M&A Case Studies: ChiliSoft

The AVC community's very own Charlie Crystle has a great story about the sale of ChiliSoft at the height of the late 90s bubble. I've asked him to tell it as case study number one in the M&A Case Studies on MBA Mondays.

We will be discussing this case in the comments. There's a bit of shorthand in Charlie's story and not everyone will understand it. Please join the discussion, ask any questions you have, and the community and I will answer them. Do not be shy. I have a busy day today, first day back after two weeks away, so I may not be active in the comments until this evening.


When Fred asked me to post about the ChiliSoft acquisition for MBA Mondays, I immediately thought “I don’t have an MBA”, and “it was such a weird set of experiences”. I hope it's useful to someone. Here’s part of the story, skipping lots of details. (For an invite to my latest startup, see the end of the post).

ChiliSoft sold for $100 million in 2000. Or $70 million. Or $28 million. It depends on the date you choose, the built-in triggers, and ego. Notably, from December 1999 to May 2000, my stake dropped from 40% to 15% when the deal closed. Most employee stakes dropped as well–but not all employees.

My point at the end of this post will be something like this: sweat the details.

Some context.

I started ChiliSoft in 1996 out of my software services company in Lancaster, PA. I had no money, and Dad had just passed away days before. It was a tough time, but I saw this huge opportunity for adding functionality to web servers so I took the deep plunge.

I tried raising money nearby, but in those days there wasn’t a firm like First Round in PA that really got the space, so I headed to the West Coast with a credit card, deeply believing in our mission to take over the world. Tip: try to take over the world.

To save money, I slept on Ben’s (my attorney) floor as I bounced around the Valley trying to get meetings and raise money. Ben finally got me a meeting with DFJ, and a few months later Warren Packard and Steve Jurvetsen produced a term sheet. Tip: floors are cheaper than hotel rooms.

Warren and I signed the term sheet for $1.4 million on a Sunday night at 11 pm at a bar in a casino in Las Vegas–completely emblematic, it seemed. But I was out of debt–DFJ saved my life, in a way. Tip: try not to run up debt–it’s unlikely you’ll be saved by Series A.

That Series B deal was nuts–$3.7 million on $19 million pre-money, with about a million in revenue, perhaps, and a cap on the preference. That meant if we sold for more than $42 million, Series B simply got its pro rata share–and everyone would be thrilled. Tip: don’t create the wrong incentives.

Over the next year and a half, we fired the CEO, and I ended up taking the CEO job back. I wasn’t a popular guy with investors for that, but my gut (informed intuition) said that we needed to cut the bullshit and sell software. I figured they’ll like us when we win. Tip: they’ll like you when you win.

The chill set in, so I focused the company on sales, and kept sending reports to the board. We increased revenue in that next quarter by 3 times the prior one, and things thawed. Tip: communication matters with investor relationships.

I started a CEO search; I really didn’t want to run the company, but also didn’t want to see someone run it into the ground. A few months later, we had our guy. Tip: run the company, get help with ops.

At the same time, we were lower on cash than was comfortable, and I had the choice of cutting from 35 people to 9, or bringing on the CEO and making sure he had cash in the bank. DFJ and the other firm offered an onerous bridge: monthly escalating warrants, and a controlling board seat. I didn’t really grok the meaning of the warrants. Tip: sweat the details.

I didn’t want to send people home and our pipeline was strong, so I chose to keep the ride rolling and go with it. Everyone was surprised when I wasn’t fired right away, but there I was, still employed. 

That Fall a great sales/biz dev guy, Brian Pavicic, asked me to attend a conference with him. He was incredibly excited about a potentially big licensing deal with Cobalt Networks, which made linux servers for ISPs. ChiliSoft had a number of large ISP partners, like PSI and ATT, and that kind of distribution at the time was a big win.

Somewhere in the conversations the talk turned to a merger–Cobalt saw our application server as a strategic edge, and admired our traction with major customers like Excite. And that’s where it gets murky for me; I had been focused on launching a suite of small business apps on top of ChiliSoft, and the talks went on without me.

A month later I  got the voicemail from Ben. “Just make it easy, accept the severance, you’ll make a lot of money in the sale…”. I sat down in the CEO’s office and acted like I didn’t know anything, and talked about how excited I was about the company, and how he was doing so well, and…he could have at least had the balls to tell me himself. Tip: You won't always be indispensable.

I imagine they wanted me out because I was dogmatic about the direction of the company–I wanted to make the engine free and sell apps into it, like the CRM system I was building–and they wanted to get the company sold and get liquid. Besides, CRM wasn’t going to be big or anything. But I was difficult, admittedly.

So I left, a bit bitter and burned out, and spent a few weeks more in Seattle to take in the WTO riots and plan my trip home. Tip: stay away from riots after getting fired from  your startup.

