True Finance

The education of an Internet entrepreneur.

This is the story of one startup — the money part of the story. A startup needs money — other people's money, and lots of it. And those other people, also known as venture capitalists, invariably demand something in return for their money: a portion of the eventual profits, a share of corporate control. This part of the startup story — the gritty, inside, financial part — has gone largely untold.

In a new book, "High Stakes, No Prisoners," Charles H. Ferguson chronicles the life cycle of Vermeer Technologies Inc. — from the summer of 1993, when he "got the beginnings of a very cool, very big idea," to January 1996, when Microsoft bought the company for an estimated $130 million. During that time, Ferguson helped create FrontPage, a tool for designing Web pages. (Four years after its launch, FrontPage remains the premier software tool of its kind, with more than 2 million users and a market share of roughly 70%.) He also met a lot of venture capitalists, and he learned how to play the games that VCs play.

The story so far: While Ferguson has never started a company before, he has done a lot of other things. He's written a major work of policy analysis, "Computer Wars: How the West Can Win in a Post-IBM World" (Times Books, 1993). He's testified before Congress and consulted to the White House. He's worked with such companies as Apple Computer, Motorola, and Xerox. And now he thinks that he's spotted a wide-open opportunity: "to develop a single, standardized software product that would allow anyone and everyone to create and operate their own online service." The next step: finding the money to finance his dream.

Andy Marcuvitz is heavyset. he wears badly fitting suits. He has no discernible personality, sense of humor, or compassion. All of which are ideal traits for a venture capitalist. During 18 months of extremely intense interaction, we never had a personal conversation, I never heard him make a joke, and he rarely smiled. Indeed, a smile from Marcuvitz is not a good sign. In arguments he's relentless: His voice remains even, he never loses his temper, and he can dig in for hours. If I had known when I started Vermeer that Marcuvitz was going to be one of the most important people in my life, I would have seriously reconsidered the whole thing. And yet, he was good for me, and, in a slightly twisted way, I respect him a great deal.

I first met Marcuvitz in August 1994, when we agreed to have dinner at Harvest, an informally elegant restaurant near Harvard Square in Cambridge, Massachusetts. Vermeer was starting to look real. To call our operation "organized" would have been an overstatement, but the core technical team was in place, and work was under way on the product architecture, a demo, a business plan, and a set of financial projections. We had hired headhunters, market-research consultants, an accountant, and lawyers. We had incorporation documents, employment contracts, nondisclosure agreements, and a stock-option plan. Since only one guy was drawing a salary, I thought I could manage our burn rate for a while, but I was feeling a growing sense of urgency.

So when Andy Schulert — who had been at DEC and Apollo Computer, and who was now our server-team leader — called to say that a former boss of his who had become a big VC wanted to meet me, I agreed. First, though, I grilled Andy S. to make sure that he hadn't revealed anything about our plans. I was already paranoid — in some ways overly so, in other ways not enough.

Marcuvitz and I spent the first part of dinner on introductions — who we were, what we'd done. He was in his forties, the number-two guy at Matrix Partners, one of the most prominent VC firms on the East Coast. Marcuvitz was extremely smart and technically deep. He had a master's degree in computer science from Harvard, and he had been one of the founders of Apollo, as well as its first vice president of R&D. Of all the VCs I was to meet over the next few months, Marcuvitz was one of the few who understood the Internet.

Andy M., as we came to call him, described his background in his typically neutral, unemotional fashion. When it was my turn, I was at my most obnoxious. I listed my glittering credentials: PhD in political science from MIT, policy-research work, White House connections, congressional testimony, consulting to Fortune 500 clients, powerful friends, an important book. I told him that Vermeer would be a paradigm-shifting company, that he'd have to sign a nondisclosure agreement to hear about our plans, and that, in any case, we wouldn't talk to anyone until we were ready. I told him that I was already lining up private investors as an alternative to VCs, that I planned to drive a hard bargain, and that I would never let VCs gain control of the company.

I had expected Marcuvitz to act unimpressed — just as a matter of tactics. But it was rather disquieting to see that he really was unimpressed. He smiled coldly and began giving me the Marcuvitz treatment: Coolly, logically, patiently, he explained in great detail how I was wrong, and how whatever he wanted was not only objectively right but also in my best interest.

