Reading the telecom stock-option tea leaves

Jan. 1, 2001
I have job offers from several telecom start-up companies backed by venture capital (VC) and also companies that have recently gone public. Focusing on the potential value of the stock options of these telecom companies, which path should I take?
1304qa Chang New
Q: I have job offers from several telecom start-up companies backed by venture capital (VC) and also companies that have recently gone public. Focusing on the potential value of the stock options of these telecom companies, which path should I take?A: That depends on how much of a gambler you are and whether you like betting on the direction of the stock market. Seriously though, it depends on your assessment of the growth potential of the public company and the likelihood that the start-up company will ever have a liquidity event. You need to do your own homework, because getting VC funding is no guarantee that the start-up will succeed. If we have a bull market, the gain in a hot pre-IPO company can be spectacular and public companies that have strong sales and profit growth will also have solid gains. In a bear market, a start-up company could fare far worse because it could run out of money and find VC support hard to come by.

Since a number of people have asked how I think telecom stocks will perform, let us digress a moment and look at the crystal ball. Carriers are not doing well due to excess bandwidth. But they must have new capabilities in order to stay competitive. The telecom-equipment business will therefore continue to be robust for many years. The valuation of telecom equipment and components suppliers will, however, over time be based on the more traditional Wall Street yardstick, which is a price-per-earnings ratio tied to the rate of growth, rather a promise. At the same time, as capacity builds, competition will likely get more fierce. That means strong companies will continue do well, whereas the weaker ones will languish. The IPO market will become much more selective and valuation will become more rational as well. Investors' approach will go from investing in any company in a particular space to investing only in good companies in the space. Venture capitalists will also become more selective. Marginal business plans will not get funded, and even those that get funded could lose their support and go bankrupt. That would free engineering talents to join stronger companies, making the disparity even greater.

Is this being pessimistic? Not at all. What I describe is logical deduction and the kind of adjustment needed to build a healthy industry with sustainable growth. Which job would I pick? Since

I am not a gambling man, I'd go with a solid gain rather than all or nothing.

Q: An investor and I formed a partnership with an ownership split of 70:30 in my favor. The project took longer than expected and he wanted more equity. We couldn't come to an agreement, so he fired me. How can I start over? An important fact is that the patent has not yet been filed, but I have signed an employment agreement. A: This is the kind of pitfall an entrepreneur could face when working with an amateur angel investor, although I suspect I am only hearing one side of the story. My feeling is there is not an obvious path for this dispute to sort itself out. It is important for you to work toward an amicable resolution. Remember, you are at a disadvantage here because an investor can afford to walk away from a percentage of his wealth, whereas this may be your one big chance.

On the face of it, I am not sure how he can fire you since you have majority ownership and also have the know-how. Assuming he does have that power, he can hire another engineer to carry on the work in the current partnership. Assuming no further investment is needed, then you will continue to own 70% of the partnership, even though you are no longer an employee. Chances are he'll have to make further investments and/or bring in other investors. In the latter case, you can reasonably argue that this additional investment converts to shares at a rate close to what the next round of investors would pay.

The partner who starts a new entity to pursue the business may very well be accused of stealing intellectual property (IP) from the partnership. In some ways this is no different from what some engineers do when they start their own company while hoping their employer will overlook the situation. That's not likely to happen in your case. So you need to clearly establish what you use is not proprietary to the partnership, if that's even possible from your partner's perspective. You may have to give a percentage of your ownership in the new entity to your current partner, because without him signing off on the IP ownership, I don't think you can get funding from a seasoned investor.

I strongly recommend you study "Getting to Yes," written by Roger Fisher et al., or hire a sharp lawyer.

About the Author

Milton Chang

MILTON CHANG of Incubic Management was president of Newport and New Focus. He is currently director of mBio Diagnostics and Aurrion; a trustee of Caltech; a member of the SEC Advisory Committee on Small and Emerging Companies; and serves on advisory boards and mentors entrepreneurs. Chang is a Fellow of IEEE, OSA, and LIA. Direct your business, management, and career questions to him at [email protected], and check out his book Toward Entrepreneurship at www.miltonchang.com.

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