Did Michael Arrington Screw Jason Calacanis and the State of California?

This week lawyer turned blogger Michael Arrington sold the TecnCrunch network of sites to AOL for an undisclosed sum. That sum has been speculated to be between $25 and $40 million.

The timeline of events suggests a not-so-pretty picture to this saga. But first some background.

The Crunchpad

The Crunchpad was a project to create a $200 tablet started by Arrington in 2008. By June 2009 there had been several prototypes by then in partnership with Fusion Garage. In November 2009, the Crunchpad was dead as Fusion Garage had announced they were going it alone. In December 2009, filed a lawsuit against Fusion Garage from which not much was heard until a September 2010 update that included some fairly damning communications from discovery.

I, like many, felt that Arrington has been screwed on this one. It was clearly his idea and Fusion Garage had seemingly seriously misjudged both the market for their “JooJoo” and Arrington’s resolve to see justice done beyond any sense of any possible restitution.

No formal contract seems to exist between the two parties, which struck many as strange given that Arrington is a lawyer. Fusion Garage seems to have relied upon this fact too not fully understanding or appreciating that a partnership can be inferred from one’s actions.

Tech Crunch Conference

In January 2007, Arrington announced the TechCrunch 20 conference as a joint venture between himself and Jason Calacanis, founder of the Silicon Alley Reporter, Weblogs Inc and Mahalo. TC20 (later TC40 and TC50) was a conference for startups held in San Francisco annually that launched some highly successful companies including Mint.com and Yammer.

In May 2010, Arrington and Calacnis parted ways on TC50. Arrington had earlier (March) launched TechCrunch Disrupt, his own conference. Soon after the split, Calacanis went on to launch the Launch Conference.

Covering the Valley… from Seattle?!

TechCrunch is either a blog or a news organization (depending on whom you ask) that covers startups and entrepreneurs, primarily in the internet space. The Mecca for such companies is of course Silicon Valley, although there are nascent startup scenes in Boulder (eg TechStars), New York, Austin, Boston and other places.

On May 3, 2010, Arrington announced a move to Seattle:

My plan is to roughly split my time between Seattle and Silicon Valley … Seattle is sort of like the minor leagues of the startup world, … But to be honest the biggest reason I’ve moved is to simply mix things up in my life. Like many people I tend to get bored if I stay in one place too long – five years is the longest I’ve lived anywhere since high school. It was time for a change.

The Tax Man

California and Washington have one important difference: Washington has no state income tax. California’s marginal income tax rate is 10.3% (over $1 million). Why does this matter? Capital gains, such as the sale of a company, depending on the state are added to gross income.

That could be as much as $4 million!

There are however some problems. From Do you want to avoid California residency?

(1) California residents pays California tax on all their income.

(2) California generally taxes California-source income, …

So, who is a resident? In determining residency, California law provides two presumptions. The first presumption is that a taxpayer who, in the aggregate, spends more than 9 months of a taxable year in California will be presumed to be a California resident. The second presumption is that an individual whose presence in California does not exceed 6 months within a taxable year and who maintains a permanent home outside California is not considered a California resident provided the taxpayer does not engage in any activity or conduct within the State other than as a seasonal visitor, tourist, or guest.

Permanent residence in Washington? Check. Splitting time between Seattle and the Valley? Check.

But there is no hard and fast rule for what qualifies you as a California resident. It is a subjective test based on factors such as the location of your permanent residence, the location of your family, where you are registered to vote, how much time you spent in California and so on.

Now there’s nothing wrong with minimizing one’s tax liability. The late Australian media magnate Kerry Packer went so far as to say to a 1991 government inquiry:

Of course I am minimising my tax. And if anybody in this country doesn't minimise their tax, they want their heads read, because as a government, I can tell you you're not spending it that well that we should be donating extra!

The interesting part is that the move implies intent. If the California FTB (Franchise Tax Board) argues Arrington moved simply to avoid tax on a business that is clearly associated with, was created in and operates within the state of California, then tax is due. One could go so far as to argue the ethics of paying what’s owed.

But if you ignore that argument and instead argue that the May move to Seattle indicated Arrington’s intent to sell to AOL (rather than simply being a happy coincidence that he moved to an income tax free state 4 months before receiving $30 million), it puts subsequent events into a whole different context.

AOL Buys TechCrunch

On 29 September 2010, AOL Bought TechCrunch. No dollar amount for the sale has been disclosed. Rumours of $25 to $40 million abound. My personal opinion is that it was in the region of $30-35 million with a substantial ($10m+) earn out over 3+ years. The basis for this opinion is, in Arrington's own words

So we begin another journey. I fully intend to stay with AOL for a very, very long time. And the entire team has big incentives to stay on board for at least three years.

(emphasis added)

Plus earn-outs on an acquisition are common practice.

Where this gets really interesting is that according to Business Insider, AOL Tried To Buy TechCrunch Twice Before:

During the second run, AOL wanted to buy TechCrunch for something a little under $25 million. TechCrunch, in negotiations led by CEO Heather Harde, wanted closer to $30 million. AOL wouldn't go there because it thought too much of TechCrunch's revenues were from a conference business it didn't entirely own itself.

(emphasis added)

Tim Armstrong has been CEO of AOL since March 12, 2009. With TechCrunch Disrupt launched in March 2010 and Armstrong purportedly having made at least one other run at TechCrunch, it’s plausible that this move had been planned six months ago.