Kid [he said], if you think you can do it that way, be my guest. But you're already raising warning flags for VCs. In the first place, we don't like nondisclosure agreements: They're generally a sign of trouble, like husband-and-wife boards of directors. Founders who are obsessed with secrecy tend not to understand what's really important to a company's success, and sometimes they're just crazy. You should be letting us get to know you. You don't seem to have much business experience, and what little you do have is not in startups. That's okay, but be sure that you don't make a big mistake. For example, raising money from random rich people is usually bad: It's dumb money, and it takes too much time to service. If you do manage to fool someone, your valuation will be too high. So then, when you try to get serious VC money, either you'll have to explain to your friends why you overcharged them, or you'll try to get the VCs to accept a huge setup for no reason. VCs don't play that game, so you could ruin your whole deal. And anyway, your fears are misplaced: We don't want to control you — we just want to make money.

Marcuvitz had gotten to me a bit, although I tried not to show it. I replied: What a coincidence that you should say all that! It has to do with your being a VC, I suppose? He and I fenced throughout the evening, exploring each other's opinions — about industry trends, people we knew, Microsoft, the decline of Lotus and Novell, and more. Again, I said that we'd be in touch when we were ready, not before, and that he'd have to sign a nondisclosure agreement, period. In retrospect, I'd call the evening a draw. While I did expose my naïveté, I think I also convinced Marcuvitz that I was smart, that I understood strategy, that I knew a lot about the industry, and that I wasn't going to be a pushover. But Marcuvitz was clearly no pushover either. I began to suspect that this was going to be harder than I had originally thought — and maybe not too much fun. I was right. Venture capital is a rough game.

Rude Awakenings

Any illusions that I had of quick, smooth fund-raising soon evaporated. Most of the VC firms that we presented to didn't know anything about the Internet, and few of them had heard of the Web. Worse, most of them didn't care. If an industry didn't already have a lot of buzz around it, they weren't interested.

Some of our problems, however, were my fault. Another of my many rude awakenings came when I realized that I didn't have the contacts or the experience that I thought I had. I'd been around high technology for a long time, and I thought I could easily get to the right people. Not true, as it turned out. I had never raised money for a startup, and my consulting work was irrelevant. I knew some of the right firms, but unless you have an introduction from someone whom they know, they often don't even return phone calls.

About a month after our introductory dinner, I called Marcuvitz and told him we were ready to talk. Our first presentation took place at the offices of Matrix Partners, in Waltham, Massachusetts, in mid-September — after Marcuvitz had finally signed our nondisclosure agreement. The format was essentially the same one that we would use in all subsequent meetings with VCs: I began with an overview — what was wrong with the current online-services industry; the possibilities created by the Web; the explosive growth that was already under way; the huge software opportunity; our product; the status and strategy of our company.

Then Peter Amstein — who had been at the National Center for Atmospheric Research and at Pixar, and who was now our client-side team leader — gave his demo. It was very slick. Peter is a superb engineer who also has excellent market intuition and outstanding presentation skills. He had created a hypothetical Sharper Image catalog-shopping site, complete with graphics, order forms, links to inventory databases and FedEx shipment information, and so forth. Then he showed how our product could radically simplify the process of developing such a site, by using a state-of-the-art GUI (graphic user interface) and small drop-in programs that we called "bots."

Next, Randy Forgaard — a former senior engineer at Beyond Inc., who was our cofounder and CTO — presented our architecture. At one point, Marcuvitz raised the Microsoft issue: Wasn't Microsoft a potential competitor, since it was creating many of the same capabilities with Marvel, an online service that it was developing? No, I replied, because Marvel is not Internet- or Web-based; it's a conventional, proprietary online service. Oh, really, said Marcuvitz. I knew then that he really got it.

Marcuvitz listened politely as our consultant presented our financials. Then he promptly told us that those numbers didn't mean anything. Marcuvitz said that VCs would use financials only to test whether we'd thought seriously about the size of the opportunity and the cost of bringing a product to market. We don't invest on the basis of numbers, he said, because nobody can predict how something like this will turn out. We invest if we like the team and the business idea, and if we see a revenue opportunity of $50 million or more. Then came the first hint of the war to come. He smiled at our proposed valuations, gave us a dry lecture on the impossibility of making accurate forecasts at this stage, and said that the only thing he could rely on was VC experience.

