Raised first round from VCs (Noro-Moseley & Monarch), with each getting one seat on the board Added a 5th, very experienced industry person
Outsourced to ThoughtMill
Also hired Gus as internal development team leader
Tensions continued to grow, and worsened after Ockham hired a COO Mike left
Company sold in 2002 to competitor
Splitting Founder’s Equity
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
Building a Board
Boards and new ventures
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
The Size of the Board
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.
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?
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
Outsourcing & New Ventures
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
The case ends as James Triandiflou, the founder of Ockham Technologies, describes the company’s early growth in launching an enormous deal with IBM and triumph over financing their business operations because it received financing offers from successful investors and venture capital firms. However, Ockham continues to face operational problems from assembling its human recourses to establishing outsourcing relationships for its on-going success. Rationale for problem selection:
1. James Triandiflou’s faced problems with assembling his executive team. Though Ockham Technologies assembled its founding team, numerous problems arose: (1) there was “friction” between co-founders Triandiflou and Meisenheimer as they shared different prospective on company’s control issue leading one to make decisions without the involvement of the other (p 12). (2) Building the company’s board of directors was also a challenge. Triandiflou had issues with having two members from one venture firm because he wanted to keep his board small. If Ockham does not bring together the right people, it may risk falling apart and thus jeopardizing the growth of the company. 2.
Ockham’s founding team was inexperienced. Triandiflou was aware that he needed broad range of skills. On the other hand, his team was lacking experience in the industry. The case mentions, that he was looking to find “the best athletes by hiring the “best people.” (p. 4). When it came down to developing their actual product, his team did not have the knowledge, so they relied on outsourcing their software development to Ron Hardin from Flex Solutions. They were extremely lucky to land the $100K IBM deal considering their software prototype presentation with IBM was not well prepared (pp. 6-7). Judging on their PowerPoint slides from Exhibit 5, not much thought was put into their presentations (p. 18). One point to note is that working with a big company like IBM can also pose high risks. If Ockham fails to perform according to IBM’s expectation, rumors will spread, and customers would lose confidence.
Therefore, Ockham may never win another deal again. 3. Trouble deciding to outsource their system development work. Ockham’s dilemma was deciding either to outsource their product development or operating in-house. First of all, the team was not satisfied with the quality and progress of their progress with Flex Solutions (pg. 6). Their insecurities led Ockham to reconsider their equity deal with Flex Solutions, which they had previously discussed. Ockham decided to pay cash for their work instead of having a stake in Ockham Technologies (p. 7). Secondly, Triandiflou lacked operational skills for a software startup if he decides to hire its own developers. Ockham’s realized that the deadline to deliver the product was tight. If Ockham does not decide quickly, it can risk losing their biggest customer. Action Plan:
1. Enhance communication and establish boundaries to reduce employee conflicts. Conflicts in the workplace arise as a result of numerous factors. In the case, tension between the co-founders was due to values and goal differences in the company (p. 12). Jim Triandiflou and Mike Meisenheimer need to establish healthy boundaries and open communication in company involvement for smoother operations of their business. “Divide and conquer” as mentioned in the cast, is an effective strategy. When resources are limited (such as this case), it is essential to ensure duties are segregated. This way, restrictions are created, and no one person would have complete control over a process, and all would be partially involved. This might help alleviate some control issues that currently exist with the company. 2. Ockham Technologies should obtain financing from Noro-Moseley. While comparing the alternative financiers, Noro-Moseley is best suited for Ockham for two reasons: (i) they are the biggest and well-known venture capital firm in Atlanta, and (ii) two of its general partners have direct work experience in sale force management and information technology.
Although Triandiflou will be giving up some control by having two board members from one venture firm (2 out of 5 or 40% as opposed to 2 out of 3 or 67% control), Ockham will benefit from having experienced members who can provide valuable resources and expertise to the company. Seeking advice from an inexperienced board member such as Bobby Crews would be less valuable to Ockham’s operations and growth. 3. Ockham Technologies should outsource their product development to NIIT, company based in India. The company’s criteria in outsourcing are: (i) meet aggressive deadlines (ii) reuse 80% if the product for future customers (iii) meet specifications and quality standards and (iv) forge a productive relationship and (v) keep the costs low (pp. 8-9). 4. The company most suited is NIIT because the company specializes in software development. Ockham would be equally price sensitive between NIIT and Thoughtmill because of equal fixed cost. However, NIIT’s formalized development process and strong credentials seems to be the best fit to satisfy Ockham’s quality constraints. Outsourcing to Hotshot Coders seems sketchy because the lack of information provided in the cast.
