1. Ockham Technologies, Equity, Boards, and related issues
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. Splitting Founder’s Equity
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
Splitting 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
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%
10% - as per 2.1(b)
0% - as per 2.1(a)
Jim
50%
50% - as per 2.1(a)
Mike
30%
30% - as per 2.1(a)
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. Outsourcing & New Ventures
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. Social capital & Entrepreneurship
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. seeking capital or other resources
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 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
Incentives
Staging of
capital
Allocation of contractual rights – VCs use convertible securities and covenants to delay the entrepreneur’s compensation until the outcome of the venture is revealed
Staged investments provide VC the right to abandon if negative information about the entrepreneur or venture is revealed
Entrepreneurs 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 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