Something
Ventured:
June 28th, 2002
By Brent
Holliday
Greenstone
Venture Partners
"Money,
it's a crime.
Share it fairly but don't take a slice of my pie. "
- Pink Floyd, Money
Technology
is a bad, bad place to be if you watch the markets and
the media. What can I tell you? Those of you that still
like technology are probably looking for a little crumb,
a little insight, a little hope… Are we at the bottom?
We have dipped back to the post September 11th market
value through a perception that all accountants are
crooked, every CEO stuffs his pockets and runs and no
numbers generated by public companies can be trusted.
The new irony: Osama Bin Laden's achievement in striking
at the symbol of the American capitalistic system and
the fear and panic that gripped that system immediately
after driving markets to new lows, has now been matched
by a bunch of corrupt, morally bankrupt senior
executives... from America.
The
implications of the Enron/Adelphia/Tyco/Global Crossing/ImClone/Worldcom
debacle are huge. From the 100,000 foot level,
capitalism is taking it in the gonads. Self-interest is
at the heart of the capitalistic system. Self-interest
is a milder euphemism for greed. Martha Stewart was
using some form of "self-interest" when Sam
Waksal called her and told her that the FDA called his
bluff on the colon cancer drug at ImClone. Pop ethics
quiz: You are Martha. Do you say, aww too bad, I lost
this bet. OR do you sell now and avoid losing money.
Hmmm. Is the latter illegal? Yes, but only if you get
caught. Drat! Those cell phone calls are traceable with
a date and time stamp.
Enron
execs used "self-interest" when they decided
to use the grey areas of accounting rules and create off
balance sheet limited partnerships to hide losses. This
pumps up earnings and makes their stock options more
valuable as investors are duped into thinking that this
company prints money.
So,
is self-interest evil? Is greed bad? Where's Gordon
Gecko when you need him? Not if you play by the rules
and the rules are enforced. Because of the fallout and
lack of investor confidence in the world's largest
capitalistic system, the rules are about to change, big
time.
Auditing
is under a microscope and changes there will be
profound. Board of Director rules and responsibility
will change. Punishment for breaking securities laws
will step up and many CEOs will be scapegoats and get to
walk with orange jumpsuits and leg irons instead of
fighting legal battles from their cellphone on a beach
in the Grand Caymans.
I
wanted to talk a little about a proposed change being
considered that really is profound and has great
implications in wanting to be a founder or an officer in
a new company. In order to better protect investors,
shareholders and employees, the senior officers (C level
- CEO, CFO, CTO etc.) of the top 5000 public companies
in the US may be asked to sign personal indemnity
clauses that put them on the hook for any impropriety in
the companies that they manage. In other words, no more
option of claiming that they did not know what was
happening in the company. So, if the company does
anything wrong in the eyes of the law, the senior
officers are wiped out. Kaput. All the houses in Aspen
are gonzo.
This
has a nice balance to it if you think of CEOs as money
grubbing bastards with big cigars in their mouths and no
concern for the little guy investor, shareholder or
employee. They can't take the money and run. If there
was something untoward done on their watch, and even if
they knew nothing about it directly, they will be on the
hook and lose everything. Call it the "Captain goes
down with his/her ship" mentality.
If
you are thinking about being a senior officer at one of
these companies and believe more in the spirit of free
enterprise and open markets, this scares the kaka out of
you. The whole proposition of running a company becomes
a LOT riskier under this new proposal. Why would you
want to take the risk of losing everything that fortune
has bestowed on you on the off chance that you hired
some cretin that runs afoul of the laws without you
knowing? This would make you think twice about checking
references on the people you hire, huh. The trust that
you would need to have with your staff would be huge.
Which
side is right? You can see good to both sides. Wouldn't
it be nice to make a CEO responsible and capable of
losing everything? Wouldn't that force open, honest and
accountable senior management? But who would take the
risk? Wouldn't we drive away a lot of capable leaders
because of the added risk of catastrophe?
I
mentioned that the proposal was aimed at the top 5000
public companies in the US. In the start-up venture
capital world, this type of senior officer
responsibility has been commonplace for years. Founders
and senior managers of start-ups have often signed
personal representations and warranties in order to get
money from investors. The recourse for misrepresentation
or breach of employment or key person agreements is
often the entire amount of money invested and/or all of
their shares. So if a founding member of a technology
company that raised $5M is found to have materially
breached one of these agreements, the investors could go
after them for the entire amount, essentially wiping
them out.
