Published in the San Diego Union-Tribune, January 15, 2024
by Neil Senturia
Who has the power — the CEO, the Board of Directors or the Venture Investor? You can have door #1, door #2 or door #3, or you can do the screwball comedy farce where all the doors open and close simultaneously. Which is exactly what happened.
Enter our hero, Sam Altman, CEO of Open AI, who was fired and then rehired 36 hours later when the employees revolted and threatened to walk out the door, the board was thrown out (reconfigured), and finally the major investor, Microsoft, removed the children from the dinner table and brought interim peace to the fractured company. One could fairly say that the intelligence during that period was clearly artificial.
There is an important teachable moment here. When all is said and done, Altman had the cards. A famous phrase informs and cautions many tech companies — “Your IP walks out the door every day at 6 p.m., and you hope that it comes back in at 8 a.m. the next day.”
Herewith a story. I have a client with a puzzle.
The young man starts a company funded by angel investors. It gets some traction, then the pandemic and corporate intrigue intervene, and the company finds itself at the edge of the abyss and desperately needs money.
As in every good fairy tale, a godmother showed up but with a twin that looked suspiciously like the Wicked Witch of the West. However, better to live another day than die like a dog, and our CEO took their money. Very expensive money, with significant penalties.
For students of startups, please reread the section of your term sheet on 4X liquidated preferences and participating preferred.
Then the company began to thrive, it got customers and revenue and now it has suitors calling to buy and invest and support their technology. You would think our CEO would be happy. Nope.
His problem is a simple one. He has a big vision, he sees that the tech could be used in many verticals, and the new suitors who are offering $10 million to $20 million to grow the company see the same thing.
The problem is that the terms of the original venture investor are somewhere between onerous and draconian. Of course, any new investor will want the same deal as the original gang, and thus it becomes clear to my CEO that with all the preferences, unless he sells the company for more than $500 million, he and his employees will make barely enough for a mocha grande.
Which door should he pick? Oh, by the way, he needs some money, the company goes broke in 120 days. It is time to renegotiate.
Let’s return to Mr. Altman. It was the revolt of the employees that saved the day. Open AI had raised approximately $10 billion, but its value without the team or the CEO was substantially at risk. It is always the team.
As in any good thriller, little clues always emerge during the run of the show. And, indeed, there is one more data point in my little tale. The original VC does not yet know that larger, much more powerful investors are circling and thus, our CEO may have some potential escape hatches, maybe.
I won’t spoil the ending. But as a CEO or a director or as an investor, it is always important to really understand where the power lies. In a poker game, the other side doesn’t get to see your pocket hole cards until the call.
One more nuance as you consider the tale. If the CEO were independently wealthy, it might be quite easy for him to tell the original investor to renegotiate or I am taking a walk. “Listen, you dummies, this could be a billion-dollar company and your greed is preventing that from happening.”
But if the CEO is not rich and needs this deal to save his marriage and his family, how easy will it be to draw a line in the sand and threaten to walk out the door unless…
Deals are like sausages. I like them in pasta , but watching them being made, well that could cause major indigestion.
This is why I love the game.
Rule No. 791:
Perhaps a bit more Parmesan, please.