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RICH VS KING - CASE ANALYSIS

Group C: Sam, Kate, Sean, Antonio


Case Facts

● Entrepreneur: Jim Triandiflou founder of Start up Ockham Technologies


○ Wants to build value through acquiring customers, and developing product.
○ Needs capital to continue to grow the business.

● Local VC
○ Offer of 2 million in seed money based on reputation of Jim Triandiflou.
○ Primary concerns and motivation are unknown.

● Angel Investor
○ Two part investment totaling 10 million with an initial valuation of 3 million.
○ Wants a larger portion of equity but is less concerned with control over the company and Board of Directors.
○ Allows for greater investment back to company under guidance of founders with absence of dividend.

● Experienced VC
○ Proven experience in sales management, wants liquidation preference and 18% dividend accruing annual dividend.
○ Wants control on the board with three seats.
Rich VS King – Framework and Implications
Rich Entrepreneur (Wealth Motivated) King Entrepreneur (Control Motivated)

● Price / Valuation ● Board Composition


● Option Pool ● Protective Provisions
● Liquidation Preference
● Dividend Rights ● Drag-Along Rights

Is Jim Triandiflou a King Entrepreneur ? (Yes / No)

❑ Refused $2 million offer without discussing terms. Choose to bootstrap the venture with $150,000.

Term Sheet vs ‘Bootstrapping’

❑ Term Sheet (Short-term): Extra capital to scale operations and growth. Access to expertise and contacts.
❑ Term Sheet (Long-term): Loses control over the company. Role of CEO for the founder is at risk.
❑ Bootstrapping (Short-term): Able to maintain control over the company.
❑ Bootstrapping (Long-term): Risk of losing talent and market share to more well-funded competitors.
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❑ Term Sheet (Positive): Help in recruiting top management, shaping venture’s business plan.
❑ Term Sheet (Negative): Founders have to sacrifice equity, seats on board & control over major decisions.
Angel Investor VS Venture Capital (Term Sheet)

Angel Investor Term Sheet VC Term Sheet

✓ $3,000,000 Valuation with Series A Preferred ✓ $4,000,000 Valuation with Series A Preferred
Stock ($1 per share), Upon milestones would Stock ($1 per share for 2,000,000 shares)
invest additional $7,000,000
✓ 18% Dividend rate and no redemption rights
✓ 0% Dividend Rate and no redemption rights
✓ Series A Preferred entitled to two directors,
✓ Series A Preferred entitled to one director and a third mutually approved director
chosen by Angel
✓ Senior priority in liquidation in the amount of
✓ No Liquidation preference, just at 1:1 to the original purchase price plus accrued
Common stock dividends

Jim’s Take: He should not regret earlier $2 million offer as he did not know the terms. Among the present
three offers, Jim will most probably choose the offer from angel investor as it's the best deal.
The Rich King
● Steve Jobs & Mark Zuckerberg: Rich

○ New entrepreneurs struggle to imitate richness while also maintaining king-like control
○ At the outset of a technological burst, Jobs and Zuckerberg created technology and products that allowed them to have
king-like powers. However, they did so through collaboration, constant development, acquisitions, mergers, and accruing
mass investments from others.
○ Jobs - famously gave up company control - divested stake in mid 1980s
○ Zuckerberg - owns roughly 20% of Facebook, 29.3% on day of IPO

● Jeff Bezos: King

○ Direct development of company mission - long-run approach to company sights


○ Innovation often directly avoiding concerns regarding revenue, and concentration on consumers to build a new market
segment from the ground up
○ Owns 17% of Amazon, at Class A shares - prioritizing vote by 10x that of other shareholders
○ Richness and control is not due to mere rise during technology boom. Rather, innovation directly related to business
model innovation, not product innovation reliant on technology
■ The former is harder for competitors to duplicate; the latter - intense competitive frontier
■ Takes advantage of “rich” opportunities when market is ready
Dilemma of Being a Rich Entrepreneur

How to lose while being rich:


● Significant equity in your company does not matter if your company is not worth anything

● Giving up too much control to VCs that do not share your vision or understanding of a new
market/product

● Allowing VCs the ability to boot you from the company before your equity vests

● Initial dividends may detract from investment opportunities needed to grow your business

● Lack of control by founders may lead to decreased loyalty or sense of purpose and mission
by employees (energy is contagious)