contain a bowl of M&Ms -- with all of the brown M&Ms removed. This story is generally shared as a symbol of the band’s excessive behavior, but in truth, the brown M&Ms were an ingenious tool for keeping the band safe. Van Halen had a very complicated stage show, complete with dangerous special effects and pyrotechnics (i.e., fire on stage). The band was always worried that the venue would not read it’s contracts, which included various safety precautions, carefully. So the band started including a contract provision, buried in the contracts, that there needed to be a bowl of M&Ms — with the brown M&Ms removed — in the band’s dressing rooms. That way, if the band arrived at its dressing room, and there were either no M&Ms, or brown M&Ms in the bowl, they knew that the venue probably did not carefully read the contract and that they needed to double-check all of the safety precautions.

So what do Van Halen and brown M&Ms have to do with venture finance?

In venture finance, it is standard practice not to issue fractional shares. So if you invest $5,000,000 to purchase Series A preferred stock, you will end up with a whole number of shares. The challenge is that this will almost certainly require rounding as the share purchase price is usually a fractional number. Continuing our example, if you invest $5,000,000 and the Series A purchase price is $1.8056, you would expect 2,769,162.61 shares ($5,000,000 divided by $1.8056). However, nobody issues fractional shares, so the company will need to round to the nearest whole share (and as the investor, you should expect the company to round up). This would provide you with 2,769,163 shares! Congratulations, you scored an extra 0.39 shares! Unfortunately, you actually need to pay for the extra 0.39 (otherwise it will create an accounting/auditing problem). So instead of wiring $5,000,000, the company should ask you to wire $5,000,000.71 (2,769,163 shares x $1.8056).

This is your Van Halen moment!

In most deals, the company (or their lawyers) will provide you with a term sheet and a pro-forma capitalization table that models the financing. Eventually, they will also request a wire. Now, while I’d like you to reverse engineer the pro-forma and double-check the math on all of your venture deals, I know you are really busy. So take a close look at that wire request. Is the company requesting $5,000,000 or are they requesting $5,000,000.71? Those 71 cents are your brown M&Ms! If they aren’t there, then it is definitely time to double-check everything.

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