Doug Cosman, founder of Yieldex, must come up with the decision of whether to give up his software start-up for a $4 million selling price offer or to hire Tom Shields as CEO and pursue capital financing. Doug's investors as well as CEO candidate Tom Shields advised him not to accept the offer and rather focus on expanding the company into a bigger enterprise. Cosman is inclined to sell due to the financial gain from the potential buyer.
Toby Stuart; Alison Berkley Wagonfeld
Harvard Business Review (809090-PDF-ENG)
January 22, 2009
Case questions answered:
Case study questions answered in the first solution:
- How much of the equity does Tom Shields deserve?
- Would you sell to Turn, Inc., and why?
Case study questions answered in the second solution:
- What is the Turn, Inc. deal worth to Yieldex founder Doug Cosman? To the existing investors? Assume no interest payments are due on the convertible note held by angel investors.
- What other considerations should Doug take into account?
- How much of the equity does Tom Shields deserve?
- Supposing that Doug was to refuse the Turn Inc. offer and hire Tom Shields, considering only financial payoffs, should Doug Cosman take the Turn Inc. offer or refuse it if there is no discounting?
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Yieldex (A) Case Answers
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Introduction – Yieldex
Dough Cosman is the founder of Yieldex, a start-up software company. In 2007, he reached out to venture capitalists, and both he and his Angels investors agreed that the best decision for his company would be to hire a CEO to complete a successful Series A funding. Series A funding is a name given to a company’s first significant round of venture capital financing.
While he was pitching to investors at S.V., he met a venture capitalist and Internet entrepreneur, Tom Shields. He immediately realized that Tom Shields would be the perfect CEO for his company as he had the technical and business skills his start-up needed to succeed.
They began negotiating an equity split. However, Cosman received a call to sell his company for $2 million in cash and $2 million in preferred stock.
Now Dough Cosman finds himself in a bit of a situation where he has to decide whether to sell his start-up for a $4 million price offer, hire Tom Shields as the CEO of his company, pursue capital financing, and expand his company to grow.
Early Growth
After Cosman began hiring more employees in software and engineering, Yieldex began developing faster. Cosman is a software engineer who does not have the management expertise that Tom Shields should bring to Yieldex and thus enrich and lead to success.
A symbiosis between the management and the creative team of a business is essential as the connection to problems has to be as close as possible to counteract problems. Washing saw this as a good sign and convinced Cosman that it was time to start talking to venture capitalists and investors.
Most of these investors were in Silicon Valley, so Cosman spent half of his time out of the office in California. However, during these meetings, Cosman saw that many venture capitalists didn’t actually have expertise in the area they invested in.
Despite being frustrated, Cosman was convinced by Washing to meet one more venture capitalist. Tom Shields was a VC working at Woodside Fund and distinguished himself by being one of the few investors who had previously worked in engineering. He also held an engineering degree from Harvard College and worked at Oracle.
He transitioned from engineering to business when his startup, NetGravity, was sold in 1999 for $530 million. Shield initially did not want to meet with Cosman but caved in June 2007.
They met in the Redwood Shores office of Woodside Fund. During this meeting, both Cosman and Shields were surprised by the competence of the other. Cosman was pleased that Shields knew the technical underpinnings of Yieldex, and Shields even stated that “I felt as if the stars were aligned” (p.3).
The meeting went spectacularly well, and Shields began seriously thinking about taking on the CEO role at Yieldex. The week of that meeting, Shields flew out to meet the Yieldex team in Boulder and even met with Scoggins, Washing, and Sequel Investors to see what their funding interest in the company was.
Management Negotiations
Even though Shields would be the perfect CEO for Yieldex, the negotiations on how equity would be split still required a lot of work. Typically, a Series A CEO got about 10%, but Shields wanted the split to be 50/50. He also demanded to be recognized as a co-owner.
Washing knew that a 50/50 split in common stock would be necessary to convince Shields to leave his VC firm, but Cosman was hesitant to split that evenly. Shields argued that his role would include technological and marketing skills, and he would take on the brunt of future funding activities.
Ultimately, in August 2007, both Cosman and Shields tentatively agreed on their split in responsibilities. Shields would run the company from a marketing and business standpoint from the Bay Area, while Cosman would become Chief Technology Officer and stay in Boulder. They also negotiated an open position to be filled later, titled Vice President of Engineering.
Proposed Series A Financing
Sequel Investors agreed to go ahead with Series A financing as a lead investor if Shields was announced CEO of Yieldex. Sequel Investors also planned to…
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