Why
does this common form of agreement to put CEOs and
founders on the hook exist? Especially given that
start-ups have inherently more risk and unpredictability
than one of the top 5000 public companies. The answer is
that the senior management and founders of a start-up
are usually unproven and the threat that misrepresenting
or acting in a fraudulent manner could lead to financial
ruin is an effective way to get them to pay attention to
the investors and the Board. The
"self-interest" for a founder or senior
officer in a start-up is the value of the shares
increasing. Guiding them to act in everyone's interest
is easier with this yoke on their shoulders.
The
fact that most start-ups have these terms applied
personally to the founders and senior management does
not deter a lot of start-ups from receiving venture
capital and going on to success or failure. The risk of
personal ruin is actually quite low statistically. Very,
very few start-ups have actually had investors enforce
their right after a judgment against a founder or senior
manager. It just doesn't happen that often. Perhaps,
then, this is evidence that it works and management acts
honestly when they are personally liable.
A
number of start-ups with more experienced founding teams
do not sign personal warranties with investors. Both
sides feel comfortable that they will act appropriately
and the personal piece becomes unnecessary.
Going
forward, if this new proposal takes hold in the US, its
easy to see that it will percolate down to smaller firms
as investors on the private equity side make it
mandatory for funding. Then the effects of CEO and
founder behaviour at the technology start-up might be
the example that proponents point towards.
Let's
wait and see if this is a mere knee jerk reaction to the
scandals plaguing the market today or a fundamental
shift in the relationship between management and
investors. Interesting times, that's for sure.
Letters
From Last Time:
Hi Brent,
Your column on WiFi is spot on. The real question is
whether an entrepreneur can find a good way to get ahead
of the trend, and whether there is enough customer
demand to sustain a WiFi carrier.
It would be interesting to see if an aggressive telco
would want to exploit this opportunity. Check out T
Mobile Wireless Broadband (http://www.tmobilebroadband.com/),
which does the Starbuck sites in the US and a whack of
airports. 576 sites in the US. If they expand
aggressively, they'll be in enough places for the casual
US business traveler to sync up. T Mobility is a
subsidiary of Voicestream Wireless, which is a sub of
Deutsche Telecom. The giant turns nimble? US$30 per
month for unlimited access is a heck of a lot cheaper
than the number quoted to you by the Telus Mobility
exec. And For a different approach check out the Boingo
Wireless site (www.boingo.com)
and Cafe.com (www.cafe.com)
There are a number of companies trying their hand at
making money out of providing WiFi services, including
Vancouver's very own FatPort (www.fatport.com).
You might want to ask them for their perspective on the
situation.
Only time will tell whether these types of companies
will get enough customers to survive.
All the best,
Bruce Tattrie
Campney & Murphy
Thanks for the additional links and
examples. As you will see in a second, Sean O'Mahony
from Fatport and I might appear to be in cahoots on this
topic. As for the opportunities in the market, there are
more coming, other than service providers. Didn't
someone once say that they didn't want to fight the war,
but rather, supply the bullets? Something like that.
Oh the sheer beauty of it all as I read your great
article from Seattle airport while roaming on the
Wayport network.
I'm just on my way back from Boston (the inaugural
plenary meeting of Pass-One) where both Boingo and iPass
indicated that they are completely behind the
initiative. It's interesting how many of the US cellular
carriers are becoming actively involved.
Then I came to Seattle for the Eye for Wireless
conference.
The sector is hot and heating up further.
Here's the really beautiful thing though. I traveled
from Vancouver to Chicago to Boston to Denver to Seattle
to Vancouver. Connectivity all along my route.
I've tasted a little bit of the future and I like it, I
like it a lot. I'm deeply involved in this and I'm
excited like I haven't been by a technology movement
since I too used Mosaic back in 1994.
Sean O'Mahony
Fatport
OK. From the entrepreneur locally in
the space, an un-biased view of how hot things are...
thanks for your views and best of luck.
I had multiple requests for the Pringles Can antenna
upgrade. Here is the official link, but beware of the
warnings http://www.oreillynet.com/cs/weblog/view/wlg/448
What Do You Think? Talk
Back To Brent Holliday
Something Ventured is a bi-weekly column designed
to supplement the T-Net British Columbia web site with
some timely, relevant and possibly irreverent insight
into the industry. I hope to share some of the
perspective and trends that I see in my role as a VC.
The column is always followed by feedback (if its
positive or constructive. I'll keep the flames to
myself, thanks).
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