At the end of our presentation, Marcuvitz said he was interested in our ideas and would like to go further. He asked whom else we were talking to, and he got irritated when I wouldn't tell him. He told us that Matrix rarely invested alone and that he would need at least two partners. I asked if he had any suggestions, and he gave us the names of two VCs to call: Bill Kaiser at Greylock and Geoff Yang at Institutional Venture Partners (IVP). He was doing us a favor, he said; he'd be interested in their reactions. I made a smart-aleck remark about the VC herd mentality. He was not amused.

A week later, Marcuvitz asked me to meet with Paul Ferri, the founder of Matrix. Ferri was clearly a very tough guy — even more laconic and poker-faced than Marcuvitz, and with a long history in the VC business. Coolly, Ferri started questioning me. Did I want to be the CEO? How much money did I think the company needed for its first round? Then he came to the main event: valuation. When VCs are interested in a company, they focus on assessing whether its founders will play the game and on testing what is called "pre-money valuation." This is the value of the company prior to the VCs' investment, and it determines the share that they get. Marcuvitz said he placed our pre-money valuation at about $1 million to $2 million. Which meant that if VCs invested $4 million, the total value of the company would be, at most, $6 million — and that the VCs would own at least two-thirds of it.

I felt my blood rising. Forget it, I said. You're not going to control this company. Look, said Ferri, forget about control for a moment; let's just talk about money. Marcuvitz chimed in: When a company works, nobody remembers the first-round valuation. You should focus on getting the best help you can on your board and on making this company as successful as possible. Well, I didn't feel like forgetting about control, and I didn't like what I was hearing. Their numbers meant not only that we'd surrender control but that we might not make very much money. In fact, this kind of thing used to happen all the time, and sometimes it still does. Randy, for example, had been one of the most senior guys at Beyond — the fifth employee, the third engineer. He started out owning 2% of the company, but by the time it was sold for $18 million, his share had been so diluted that he got only about $76,000 — not much to show for four years of working 70-hour weeks at a below-market salary.

I told them that I wanted a pre-money valuation in the $20 million to $30 million range. Soon afterward, I realized that this comment marked me as naive and possibly dangerous, because it showed that I didn't know the rules of the game. Marcuvitz and Ferri smiled, and once again they patiently explained VC valuation rules of thumb: We have a lot of experience in doing this, they said. We look at a company at your stage of development, we take into account what we know about you, your team, the uncertainties of the market — and we come up with about $2 million. I argued back, not quite as patiently, with a long list of reasons why a $2 million valuation was ridiculous. Marcuvitz and Ferri said, Well, go talk to other VCs; they'll all tell you the same thing. Which, of course, they did.

Torture

Anyone who tends toward arrogance, as I do, should be sentenced to a term of VC fund-raising during a tight market. The next five months were one of the most frustrating and humbling periods of my life. From mid-September to early December, we presented to more than 20 VC firms and to a few individual investors. About half of those presentations took place in California; the rest were in Boston or New York. That meant a lot of travel and a lot of large bills, which were paid for out of my rapidly dwindling personal bank account.

The worst problem by far was that most VCs didn't know anything. Of the 20 or more VC firms that we met with in late 1994, all but about 5 needed a ground-up education in the Internet — which made their arrogance and stupidity doubly hard to take. Often we had to arrange special meetings to show VCs how to use the Web, what was available on it, how to get an Internet account, how email worked, how Web sites compared with traditional online services such as CompuServe, and so on.

VC presentations became a ritual, with the tension and anger that they provoked in me partially offset by boredom and by the predictability of the problems that arose. One such problem involved conflicts of interest. We scheduled a meeting with Bill Kaiser of Greylock, whom Marcuvitz had recommended. Greylock is a tony Boston firm that invests mostly old-family money, and it is well regarded. Even so, we checked out everyone who worked at the firm, and our diligence paid off. Greylock, we discovered, was already a major investor in Spyglass and in Open Market Inc., both early Internet companies that we considered to be potential competitors. I canceled the meeting. Greylock professed to be shocked, and Marcuvitz was irritated: He couldn't imagine what I was worried about. But while I may have been naive, I wasn't insane.