Fast foward to the deal.

The deal was struck at $100 million In January 2000. But the VCs insisted on fixing the number of shares, not the value of the deal. A month later, they looked like geniuses: the deal was worth $135 million. Next month, $70 million. It closed in May at $28 million, 72% down from the deal price. Tip: fix the price, not the stock.

The management team also threatenend to quit if they didn’t get an additional 10% of the deal. JLM's rule is "if anyone goes to the pay window, everyone goes to the pay window" and I bet he'd add "and no double-dipping." 

The US doesn’t allow management to hold a company hostage in a transaction like that without suffering a massive tax consequence, unless they get approval from the majority of shareholders. That would be me and a few others.

From my perspective they already had better than average option allocations, and I didn’t believe they would walk. But at that point I basically decided to stop paying attention to the details, and just get it done, after a threatening call from the Cobalt CFO. Fun stuff.


So how did my stock drop by 62% in 6 months? Three things: escalating warrants, management shakedown, and the timing of one of the dips in Cobalt’s wild ride in 2000. The deal closed below the $42 million threshold at $28 million, which triggered more magic. The management shakedown took another 10%. Tip, again: sweat the details.

And the escalating warrants? Let’s just say it made DFJ very happy. They made ( I think) over 15 times their original investment, with a big boost coming from the bridge deal). Overall I owe a lot to those guys–learned a lot, made a lot, and don’t regret much of it. Tip: you don’t have to accept a bad deal–at least try to negotiate.

Some final tips: Run your company–you’ll figure it out. Get good advisors, but follow your gut. Don’t touch anything with escalating warrants. Be generous with employee options and make them meaningful.

And once you close your acquisition and get your stake? Don’t let it ride, especially in a bubble. I did. Then Sun bought Cobalt and dropped 97% in value. I sold enough stock to invest in a few startups and support some great nonprofits, but it was a huge, huge hit.  Founders love to take risks, but we’re notorious for taking stupid risks with our own money.

My Next Big Thing? Something new around search–get an invite here. I’m raising capital and building a team, and would love to hear your thoughts on it. 

I hope some of this has been helpful!

#MBA Mondays

Comments (Archived):

  1. Reid Curley

    Charlie, thanks for telling us your story. It touches on so many things that have been covered here, so I can understand why Fred wanted you to share it. The old saws about how “the upside takes care of itself” and “these downside protections don’t matter until they do and then they are the only things that matter” are demonstrated to be true once again.Could you clarify the liquidation preference of the Series B? It sounds like it was a participating preferred or had a multiple on it to the extent the exit valuation was less than $42 million, but I am not sure. Also, it seems like the bridge warrants were a major factor in the outcome. With the benefit of hindsight, what would you have done differently? Under what terms would you still raise the money rather than making cuts?Thanks again for taking these discussions out of the realm of the hypothetical.

  2. Dave W Baldwin

    Thanks for sharing Charlie. Very insightful.

  3. Steve Poland

    “Be generous with employee options and make them meaningful.”Can you be more detailed on “meaningful”?

  4. ErikSchwartz

    “Don’t let it ride”I have that T-shirt.

    1. PhilipSugar

      I do too.

  5. ShanaC

    Ok – so how do you measure stupid from smart when it comes to risks?(And seriously, excellent writing. And I promise to stay away from riots)

  6. awaldstein

    Great share…thanks.In reading this, you were lucky actually. A lot of bubble stories went from 100 to 0 with no stops in between.

  7. Ian

    Can you explain how escalating warrants work?thx!ian

  8. Fernando Gutierrez

    Thanks for sharing!Your comments about founders own money reminded me to a post I read recently (although it’s from May) by Paul Buschheit in which he also advices to be conservative.http://paulbuchheit.blogspo

  9. kidmercury

    great story charlie. you should turn this into a movie. move over mark zuckerberg — there’s a new internet hollywood story!thanks for sharing.

  10. William Mougayar

    Interesting roller-coaster and great lessons. It’s often more important to know what NOT to do, than what to do.If you can disclose, what % ownership did you have at the end after all the hoops you were jumping through.

  11. DonRyan

    Don’t let it ride. Words to live by.

  12. Monty Kalsi


  13. Monty Kalsi

    Great story Charlie! Never knew about all the hoops you went through with Chillisoft.

  14. RichardF

    Great story Charlie, love the tips, they are worth listing out.

    1. Tereza

      Yeah, loved those tips!

  15. Tereza

    Great post, Charlie.And great call on Fred’s part to have Charlie mind the boards while he’s running around Manhattan picking up LP checks. There’s just not enough time in the day!

