Presentation on theme: "Ockham Technologies, Equity, Boards, and related issues"— Presentation transcript:
1 Ockham Technologies, Equity, Boards, and related issues John BurrOckham Technologies, Equity, Boards, and related issues
2 Ockham Technology – what happened? Board of DirectorsRaised first round from VCs (Noro-Moseley & Monarch), with each getting one seat on the boardAdded a 5th, very experienced industry personDevelopment/outsourcing –Outsourced to ThoughtMillAlso hired Gus as internal development team leaderFounder tensionsTensions continued to grow, and worsened after Ockham hired a COOMike leftCompany sold in 2002 to competitor
4 Considerations in Allocating Initial Ownership Potential Problem – Ockham founders split only based on amount of initial equityOther criteria to use:What cash, ideas, & property contributed?If property, what is value?What contributions are founders expected to make in the future?What opportunity costs will each founder incur?Career risk taken by each founderFinancial demands faced by each founderMay have to reserve ownership for future founders.Potential problem - split equity very earlySplitting the ownership of the firm is one of the most difficult aspects of structuring the new business. It can be a very sensitive issue - but delaying it may prove disastrous. For example, what if a person contributed actively at the pre-incorporation stage, but is not longer an active part of the founding group. That person may reappear at the time of venture financing, where the firm’s value has escalated, and assert an ownership right. It is best to settle their claims at the incorporation stage, where valuation is low, rather than having to deal with them at the time when the company has increased in value.Founders should take into account any contribution to the business that they believe should be recognized, including those listed on this page.Finally, it is advised that each member of the founding team be represented by different attorneys. In practice, this is usually not done, but it may present a conflict of interest if not done.
5 Dynamic equity-splitting PersonInitial share of equityShare if FULL-TIME involvement on 4/19/2000Share if only PARTIAL involvement on 4/19/2000Share if NO involvement on 4/19/2000Ken20%10% - as per 2.1(b)0% - as per 2.1(a)Jim50%50% - as per 2.1(a)Mike30%30% - as per 2.1(a)Generally, dynamic is better than static
7 Boards and new ventures Texas angel – $10 mm, 50% stake (“Dumb” money)VC - $2 mm, 33% stake (“Smart” money)Does VC create $48 mm in value? ($8mm / 16.7%)Advice & Resources to build pieControl & Ownership
8 The Benefits of Having an Independent Board Brings perspective and experience, and a set of complementary skills for the CEORecognize the need for long-term planning and assist in long-range strategiesCan provide a framework for control and discipline and give CEO someone to answer toCan be challenging and objective critics, serving as an internal check for CEOCan be mentor or coachCan lend credibilitySource: Bagley, CE & Dauch, CE. The Entrepreneur’s Guide to Business Law, West Publishing.
9 The Size of the Board 5-9 people Small enough to be accountable and to act as a deliberate body, but large enough to carry out the necessary responsibilities.Outsiders should outnumber the insidersUsually, no more than 2 insiders on the board.Source: Bagley, CE & Dauch, CE. The Entrepreneur’s Guide to Business Law, West Publishing.
10 Type of Representation Needed on Board Need functional skills needed to keep the business running smoothly and to bring business to next level of growthNeed right mix of personalitiesShould inventory the resource needs of the company before you begin recruiting the board:What is the competitive advantage of the company?What will be the demands on the company and the likely changes in the next few years?How much technical expertise is needed to understand the company’s practices?What role does marketing play? R&D? Customer service?What is the company’s access to financing?Source: Bagley, CE & Dauch, CE. The Entrepreneur’s Guide to Business Law, West Publishing.
11 Type of Representation Needed – The needed skills Assess management team’s strengths and weaknesses with regard to industry experience, financial expertise, marketing experience, start-up experience, and technical know-how, maybe international experience.Age, gender and cultural backgroundBe wary of filling board with:People whose interests may not be aligned with the company’s, or to whom the company already has access.AttorneySubordinates to CEOConsultantsSource: Bagley, CE & Dauch, CE. The Entrepreneur’s Guide to Business Law, West Publishing.
12 Outsourcing & New Ventures Lesson #3Outsourcing & New Ventures
13 Reasons new ventures outsource At early stages, founders are stretched too farFounding team may lack relevant capabilitiesWorking on tight deadlinesAdds flexibility when when a company is still experimenting with its business modelNegative: May lack a level of control for critical function
14 Social capital & Entrepreneurship Lesson # 4Social capital & Entrepreneurship
15 Entrepreneurship exists precisely because people do not have equal information or beliefs - Kirzner (1973)If a resource owner held the same beliefs and information as anentrepreneur, she would adjust the price to the point where theentrepreneurial profit would be eliminated.
16 seeking capital or other resources Problem Domain:seeking capital or other resourcesDilemma 2:Entrepreneur canengage inopportunisticbehaviorDilemma 1:Entrepreneurs arereluctant to fullydisclose ideaA MARKET FOR LEMONS
18 Sample of over 64,000 Swedish males followed between 1994-2001. Folta, T.B.; Delmar, F.; Wennberg, K Hybrid Entrepreneurship. Management Science.
19 Folta, T. B. ; Delmar, F. ; Wennberg, K. 2010. Hybrid Entrepreneurship Folta, T.B.; Delmar, F.; Wennberg, K Hybrid Entrepreneurship. Management Science.
20 SOLUTIONS TO THE LEMON’S PROBLEM IncentivesStaging ofcapitalAllocation of contractual rights – VCs use convertible securities and covenants to delay the entrepreneur’s compensation until the outcome of the venture is revealedStaged investments provide VC the right to abandon if negative information about the entrepreneur or venture is revealedEntrepreneurs face forfeiture provisions that require them to lose shares if they have below-target performance, and punitive dilution rates, which protect the investor’s investment if the venture underperforms. It would be foolish to accept these terms if they were not truly confident in their own abilities and deeply committed.Social CapitalDue Diligence
21 SOLUTIONS TO A SECOND PROBLEM – EX POST MONITORINGBoard ofDirectorsKeys tosubsequentcapitalSocial Capital
22 Social ties “interject expectations of trust and reciprocity into the economic exchange that, in turn, activate acooperative logic of exchange. This logic promotes thetransfer of private information and resources …and motivates [both parties] to search for integrativerather than zero-sum outcomes.”Uzzi and Gillespie (1999: 33)
23 ReputationInformation NetworksWhat is Social Capital?Personal TiesReferrals