Lessons Learned From a Failed Ivy League Entrepreneur

A "Case Story" By Chris Cononico
 

Chapter Eighteen

As college seniors, we were constantly reading the tealeaves to determine whether or not we should become entrepreneurs after graduation. We each had strong job offers from corporate America that we constantly compared with the business prospects of our company. Naturally, our first preference was to become wealthy entrepreneurs. However, the collapse of our relationship with Drucker, and rumors that the PennCard was ready to be launched, did not bode well for our business.

The words of Professor Smith still echoed in my head. “A pizza shop owner is not an entrepreneur; he is self-employed. The guy who owns 100 pizza shops, he’s an entrepreneur.” QuakerCard made me feel like a pizza shop owner. It wasn’t enough, but if we could expand our program across the country, it might be worth remaining with the business. Otherwise, I planned to accept the offer I had from Morgan Stanley to be an analyst in their corporate finance group.

As we pondered the fate of our business, we received a surprising phone call from our equipment supplier, CMC. Apparently, they had been asked to bid on an RFP by a major university, and CMC wanted to know if we were interested in partnering with them to run the system. CMC thought the services we provided 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 to say the least.

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

With a potential CMC partnership in the works, the prospects of our company couldn’t have been more uncertain. It wouldn’t have shocked me if in a year we had several university clients whose systems we were managing. It also was very possible that another year could pass and we’d be no further along. There was just no way of knowing and it added to the pressure we felt. I discussed my job options with my parents and they were initially skeptical when I told them I was even considering staying with my business. That only added to my anxiety.

Of the four of us, George, Mark, and I spent a lot more time in the office than Jake did. It was our senior year, and Jake was adamant about not letting the business interfere with his student responsibilities and his college experience. In retrospect, I can’t blame him, but back then I did. During this period, I spent a lot of time talking with George and Mark about the company’s potential. The three of us were considering the possibility of staying with the business after graduation, and we wanted to establish an exciting vision for its future. Since Jake had gradually become less involved in the daily operations of QuakerCard, he never joined us in our late night strategy sessions. We 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 my partners and I started QuakerCard, we agreed to split ownership evenly between us. It never occurred to us that we should impose a “vesting schedule” on ourselves. 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, we were all equal shareholders, but we didn’t think Jake was still earning his keep. In many ways, he had disengaged himself from the action. Mark, George, and I risked working ourselves to the bone, while we gave Jake a free ride with his equal 25% stake. By having vested everyone’s stock immediately, we had created a problem for ourselves.

In retrospect, we set the bar pretty high for Jake, because the three of us were workaholics. Mark and I both had girlfriends, who were almost threatening to leave us, because we spent too much time at the office. If there were ever a problem with the business, we would skip classes that day. We would stay up late at night shooting new ideas off of each other into the wee hours of the morning, instead of studying or drinking beer at parties. We were completely dedicated; Jake was not. Suddenly as founders, the three of us were no longer on the same wavelength as Jake. Something had to be done.

Ultimately, we determined that Mark was going to be the person to “talk” to Jake, because he had the best working relationship with him. It’s weird that all of the sacrifices and history we had with Jake didn’t seem to mean as much anymore. It was all of the long hours that George, Mark, and I spent together that formed a tighter bond between the three of us, and it seemed to weaken our relationship with Jake at the same time. He just didn’t feel like an insider anymore. I told myself that it wasn’t my fault. I wasn’t screwing him; he was letting us down. In fact, if he stayed with the company, he was screwing us, because he didn’t care about the business as much as we did, and he knew it.

Still, no matter how you sliced it, this whole endeavor came from Jake’s suggestion for a project idea. He was even the guy who came up with the name QuakerCard. His mother was our accountant. It was an awful situation, but the three of us felt we needed to resolve it before we made any decisions to remain with the company for the long term.

In the end, Jake handled himself with a lot of dignity. He could have tried to hold us 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 we were.
Ultimately, Jake handed in his resignation and we redeemed his outstanding shares for $10,000, which was the amount he originally contributed. In return for signing a 3-year non-compete agreement, we signed an indemnification agreement that held him harmless from any future claims. After graduation, we never spoke again. I don’t think there were hard feelings. The business relationship simply ended.

 

Copyright  2005 by Chris Cononico
All rights reserved. No part of this manuscript may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the author, except by a reviewer who may quote brief passages in a review.