Control vs.

Wealth decisions

BizCamp #8: May 28, 2013 @ Buda KortrijkBruno Lowagie, CEO iText Software

Bruno Lowagie, CEO iText Software

IT’S UNFORTUNATE BUT TRUE: IF ENTREPRENEURSHIP IS A BATTLE, most casualties stem from friendly fire or self-inflicted wounds.

Bruno Lowagie, CEO iText Software

Entrepreneur = Wealth

Bruno Lowagie, CEO iText Software

p15-18: If many founders really believe this, it appears they are largely wrong. Entrepreneurs earned 35% less over a 10 year period then they could have earned in a paid job (Hamilton, 2000).

Entrepreneurs as a class make only as much money as they could have if they had been employees. In fact, entrepreneurs make less, if you account for the higher risk (American Economic Review, 2002).

Bruno Lowagie, CEO iText Software

Entrepreneur:Power & InfluenceAutonomyManaging People

Employee:SecurityRecognitionAffiliation

Entrepreneur = Control

Bruno Lowagie, CEO iText Software

When I analyzed 212 American start-ups that sprang up in the late 1990s and early 2000s, I discovered that most founders surrendered management control long before their companies went public. By the time the ventures were three years old, 50% of founders were no longer the CEO.

Bruno Lowagie, CEO iText Software

In my experience, founders often make decisions that conflict with the wealth-maximization principle. I noticed that some options had the potential for generating higher financial gains but others, which founders often chose, conflicted with the desire for money.

RESEARCH NEEDED:10,000 companiesbetween 2000 and 2009

Bruno Lowagie, CEO iText Software

• Cofounders (chapters 3-7)• Solo vs. Team• Relationships• Roles• Rewards

• Hires (chapter 8)• Relationships• Roles• Rewards

• Investors (chapter 9)• Self-fund vs. Outside capital• Sources of capital• Terms• Board of Directors

• Successors (chapter 10)• Trigger of succession• Openess to succession• Desired role after succession

• Other factors• Preferred rate of startup• Capital intensity• Core founder’s capitals

Decisions

Bruno Lowagie, CEO iText Software

Complete control

< $$$

Little control

> $$$

Bruno Lowagie, CEO iText Software

• Cofounders (chapters 3-7)• Solo (or weak cofounders)• From immediate circle• Be the CEO• Maintain most equity

• Hires (chapter 8)• Close personal network• Keep control of key decisions• Hire less expensive juniors

• Investors (chapter 9)• Self-fund; “bootstrap”• Friends, fools, family• Resist investor-friendly terms• Avoid official board

• Successors (chapter 10)• Avoid until forced• Resist giving up CEO position• Prefer to leave

• Other factors• Gradual to moderate growth• Low capital intensity• Can build startup without help

Control decisions

Most likely outcome:• Maintain control• Build less value

“KING”

Bruno Lowagie, CEO iText Software

Complete control

< $$$

Little control

> $$$

KING

Bruno Lowagie, CEO iText Software

• Cofounders (chapters 3-7)• Build team• Find the best founders• Delegate decision-making• Share equity

• Hires (chapter 8)• Hire experienced employees• Delegate decision-making• Incent with cash or equity

• Investors (chapter 9)• Take outside capital• Target angels or VCs• Be open to terms• Be open to losing control

• Successors (chapter 10)• Initiate succession “in time”• Be open to giving up CEO role• Remain executive (expertise)

• Other factors• Fast to explosive growth• High capital intensity• Fill gaps by involving others

Wealth decisions

Most likely outcome:• Build financial value• Imperil control

“RICH”

Bruno Lowagie, CEO iText Software

Complete control

< $$$

Little control

> $$$

KING

RICH

Bruno Lowagie, CEO iText Software

Chances at success:

Maintain control: 80% x 80% x 80% = 51% probabilityBuild fullest value: 20% x 20% x 20% = 1% probability

Maintain control: 20% x 20% x 20% = 1% probabilityBuild fullest value: 80% x 80% x 80% = 51% probability

If you go for being King:

If you go for being Rich:

If you go for something in-between:Maintain control: 80% x 80% x 20% = 13% probabilityBuild fullest value: 20% x 20% x 80% = 3% probability

Maintain control: 20% x 80% x 20% = 3% probabilityBuild fullest value: 80% x 20% x 80% = 13% probability

Bruno Lowagie, CEO iText Software

Complete control

< $$$

Little control

> $$$

KING

RICH

EXCEPTION

Bruno Lowagie, CEO iText Software

Complete control

< $$$

Little control

> $$$

KING

RICH

EXCEPTION

FAILURE

Bruno Lowagie, CEO iText Software

• Cofounders (chapters 3-7)• Solo (2000)• “Couple-preneur” (2008)• We are the CEO, CTO, CFO• We have 100% ownership

• Hires (chapter 8)• Own network; first hire in 2011• No C-level hires, no real VPs• Experimented with juniors

• Investors (chapter 9)• Bootstrap• No external money• No angels, no VCs• No boards

• Successors (chapter 10)• Adapted to new tasks• Being CEO = I “underperform”• Should I become chairman?

• Other factors• Slow (00-09) to explosive (10-...)• Zero to substantial• New challenges require new skills

iText decisions

2009 2010 2011 2012 2013

GM EBITDA

2010 72% 5%

2011 70% 35%

2012 78% 46%

Bruno Lowagie, CEO iText Software

Thank you for brainstorming with meabout switching fromcontrol to wealth decisions at iText