In 1998, Ketan Kothari looked around at his neighbors in Silicon Valley and decided that it was an excellent time to dive into the booming IPO market by taking his education technology company, Intelligent Peripheral Devices (IPD), public. Six years earlier, he had launched IPD in the second bedroom of his apartment. His initial meetings with investment bankers, however, yielded a stern mandate: Nearly everything in the company needed tweaking, from the composition of its board to its complicated name.
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At the time, IPD’s board was a casual coalition of its three 30-something founders—Kothari, his brother, Manish, and his friend, Joe Barrus, who had worked with Kothari at Apple—and their fathers, who had provided the initial seed money for the venture. The bankers stressed the importance of adding seasoned directors with experience in negotiating IPOs and running public companies.
As the markets for public offerings and mergers and acquisitions show intermittent signs of life, those who serve on the boards of emerging growth companies should be prepared for change. A liquidity event can alter the board’s needs, even when it is a formal board with decades of collective business savvy. Directors may find their positions at stake as founders prepare their companies for public scrutiny. The board itself is an important selling point, and new stakeholders will want to see an assemblage of individuals whose skills and affiliations complement each other.
It would take another six years for Kothari to reach his liquidity event. He had assumed—by his own admission, naively—that an IPO would boost his company from a $25 million business into a $100 million market-beater, based on the management skills he and the other cofounders had accrued, along with the product he had invented: a two-pound computer companion called the AlphaSmart, designed for use in classrooms. To prepare, he heeded his bankers’ advice and began taking steps to make his company ready for prime time. Kothari’s father and Barrus’ father dropped off the highly informal board without any ill feelings, but Kothari soon found that the restructuring of the board was by no means the end of the changes he had to implement.
TOP VIEW
Board members of emerging growth companies should prepare for a high-profile liquidity event as far in advance as possible. Such planning requires putting governance principals in place, scrutinizing valuation and compensation plans and making certain the board has just the right blend of skills—even if that means stepping down. |
The real transition began with an infusion of late-stage venture financing and expertise from the private equity firm Summit Partners. “We were hoping they would bring expertise in all the stuff we’d been hearing we were deficient in,” Kothari says. A $20 million influx of cash from Summit enabled the founders to postpone the IPO while they buttressed the company. Aided by the new investors, IPD made a number of strategic changes: It adopted the catchier name AlphaSmart, recruited a new CFO, cleaned up accounts by streamlining databases and diversified the board by adding ex-CEOs from other technology companies.A few years later, the company restructured its board again to better comply with Sarbanes-Oxley rules for independent directors. Barrus and one of two Summit representatives dropped off to make room for another Silicon Valley CEO and a well-known educational consultant. By then, however, external forces were conspiring against them. The dot-com bust and 9/11 thwarted AlphaSmart’s plans to go public in 2001, but the company continued to expand and diversify until it finally took the big leap in February 2004. Kothari says that the six years of preparatory work made for a smooth metamorphosis into a public company. “We had been operating like we were already public for quite a few quarters, so the heart-wrenching changes happened way before the actual public offering,” he explains. The Long Road
Such long-term planning is crucial. Hal Shear, president of the consulting firm Board Assets, has led director education seminars in conjunction with the National Association of Corporate Directors (NACD) for more than 20 years. He advises directors approaching an IPO or M&A event to begin planning well in advance and to build up corporate infrastructure. “Research shows that merely having good corporate governance doesn’t make for a smooth liquidity exit,” Shear says. “But the companies that tend to have real problems tend not to have good corporate governance, so it’s a protection device.”
| We’re no longer in a situation where it’s acceptable to build a company board at the last minute to go public. It just doesn’t work.” |
Even Google, a company that had the advantage of being the most anticipated IPO of 2004, ran afoul of U.S. Securities Exchange Commission regulations before going public weeks behind schedule and at an offering price well below its original expectations. Although Google’s choice to sell its shares via a Dutch auction—and the ensuing hype around this unorthodox method—made it something of a unique case, the search engine avatar made a number of bush-league mistakes, Shear contends. “From a corporate governance standpoint, Google was a relative disaster. It didn’t do much of this kind of preparation—such as creating an independent board—just enough to meet standards.”
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