The next stop was IVP, another elite Silicon Valley VC firm. Geoff Yang, the other referral that Marcuvitz had given me, was there. My problem with IVP was that one of its partners, Ruthann Quindlen, was married to Dave Liddle. A world-class smooth talker and quite a charming guy, Liddle regularly has big ideas involving large amounts of other people's money. At the time of our fund-raising, he had just started a new company, Interval Research, which was funded to the tune of $100 million by Paul Allen, the billionaire cofounder of Microsoft. The idea behind Interval was modest: to do revolutionary R&D, of the kind that Xerox PARC had done years ago, and then to make money by being ahead of everyone else in commercializing the results. Although I had yet to see anything dangerously valuable come out of Interval, I worried about the connection to Allen, who still sat on Microsoft's board. Microsoft was the one large company in the world that I really feared. I didn't like the idea of giving its people an early warning of what we were up to.

I explained my problem to Geoff Yang. He reassured me, of course, and signed our nondisclosure agreement. But Quindlen attended our presentation — which made me nervous and probably more abrasive. I also noted the conference-room art, which consisted solely of a huge, gold-plated reproduction of a $100 bill. Subtle. The meeting seemed mostly okay, but Yang laughed outright at our proposed valuation, which we had reduced to $10 million. I bristled and snapped: If you think you can get us for a $2 million pre-money valuation, forget it! Yang snapped right back: You can forget about $10 million! IVP didn't pursue us any further.

There were several recurring problems as well. One big problem was the stigma of being perceived as a tools company. Many VCs think that tools companies have a poor track record. Tools are usually sold only to professional programmers and therefore have small markets, but programmers love to create them and therefore start too many companies. Some tools companies — such as Atria Software, Business Objects, and Powersoft — have done extremely well. But in the minds of most VCs, those companies are the exception.

Another major problem that I didn't understand at first was the VC view that founders should not be CEOs. That view combined with my excessively confrontational attitude to produce a dangerous mixture in the minds of the VCs we met. They were afraid that I wanted to be the CEO forever. In fairness to them, I should say that many founders profess to be willing to hire a professional CEO — but then refuse to relinquish power. VCs are also conservative about managerial issues generally, and while the VCs I met were probably agnostic on the issue of how competent I was, I'd given them plenty of signals that I wouldn't play their game. For me, however, there was a major pitfall here. The VCs wanted to bring in a CEO fast, but they also wanted my stock to be subject to vesting, so that I couldn't have it all unless I stayed for four or five years. That way, they could keep me if they wanted to, but they could also take back my stock if they decided that I was expendable. I didn't trust them either: I wanted to make sure that I would be around to see if our strategy was right.

Panic and Combat

By November, I was getting really scared. I was still doing a little consulting, but the graph of my bank account was pointing in a straight line toward zero. A dozen people were working long hours without any cash compensation. That wasn't fair, and I couldn't expect it to last much longer. The Internet was exploding, and we had to start spending real money soon, or we would risk losing our head start. We continued to hire more people so that we could get to market earlier, making the bet that we'd get funded eventually. But we needed to buy computers, we needed to reserve trade-show space, and, most of all, we needed real office space.

Around this time, on a flight from Boston to San Francisco, I used frequent-flier miles to upgrade to first class and found myself two rows away from Andy Marcuvitz. Since the seat next to his was empty, I moved over and sat with him. Our conversation started out reasonably enough, but it quickly turned into a full-blown, brutal argument. Marcuvitz didn't raise his voice (he never does), but I sure did, and by the end of the flight, the whole cabin was openly listening — or pretending not to. A little piece of my cortex reminded me to be careful, because that flight is usually full of VCs and high-tech types, but the words "Internet" and "Web" were heard a lot.

I started out aggressively, and I got more so, pushing Marcuvitz about committing to us. It had been a couple of months since we first presented to him, and he could see that the Internet was exploding, just as we had said it would. He'd been the first VC we talked to, and he was one of the few who really understood the Net. Was he just going to let it pass by? Completely unruffled, he responded:

We see all kinds of opportunities, Charles, and all kinds of results. Maybe you'll be a great success, like Powersoft or Lotus, but you might be a total failure. Our experience is that, because so many things can happen, we can't afford to overpay for a young company that has inexperienced management.

He started to expand on this:

For example, Charles, how do we know that you'll stay with the company? Your strategic insight is obviously crucial to its success. (With anyone else, I would have taken this as sarcasm, but you have to have a sense of humor to be sarcastic.) What if you get into an automobile accident?

