Ed is under pressure. The venture capitalist backers of his company, who put him in the CEO's chair, are demanding cuts in the R&D budget. The VCs are after maximising profitability before the IPO in about a year's time. However, the company's founders, who are on the board, are strongly against this.
'Today I have a private meeting with one of the co-founders, Pat Cook, now CTO', writes Ed in a diary entry, 'I tell him the VCs think our level of R&D spend is too high for a pre-IPO company.'
'Pat replies that his ambition is to build a significant company, not maximise profitability for an IPO 12 months down the road', writes Ed, 'cutting back R&D now will impact the new product programme post-IPO, argues Pat.'
Ed's next diary entry reveals that he has relayed Pat's response to the VCs who have given him instructions how to proceed. He calls an emergency general meeting.
'At the EGM, I put it to the board that the directors have lost confidence in Pat's capacity as CTO and ask for a vote on Pat's continued employment with the company', writes Ed, 'the VC's representatives have a majority on the board, and have been briefed on the situation. The board votes to sever Pat's connection with the company.'
Ed's diary entry continues:
'I told Pat, "Here is notice of termination of your employment with the company, and here is a cheque paying up your service contract until the end of its term, plus a sum representing payment for buy-back of your founder's stock. All of this is effective immediately."'
'There is total silence in the boardroom.'
'I continued: "A further sum may be due to you in 12 months time contingent upon your public silence about the reasons for your leaving the company. Now that you are no longer an employee of the company, I must ask you to leave the offices immediately. Security are waiting outside to escort you from the premises. They are under orders not to let you back into your office. We will forward your personal effects to your home today by courier. We have terminated your company car lease and there is a taxi waiting to take you home."
'Pat starts to talk, looks round at the directors' faces - wooden expressions from the VC's representatives, appalled horror from the others - and walks out.'
'Christ that's a horrible thing to do, but the adrenalin's pumping. "In the absence of any other business this EGM is adjourned," I say, and leave the room.'
Only 347 days to go to the IPO and I'm out of this place with a pile of dough.
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Comments (6)
Not how its done unless the VCs are very stupid, which they aren't. Why would you get rid of the main evangelist for the product just before the IPO and leave him angry and wanting to get even?
What you do is hire a VP Engineering who reports direct to the CEO, take all the CTOs power over budgets, headcounts and schedules away and make him a globetrotting semi-academic salesperson who spends his life giving presentations.
Posted by Tom | December 8, 2009 12:28 PM
Posted on December 8, 2009 12:28
I know, I know, Tom, Ed can't even sack the CTO in an elegant way.
Posted by David Manners
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December 8, 2009 3:13 PM
Posted on December 8, 2009 15:13
It would be interesting to know the businesses profitability and share value a few years post-IPO without the new product lines that were cut from the development program - did the shareholders achieve the maximum possible return for their investment or did the VC cash in on them too?
Posted by Anonymous | December 9, 2009 8:24 AM
Posted on December 9, 2009 08:24
Yes indeed, Anonymous, but I don't suppose Ed is worried about 2012 and onwards, or even 2011, he just wants to get his IPO money in 2010 and push off to screw up some other company's long-term prospects. It's all about dressing up the company for an IPO in the short-term.
Posted by David Manners
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December 9, 2009 10:35 AM
Posted on December 9, 2009 10:35
Of course Pat now has a reasonable amount of money, all the good ideas the company has discarded and possibly a good input into the VCs so he's on a winner as well.
Posted by Mike Bryant | December 9, 2009 4:01 PM
Posted on December 9, 2009 16:01
Well you're right about points 2 and 3 Mike but, as a later diary entry shows (to be published on Jan 18), the VCs diddled Ed out of his dough. But Pat's the kind of guy who can keep starting things, whereas Ed couldn't start a sausage.
Posted by David Manners
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December 9, 2009 4:07 PM
Posted on December 9, 2009 16:07