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OCKHAM TECHNOLOGIES, EQUITY, BOARDS, AND RELATED ISSUES John Burr.

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Presentation on theme: "OCKHAM TECHNOLOGIES, EQUITY, BOARDS, AND RELATED ISSUES John Burr."— Presentation transcript:

1 OCKHAM TECHNOLOGIES, EQUITY, BOARDS, AND RELATED ISSUES John Burr

2 Ockham Technology – what happened ? Board of Directors –Raised first round from VCs (Noro-Moseley & Monarch), with each getting one seat on the board –Added a 5 th, very experienced industry person Development/outsourcing – –Outsourced to ThoughtMill –Also hired Gus as internal development team leader Founder tensions –Tensions continued to grow, and worsened after Ockham hired a COO –Mike left Company sold in 2002 to competitor

3 SPLITTING FOUNDER’S EQUITY Lesson #1

4 Considerations in Allocating Initial Ownership Potential Problem – Ockham founders split only based on amount of initial equity Other 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 founder Financial demands faced by each founder –May have to reserve ownership for future founders.  Potential problem - split equity very early

5 Dynamic equity-splitting PersonInitial share of equity Share if FULL- TIME involvement on 4/19/2000 Share if only PARTIAL involvement on 4/19/2000 Share if NO involvement on 4/19/2000 Ken20% 10% - as per 2.1(b) 0% - as per 2.1(a) Jim50% 50% - as per 2.1(a) 0% - as per 2.1(a) Mike30% 30% - as per 2.1(a) 0% - as per 2.1(a) Generally, dynamic is better than static

6 BUILDING A BOARD Lesson #2

7 Boards and new ventures Control & Ownership Advice & Resources to build pie 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%)

8 The Benefits of Having an Independent Board Brings perspective and experience, and a set of complementary skills for the CEO Recognize the need for long-term planning and assist in long-range strategies Can provide a framework for control and discipline and give CEO someone to answer to Can be challenging and objective critics, serving as an internal check for CEO Can be mentor or coach Can lend credibility Source: 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 insiders Usually, 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 growth Need right mix of personalities Should 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 background Be wary of filling board with: –People whose interests may not be aligned with the company’s, or to whom the company already has access. –Attorney –Subordinates to CEO –Consultants Source: Bagley, CE & Dauch, CE. The Entrepreneur’s Guide to Business Law, West Publishing.

12 OUTSOURCING & NEW VENTURES Lesson #3

13 Reasons new ventures outsource At early stages, founders are stretched too far Founding team may lack relevant capabilities Working on tight deadlines Adds flexibility when when a company is still experimenting with its business model Negative: May lack a level of control for critical function

14 SOCIAL CAPITAL & ENTREPRENEURSHIP Lesson # 4

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 an entrepreneur, she would adjust the price to the point where the entrepreneurial profit would be eliminated.

16 Problem Domain: seeking capital or other resources Dilemma 1: Entrepreneurs are reluctant to fully disclose idea Dilemma 2: Entrepreneur can engage in opportunistic behavior A MARKET FOR LEMONS

17 What did Ockham do to signal qualilty?

18 Sample of over 64,000 Swedish males followed between Folta, T.B.; Delmar, F.; Wennberg, K Hybrid Entrepreneurship. Management Science.

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20 SOLUTIONS TO THE LEMON’S PROBLEM Incentives Staging of capital Social Capital Due Diligence

21 SOLUTIONS TO A SECOND PROBLEM – EX POST MONITORING Board of Directors Social Capital Keys to subsequent capital

22 Social ties “interject expectations of trust and reciprocity into the economic exchange that, in turn, activate a cooperative logic of exchange. This logic promotes the transfer of private information and resources … and motivates [both parties] to search for integrative rather than zero-sum outcomes.” Uzzi and Gillespie (1999: 33)

23 What is Social Capital? Referrals Information Networks Reputation Personal Ties


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