OCKHAM TECHNOLOGIES, EQUITY, BOARDS, AND RELATED ISSUES

John Burr

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 5th, 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

SPLITTING FOUNDER’S EQUITYLesson #1

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

Dynamic equity-splitting

Person Initial 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

Ken 20% 20% 10% - as per 2.1(b)

0% - as per 2.1(a)

Jim 50% 50% 50% - as per 2.1(a)

0% - as per 2.1(a)

Mike 30% 30% 30% - as per 2.1(a)

0% - as per 2.1(a)Generally,

dynamic

is bette

r than st

atic

BUILDING A BOARD Lesson #2

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%)

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.

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.

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.

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.

OUTSOURCING & NEW VENTURES

Lesson #3

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

SOCIAL CAPITAL & ENTREPRENEURSHIP

Lesson # 4

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.

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

What did Ockham do to signal qualilty?

Sample of over 64,000 Swedish males followed between 1994-2001.

Folta, T.B.; Delmar, F.; Wennberg, K. 2010. Hybrid Entrepreneurship. Management Science.

Folta, T.B.; Delmar, F.; Wennberg, K. 2010. Hybrid Entrepreneurship. Management Science.

SOLUTIONS TO THE LEMON’S PROBLEM

Incentives

Staging of capital

Social CapitalDue Diligence

SOLUTIONS TO A SECOND PROBLEM – EX POST MONITORING

Board of Directors

Social CapitalKeys to

subsequent capital

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)

What is Social Capital?

Referrals

Information Networks Reputation

Personal Ties