Now he was warming up. He went on:

Some founders resist hiring professional CEOs, and others leave even though their stock hasn't fully vested. How do we know that you won't give us problems like that? Five-year vesting helps, but it's certainly no guarantee.

I already suspected that this issue would arise, and I realized that it was perfectly reasonable for VCs to insist on some amount of vesting. But I had serious concerns about how it would be used by venture capitalists. So I pushed back hard:

What do you mean "vesting"? Randy and I already own the company. The idea was mine, we've already worked for six months without pay, and I've seeded the company with my own money. There won't be any vesting requirement for your investment, so why should there be for mine?

Sorry, Charles [he said], but everybody has to vest. It took me five years to earn my stock at Apollo, despite the fact that I was a founder. Why should you be any different? No matter who funds you — if anybody ever funds you — they're going to insist that you be subject to vesting, just as your employees are. I started to get testy:

Andy, you didn't spend six months funding Apollo out of your own pocket. Besides, if my stock is subject to full vesting, once you get a CEO, you can increase your share of the company substantially just by firing me. If you get to protect yourself against me, don't I get to protect myself against you? If you tell me to trust you, then I'll tell you to trust me. And I'll stack my ethical track record against the track record of any VC I've met. I can give you references that are a hell of a lot more credible than yours are.

Don't be silly [Marcuvitz said]. We want our companies to succeed, and we depend completely on our reputation. We certainly don't go around firing founders just to get their stock.

Then he got tough. He was good at that:

Charles, vesting is one of many things that you clearly don't know much about, and somebody should it explain to you. You don't seem to understand valuations, and you don't seem to know how deals work. Do you know that VCs will want to use participating convertible preferred? Do you even know what that is? Do you know that your common stock is already priced too high — and that your employees will have to overpay for their options? And who are these consultants you're giving stock to? Do you have any idea how complicated you've made your financing by giving up so much, and by having so many shareholders, so early?

I was reddening. He was right about some of this, although he exaggerated quite a lot, and we actually hadn't made any fatal mistakes. But I really didn't know much about startup capital structures, and for a moment I couldn't respond to him directly with any sense of assurance. But I fired right back:

So you know about convertible preferred! I can hire MBAs by the carload to teach me about convertible preferred, and learning about it will probably take me an hour. Meanwhile, I've been teaching you about the Web. You've picked our brains for weeks. Whether or not you invest in us, we've brought you up to speed on a huge revolution that you didn't understand, and that we do. That's worth a lot more than a canned lecture on startup financing — but I'll bet you won't be giving us stock in your next 10 Internet investments.

And so it went, hour after hour — about valuations, the industry, my vesting, the VC oligopoly, the hiring of CEOs, control issues, the company's prospects. To my surprise, when we got off the plane, Marcuvitz was truly upset. It was the only time I ever saw him look rattled. Equally surprising, I felt great. For months, I had worried about all that I didn't know. But Marcuvitz had just hit me with everything that he could think of — one-on-one, for six hours. And while some of what he pointed out was embarrassing, none of it was fatal, and I'd landed as many punches as he had. As we parted company at the arrival gate, I said, Andy, that was fun; let's do it again some time. He looked as if I'd shot him.

But my good mood didn't last. Okay, so Marcuvitz knew that he couldn't push me around, and I knew that there were no real skeletons in our closet. But the VCs still held the high cards, and they knew it. One reason why it was foolish of me not to rent temporary office space was that it signaled to the VCs that I didn't really have much money. My cash situation was getting dangerous, and we were going to hit the wall unless we got funding soon, but I should have bluffed better. It was finally dawning on me that time was on their side. The longer they waited, the more apt I would be to accept their terms, and they could tell that it wouldn't take long. Their attitude seemed to be "Internet time hasn't hit yet, so why hurry?"

Throughout this period, I stayed in close touch with Marcuvitz. That may seem odd, because we couldn't spend three minutes together without getting into an argument. But even when we argued, I usually learned something. We disagreed on anything related to funding, but on substantive issues, I valued his opinion.

Andy M. is no dummy, and he's very skeptical: If you say it's a nice day out, he walks to the window to see if you're right. So if he thought I was right about something, I was probably right. And he stayed in touch with me because, no matter what he thought of me personally, he acknowledged that I was smart too, that we had spotted a major business opportunity, and that he needed to keep an eye on us as things developed.

