460 Making Key Strategic Decisions
By June 2002 the company has refined its software into a salable product
for which Dough believes there is a significant market. However, in order to
produce, customize and install the software, and in order to broadly market,
the company needs significant new investment. All prior financing, and the
meager proceeds from the test installations, are virtually exhausted. The com-
pany is fortunate enough to induce a venture capital investor, Vulture Partners,
to invest $1 million but there is a significant cost:
- Vulture Partners insists on receiving 50% of the equity in the form of
convertible preferred stock that will participate in the proceeds of the
sale of the company in preference to all the other stockholders, who hold
only common stock. - Vulture Partner ’s preferred stock will convert into common stock upon
any public offering. - Vulture Partners gets two board of directors seats.
- Vulture Partners insists upon a substantial increase in personnel in order
to aggressively address the market place; John Dough is given the title of
“chief scientific officer”; Mary Manager is made vice president; they hire
a chief operating officer who formerly was a senior vice president at a
large software firm, a chief financial officer from one of the big five ac-
counting firms, and a sales manager with experience at Mega-Soft, the
largest software development firm in the country.
The new team, properly financed, goes off to sell Dough-Ware and is fabu-
lously successful.
It is one year later, in the spring of 2002, and everyone involved in man-
agement, including John Dough and Mary Manager, agrees that substantial ad-
ditional capital is needed. It looks as though the company can reach $100
million in sales next year and have a 10% market penetration, but that’s going
to take an awful lot of money, something like $40 million. This money will be
necessary to further refine the product, increase the engineering capacity to
customize the product, and enter into sales efforts so as to speed market pene-
tration. The directors hope that a direct approach to customers will enable the
company to decrease its dependence on Big Deal Corporation, a large software
company which has marketed Dough-Ware in exchange for a substantial com-
mission. The directors call a board meeting for the end of June 2003 to discuss
their options.
THE THREE OPTIONS
Dough and Manager have understood from various board members that there
are three primary sources for financing company growth: raising additional
money on a private basis as in the past; raising money through an initial public