Their physical location is not mentioned in the case, and their fixed costs seem overly optimistic. Ockham will need to conduct further research if they decide to use Hotshot Coders. 4. Ockham should evaluate is employee performance and operational processes on a regular basis. As the company enters the growth phase, the skills required for success evolves. A few examples of these additional skills would be hiring an accounting firm to manage their performance financially, or an advertising agency to market their product. Ockham Technologies can also use various pricing structures to broaden its product line. In either case, the overall objective for executives must be able to manage their company in a way to create value that gives a positive return to their investors, and grow their businesses.
At the individual level, as the strategy and business model shift,the skills of some founders become more important than the skills of others and roles often shift. As each founder learns about the demands of building a startup, reflects on his or her motivations,and sees how well his or her abilities address the startup’s needs, his or her commitment to the startup may change. The founders also come to understand each other’s abilities and commitment at a far deeper level than was possible at the beginning. Yet founders tend to overestimate how much value they will build during those early days, which can cause even bigger problems when a cofounder’scontributions wane later on.
A founder’s personal life may also affect his or her commitment and contributions. At Ockham Technologies, all of the founders were aware of the imminent arrival of idea-person Ken’s first child. However, even Ken was unsure how this would affect his willingness to quit his full-time job and focus on building Ockham.Extreme and unexpected health problems can catch all parties by surprise. For instance, while Microsoft was still a private company, cofounder Paul Allen was diagnosed with Hodgkin’s lymphoma,which caused him to quit the company, leaving Bill Gates as the sole active founder during the crucial three years before it became a public company.
In such ways, even the most comfortable equity split can be thrown into disarray. For instance, when Robin Chase and her partner, Antje, founded the car-sharing startup Zipcar, they agreed with a quick handshake to split the equity 50–50. The team believed it had avoided destructive tension over the equity split and could now focus on building the startup. “We shook across the table,50–50,” Robin recalls, “and I thought ‘great.’” Robin had heard about other teams that had faltered because of tough equity-split negotiations, and she breathed a sigh of relief that she and Antjehad avoided such problems.
Robin poured her heart and soul into the startup, making major contributions to its growth, and was fully expecting Antje to do the same. Antje, however, remained at her full-time job and, by the summer, was expecting her second child. Robin wondered when her partner would be able to become more involved, but, in the end, Antje never joined full-time. Knowing that Antje still owned the same percentage as she did ate away at Robin, who later reflected, “That was a really stupid handshake, because who knows what skill sets and what milestones and what achievements are going to be valuable as you move ahead. That first handshake caused a huge amount of angst over the next year and a half.” Eventually Antje left the company altogether while continuing as a shareholder.
The cost to fix such problems can be very high, ranging from Robin Chase’s “angst” to more tangible financial costs. At govWorks.com, founders Kaleil and Tom had a cofounder, Chieh,who put up $19,000, worked “after hours” for five months (he had kept his day job instead of joining govWorks full-time), and then dropped out. When the remaining cofounders were about to close their first round of financing, their potential funder, Mayfield, was not willing to close until Kaleil and Tom bought Chieh out and reclaimed his equity. The VCs were willing to do a $410,000 “sweetheart deal” to facilitate the buyout.
However, Chieh wanted $800,000. Amid the pressure to close the round, Kaleiland Tom ended up settling with Chieh for $700,000, making up the $290,000 out of their own pockets. Kaleil felt he was “beingextorted.” Although the risks of this kind of outcome are real,teams often fail to address them proactively. In my dataset, half of the teams had neglected to include any dynamic elements (vesting, buyout terms, and the like) in their equity agreements, sentencing themselves to the same risks faced by the Zipcar and govWorks.com teams. http://www.startuplessonslearned.com/2012/04/founders-dilemmas-equity-splits.html