Breakthrough

The breakthrough that finally got us funded was a call from Wade Woodson at Sigma Partners. Sigma is a small, elite VC firm with offices on Sand Hill Road, in Menlo Park, California — the Park Avenue of the VC world. We had been talking with Sigma for a couple of months. On our first West Coast trip, we had presented to Burgess Jamieson, one of the firm's partners. Jamieson is an eminence in the industry, with the courtly manners of a southern gentleman — an unusual trait in this industry — and while he didn't say much, he seemed to get it.

I was in California when Woodson called a few weeks later. As I remember, the call came late in the afternoon. He said that he wanted to meet me as soon as possible. But I had meetings that night, and I was flying back to Boston early the next day. So I said that the only way I could meet him would be at the airport at 6 am. He sighed but said, Okay. I was so tense that I said, Look, I don't want to waste time, so if you're just going to say no, why not save us both some trouble and tell me over the phone? Woodson replied dryly, I don't think I would get up at 5 am for that. If I were just going to say no, I think I'd sleep in. Oh! I thought.

Woodson showed up at my airport gate at 6 am and handed me a "term sheet" — an informal offer — for a $4 million investment at a pre-money valuation of $4 million. That was a far cry from the $10 million pre-money valuation that I'd been holding out for, but it wasn't $2 million either: At least we'd keep half the company. But there were a lot of other terms too. I decided not to commit us to anything until I had talked to Randy. I thanked Woodson, told him that I regarded his offer as reasonable, and said that we needed to think about it but that we'd get back to him soon.

The proposal was contingent on our finding two other VCs to serve as coinvestors. In addition, Sigma insisted on a 20% cut in my personal stock holdings. I suspected that this was a matter of control — of keeping me from having a larger share than any of the VCs. There was a note attached to this point saying that it was absolutely nonnegotiable. The offer also stipulated a large stock-option pool for future employees, which would come out of our share, not Sigma's. The net result was that I would be left with about 12% of the company, and Randy with about 4% — assuming that we vested fully. Issues of vesting, control, CEO selection, and board membership remained unresolved. If the proposal had come two months earlier, I would have been insulted. But after Randy and I talked it through, we decided that we had no choice. The offer was twice as good as the deal that Marcuvitz had put forward — and I liked the people at Sigma. Woodson seemed genuinely pleased when I called back and told him that we would accept. Then, in his polite way, he gave me a cautionary lecture on life in the VC industry.

Now Charles [he said], we have a deal. You can't use this to go out and shop for a better offer. No reputable firm will give you better terms once they know that you've got a handshake deal with us. And we will certainly walk away if we find out that you're using our offer as a bargaining lever. If we were to pull out under those circumstances, no one else would be interested in you.

I said that I understood, and I gave him my word not to renege, although I was acutely aware of how much bargaining power I was giving up. There were still difficult issues of control, board membership, and vesting to be negotiated, and if Sigma wasn't satisfied, it could walk away at any time. If I walked away, on the other hand, I risked being blackballed. The truth is that I had no intention of doing an end run. Sigma, I felt, had dealt with us honestly and straightforwardly, and I suspected that we wouldn't do any better elsewhere. The Sigma deal was going to be it, and we would just have to get the best terms we could from it.

Plus, we were still not out of the woods: We needed two other investors. I started calling up the handful of firms that had seemed interested in us. There was Atlas Venture in Boston, which had evinced some interest after what I had thought was a mediocre first meeting. And then, of course, there was Matrix. However much Marcuvitz might detest me, I knew that he liked my idea, and I couldn't let Vermeer founder because of personalities. It was time for a little humility, so I set up an appointment with him. I must have looked pitiful when I showed up at his office — I know I was very nervous — because I thought I actually detected a fleeting note of sympathy. I explained the Sigma deal, told him that we had accepted it, and said that we very much wanted Matrix to participate. Marcuvitz was friendly but cool. The Sigma deal looked reasonable, he said, certainly more so than the terms that I had originally asked for. He liked the idea, he thought that we were smart, and he believed that the business space was promising.

But Charles [he said], you and I have disagreed about a lot of things, and my partners and I have to think about that.

I swallowed hard. I'm new at this [I said], and my diplomatic skills leave a lot to be desired. There's a lot I don't know, and that sometimes makes me abrasive. I'm sorry about that.

Well, thank you, [he said]. That certainly helps. I'll talk to Paul Ferri, and we'll get back to you.

