Ockham Technologies, Equity, Boards, and related issues

1. John Burr Ockham Technologies, Equity, Boards, and related issues

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 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

3. Lesson #1 Splitting Founder’s Equity

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 Generally, dynamic is better than static

6. Lesson #2 Building a Board

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 pie Control & Ownership

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. Lesson #3 Outsourcing & New Ventures

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. Lesson # 4 Social 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 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 2: Entrepreneur can engage in opportunistic behavior Dilemma 1: Entrepreneurs are reluctant to fully disclose idea A MARKET FOR LEMONS

17. What did Ockham do to signal qualilty?

18. Sample of over 64,000 Swedish males followed between 1994-2001. Folta, T.B.; Delmar, F.; Wennberg, K. 2010. Hybrid Entrepreneurship. Management Science.

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

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 Keys to subsequent capital Social 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. Reputation Information Networks What is Social Capital? Personal Ties Referrals