The

Entrepreneurial

Code

Lessons from an

Ivy League Entrepreneur

Chapter Seventeen

As college seniors, Johnny and his partners were constantly reading the tealeaves to determine whether or not they should become entrepreneurs after graduation.  They each had job offers from corporate America. Naturally, their first preference was to become wealthy entrepreneurs.  However, the collapse of the Drucker deal, and rumors that the U-Card was ready to be launched, did not bode well for University Services Inc. 

The words of Professor Prudence still echoed in Johnny’s head.  “A pizza shop owner is not an entrepreneur; he is self-employed.  The guy who owns 100 pizza shops, he’s an entrepreneur.”  The Bullfrog Card made Johnny feel like a pizza shop owner.  If they could expand the program across the country, it might be worth remaining with the business.  Otherwise, he planned to accept the job offer he had. 

As the partners pondered the fate of their business, they received a surprising phone call from their equipment supplier, CMC.  Apparently, they had been asked to bid on an RFP by a major university, and CMC wanted to know if University Services Inc. was interested in partnering with them to run the system.  CMC thought it might help them to distinguish their bid and sell more equipment.  So, they sent over a copy of a large RFP binder with a list of questions.  It was an interesting new development. 

Maverock was quick to point out that CMC had a long list of established university clients.  If they worked with CMC, perhaps they could be introduced to the appropriate people at other schools, which might help them break into the market.  Maybe CMC could be the reference they needed to establish their credibility.  It was an interesting new possibility.

With a potential CMC partnership in the works, the prospects of the company couldn’t have been more uncertain.  It wouldn’t have shocked Johnny if in a year they had several university clients whose systems the company was managing.  It also was very possible that another year could pass and they’d be no further along.  There was just no way of knowing and it added to the pressure he felt. 

Of the four partners, Joe was spending the least amount of time in the office.  It was senior year, and Joe was adamant about not letting the business interfere with his college experience.  Johnny spent a lot of time discussing the company’s potential with Maverock and Abe.  The three of them were considering the possibility of staying with the business after graduation. Since Joe had gradually become less involved, he never joined them in their late night strategy sessions.  They were starting to resent him for it. 

Most people work for start-ups for the stock, not the salary.  If the company succeeds, it’s the stock ownership that makes you rich.  When the partners started the Bullfrog Card, they agreed to split ownership evenly.  It never occurred to them that they should impose a “vesting schedule” on the stock ownership. 

A vesting schedule is an agreement that allows founders to earn their stock over time, perhaps over several years.  This is counterintuitive for most entrepreneurs, especially during the “honeymoon period” when goodwill and spirits are high.  However, what if one founder suddenly stops contributing?  Even worse, what if one founder wants to leave and take his stock with him?  It could be disastrous for the organization. 

The way things currently stood, the four partners were equal shareholders, but Joe had disengaged himself from the action.  Johnny, Maverock, and Abe risked working themselves to the bone, while Joe got a free ride with his equal 25% stake.  By having vested everyone’s stock immediately, the partners had a problem.  Suddenly as founders, they were no longer on the same wavelength.  Something had to be done.

Ultimately, Abe was the person they chose to “talk” to Joe, because he had the best working relationship with him.  All of the sacrifices and history they had with Joe didn’t seem to matter.  The long hours that Johnny, Maverock, and Abe spent together had formed a tighter bond between the three, and it weakened their relationship with Joe.  He just didn’t feel like an insider anymore.  Johnny told himself it wasn’t his fault.  He wasn’t screwing Joe; Joe was letting them down.  In fact, if Joe stayed with the company, he was screwing them, because he didn’t care about the business as much as they did, and he knew it. 

Still, the idea for the Bullfrog Card came from Joe’s suggestion.  He came up with the name Bullfrog Card.  His mother was their accountant.  It was an awful situation for the partners, but the three of them wanted it resolved before they made any decisions to remain with the company for the long term.  They were kicking Joe out.

Joe handled himself with a lot of dignity. He could have tried to hold his former partners ransom and demanded to be bought out at some multiple of his investment, but he didn’t. He seemed to understand the situation and the emotions involved. He also knew he wasn’t willing to commit to the business, but they were.

Ultimately, Joe handed in his resignation and they redeemed his outstanding shares for $10,000, which was the amount he originally contributed.  In return for signing a 3-year non-compete agreement, the remaining partners signed an indemnification agreement that held Joe harmless from any future liabilities.  After graduation, they never spoke again.  The business relationship simply ended.

Copyright  2005 by Chris Cononico
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