Marcuvitz called back a few days later. Matrix was willing to proceed on the basis of the Sigma term sheet, provided that we could find a third investor and that we could resolve all of the remaining issues. Marcuvitz and his partners wanted a board seat — in fact, Sigma and Matrix eventually agreed to be coleads, with one board seat apiece — and they had a long list of other concerns: Randy and I would have to submit to a vesting schedule; there would have to be a firm commitment to hire a professional ceo; they wanted a discussion of board structure; they were concerned about our allocations of stock to consultants; and they wanted changes in our employment contracts. I could live with all of those things, at least in principle. But I needed some minimal security about control issues, and we still needed a third investor.

Then, at the last minute, the people from Atlas Venture resurfaced. They wanted in (perhaps they were prompted by Matrix), but I was by no means overjoyed. Chris Spray, the lead guy, is extremely smart and quite the urbane Brit. But we had been assigned to one of his partners, Barry Fidelman. At first, Fidelman insisted on being a colead and on having a board seat — which was absurd. Here, Sigma and Matrix did my work for me: They flatly told Atlas what the terms would be if Atlas wanted to invest. After a brief, tough negotiation, Atlas capitulated, agreeing to take a nonvoting observer seat on the board and to invest only half as much as the other two. So the $4 million investment would consist of $1.6 million each from Sigma and Matrix, and $800,000 from Atlas.

Little Details Like Control

There was still a lot to take care of: control, vesting, board makeup, ceo selection. By now, my paranoia needle was permanently in the red zone. The vcs could walk away anytime, and we would just die. I became difficult to deal with — sarcastic, openly mistrustful of the vcs and their motives, angry that they kept whittling away at our positions.

The Christmas season was awful: five-way conference calls day and night — with Randy, the vcs, the lawyers, and me all fighting over the control issues. At parties, my cell-phone would ring, and I would disappear for hours and then reemerge furious and exhausted. I was not the ideal guest. At one point in December, I almost blew everything by asking for the right to do some consulting even after we got funding. My $100,000 ceo salary would be one-fifth of what I had made as a consultant; I was temporarily supporting my girlfriend, Camille; I had a mortgage; and my liquid savings were getting low. Nonetheless, it was a stupid request. That I would even dream of making it suggests how tense I had become. I raised the issue with Woodson on a call from my car phone. He responded, very calmly, that this was a deal breaker: If I insisted on it, he would walk, period. It didn't sound like a bluff (later, he told me that it wasn't). I pulled my car to the side of the road, thought for 10 minutes, and called him back. Of course I'll be full-time, I said. Thanks very much, he replied. That means a lot to us. By this time, I was beginning to like and respect Woodson a great deal. He was cool and tough, and although we had some harsh arguments, he was smart and efficient, he had a dry humor that eased tensions, and he was as aboveboard as our frequently conflicting interests permitted him to be.

Of course, we did the deal, or I wouldn't be writing this. The final documents covered an enormous conference-room table with a layer of paper that was a foot thick. Finishing the deal saddled me with one final, very unpleasant task. On our plane ride, Marcuvitz had beaten me up for giving away too much stock in payment for professional services. As usual, he was at least partly right. Because I was anxious to conserve cash, I had paid lawyers and consultants in stock — which seemed innocuous enough, except that some of them had built up big positions. For Marcuvitz and the vcs, the answer was easy: Charles, either it comes out of your hide, or you call them up and take it back! Eventually, I made a half dozen very difficult phone calls and clawed back about 15% of what I had paid out.

When we finally got a deal, we had a company party at my apartment. Randy brought Dom Perignon. Peter Amstein and Tom Blumer, an engineer on our server team, surprised us with T-shirts. On the front of the shirt, under a reproduction of a Jan Vermeer painting that had been taken off the Web (no doubt illegally), it read:

Vermeer Technologies, inc.
We can't tell you what we do,
but we do it better than anyone else!

For a short while, I was almost developing warm feelings toward Marcuvitz. About a week after we closed the deal, he called and suggested holding a pizza party for the whole company, as well as the vcs. The party was pleasant enough. My goodness, I mused, Marcuvitz has a human side. But just before the dinner ended, he stood up, shook hands, and departed. He had stuck me with the bill. That's more like it, I thought.


Charles H. Ferguson (chf@cferguson.com) is a writer, investor, and consultant who lives in Berkeley, california.

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