Jason Calacanis

Calacanis is an incendiary figure, deliberately so. As such he has many detractors. He also has a large media exit to AOL (Weblogs Inc) under his belt. When the sale announcement was imminent, Jason Calacanis Shreds Mike Arrington, Calls Him "A Trainwreck," "A Liability," And "A Sociopath":

@arrington told me he wouldn't sell @TechCrunch for <than $40M last year.TC has ~$6m in revenue/~$1.5m in profits (all TC50!)

Rather prophetic. From back in June:

The Timeline

Date Event
March 12, 2009 Tim Armstrongs becomes CEO of AOL
2009 Armstrong’s first attempt to buy TechCrunch
September 14-15, 2009 TechCrunch50 conference
March 3, 2010 Arrington announces TechCrunch Disrupt
May 3, 2010 Arrington announces move to Seattle
May 12, 2010 Arrington and Calacanis announce end to TechCrunch50 joint venture.
June 17, 2010 Calacanis first (publicly) accuses Arrington of screwing him out of a piece of the pie.
September 28, 1010 AOL acquires TechCrunch

Conclusion

Where once I felt sympathy for Arrington when he was (quite clearly, in my opinion) intentionally deceived by Fusion Garage, the pendulum has swung the other way.

It’s hard to look at that timeline and not see the intent of Arrington splitting with a partner over something that allegedly represents the majority of TechCrunch’s revenue and then going on to launch a similar conference, building on its success.

As divisive as Calacanis can be, it’s hard to argue that he wasn’t a big part of the TC50 conference at all levels: conceiving (jointly or solely) the idea for the conference, filtering and coaching startups, on-stage presentations, choosing the winners and so on.

Compare this to Chris Dixon’s story: How SiteAdvisor Went From Startup Vision To A Career-Making Exit – with Chris Dixon. There are many tales like this where the founders go above and beyond what’s required to look after those who worked so hard for them.

One could go so far as to call Arrington’s actions premeditated, even despicable.

10 comments:

StartBreakingFree.com said...

Good analysis - I bet you're right about how events went down.

But Arrington isn't really at fault here. He had a falling out with Calcanis, and avoiding the 10% income tax in California is just plain smart. Seems like he did the right thing...

Tony Wright said...

Pure and utter bullshit.

Arrington spent 6ish years of his life building value with TechCrunch. He teamed up once with Calacanis to try working a conference together. They didn't like it. Now clearly none of us know the terms of that partnership, but presumably it was a "Let's try it out" thing where they could part ways with minimall entanglement. The idea that Calacanis was entitled to company equity after this just seems silly. Every partnership has a dissolution clause, and many equity deals have a cliff for this reason.

Even IF the conference was financially a smash hit-- it was a hit because Mike built a huge brand success with TechCrunch. Jason's knowledge, following and brand was a tiny part of the value of that conference and that conference was a pretty small part of the value of Techcrunch (even if it was a big chunk of money).

It's like the guy who rolled out the advertising system for Facebook claiming that he built all the value... No-- Facebook is valuable because of it's reach (which allows it to do things like roll out ad networks, put on conferences, or whatever).

A monkey could put on a conference on the TechCrunch brand and have it succeed. The real work (and the enduring value) of Techcrunch is the YEARS of hard work that made that conference possible.

Brett Nordquist said...

Great post. You bring a number of troubling points. Once again, Calacanis looks like a prophet. I'm less interested in how Arrington avoids paying state income tax. Most people would look to minimize their tax burden. But intentionally getting rid of Calacanis when the sale of his company was imminent....that's plain creepy.

John Humphrey said...

It becomes pretty obvious that Arrington has been planning this and I agree that it's creepy he'd push Calacanis out of the deal. Jason (and team) brought a lot to the TechCrunch conferences- ask the startups who pitched! It looks like Jason took Mike at his word (as in 'joint venture'), which turns out not to be worth much.

Tim said...

I've worked on the TC40 and TC50 on the side of Jason. Calacanis brought half of the value to the event. Mike's staff worked a ton to put together the logistics, and so did Jason, Tyler and Krute. Jason is the one who had conference experience and worked with the companies, which was the biggest value. He approached Mike to do the conference in the first place, and that was 3 years of work that actually monetized the brand. I doubt Jason will sue, but there is definitely an argument to be made.

Anonymous said...

Lets see your next post where you speculate on calcanis "ripping off" laporte.

Anonymous said...

I haven't listen to a single episode of twit since twist as started.

So much more insightful and entertaining!

Anonymous said...

As being part of a startup that actually went to the conferences and was a featured startup at one of them, I can tell you that Jason did absolutely nothing for the conference except yell at startups to be ready. Jason has a huge ego, btw, and it is shocking to see in real life.

Everything at the conference was being run by Techcrunch - their employees were literally everywhere and were breaking their backs to put on a good show. Jason sat on stage and chastised attendees. I don't blame them for dropping Jason *at all* - dealing with him was horrible and I am sure most companies attending relayed that back to TC.

Also I doubt the conference is the majority of revenue. Those TC squares are $10k+ a month, and the other ads must be doing just as well..

Anonymous said...

Your timeline is misleading because while they only announced their competing conferences in May of this year, it was plainly obvious from anybody in attendance at last years TC50 that they were not going to hold a conference together again (Mike walked off the stage and Jason said as much afterwards). Jason made a lot of money from those conferences, I am not sure what would lead him to believe that it entitles him to a share in Techcrunch. Damn, then I own a share in every company I have ever worked or partnered with!

Trip Hunter said...

What an awesome post. Really excellent analysis.

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