    1. fredwilson

      two word response: wire transfers

      1. Tereza

        ROTFL.You go, girl.

  16. kirklove

    Great post Charile. Really liked your writing style. Thanks for sharing.

  17. Nico Navarro

    Thanks for sharing Charlie! and good luck on your new startup!

  18. Matt A. Myers

    I LOL’d many times. :DThank you for sharing, and thank you for your light-heartedness — it comes from tough lessons, I know.

  19. digiruben

    Excellent insights, style, tips & timing. Thanks. Best of luck in your new venture!

  20. Dale Allyn

    Charlie, thanks for this post (and thanks to Fred too, of course). I appreciate your openness and willingness to share your experience.

  21. JLM

    What a great story. A true story of those two impostors — triumph and disaster!I like the plot. I like the character and I like most of the conflict resolution.Let’s greenlight this baby!

  22. JLM

    This story reminds me of an important lesson I received about the “value savings clause”.The value savings clause is the other side of the mirror of the escalating warrants in Charlie’s story.It goes something like this —When you are selling a company for stock or over a protracted period of time, strike the sales price and THEN agree that it shall be protected and preserved through a value savings clause.If you are taking stock and it is currently priced at $30/share and it goes down, then once a year — the value reset date — you get more shares based upon its then current price. It is simple to administer.I did this on a deal 15 years ago and everybody looked at me like I was nuts. There had been damn few value savings clauses in deals at that time and even my lawyer thought I was nuts. He had never drafted a value savings clause. But I insisted.The buyer was so confident in their stock, they agreed to the deal — which in my view they should have anyway. No charity in play here.A few years later, the securities we had taken dipped in value and, you guessed it, we got bailed out by the value savings clause. More than once over the next 12 years.

    1. Morgan Warstler

      I believe this is the untold story of Mark Cuban’s sale to Yahoo.

    2. ian_peterscampbell

      Sorry I’m not quite clear on this one. Is this for a situation where you expect the deal to take a long time to close, or for a situation where the acquiring company is paying through stock granted in payments over a number of years? I hadn’t heard of the latter situation before.

      1. JLM

        It is applicable any time there are securities and a protracted period of time in which to receive the securities or there is a “lock up” period involved. This could be during an extended period of time between an agreement on pricing and a closing; or, as in my instance, when the terms of the conversion of a security have an impact on long term value.In my particular instance, I was receiving LP units which were convertible into common stock based upon an agreed conversion schedule — the element of art being that the receipt of LP units was not a taxable event while the conversion to common stock was fully taxable with the tax treatment being long term capital gain at the end of 12 months.The buyer wanted the LP units to be convertible over a protracted period of time for their own internal operational, accounting and tax purposes. They were intending to use their LP units and ultimately their common stock as trade bait.In essence the LP units were equal in value to the underlying common stock.The risk in the deal was that the underlying common stock might become devalued over the course of time diminishing the ultimate value of the transaction — to me and my folks.I preserved the ultimate value through the value savings clause which simply said that the number of LP units were increased on an annual basis by the amount of devaluation, if any, in the underlying common stock on a date certain.Once a year, we ran the numbers and if the underlying common stock had gone down in value as of that date, then the seller issued more LP units to me and my folks.As it turned out, we received a number of additional LP units several times. The LP units and the the stock also paid a 5% + dividend during the time period.I had hoped that the stock might double or triple during the applicable time period but alas that was not the case. Nonetheless, the deal was very sweet and the value savings clause was the critical element in maintaining that sweetness.

        1. ian_peterscampbell

          Think I’ve got it now. That sounds like great advice, thanks for sharing it. 🙂

        2. Himanshu Sahani

          What should a founder do if a buyer insists on a value savings clause? A friend of mine recently ended up loosing his business set up over generations to a PE fund during the recent recession.

          1. JLM

            I do not really understand how a value savings clause would apply to a seller unless there are some securities involved. You will have to give me some details, please.

  23. Kyle Pearson

    I really enjoyed reading this kind of first-hand experience Fred, hope we have more.”But the VCs insisted on fixing the number of shares, not the value of the deal.”Charlie, probably a simplistic question here, but if the shares hadn’t been fixed, how would the deal have changed? I understand why you want to fix the valuation, but doesn’t a fixed share quantity only effect the value of individual shares relative to price?

    1. Richard

      I believe it’s the number of the acquirer’s shares that would be used for payment which was fixed, instead of the total amount to be paid with those shares. If they lose 70% of their value it takes a lot more shares to pay the same amount, which could then be sold in short order for close to that amount.

      1. Kyle Pearson

        Oh… Ok, that makes things much more clear, thanks.

  24. markslater

    great story Charlie.Hey fred – how about a story about a failed merger – Just went through one in the last quarter. let me know!

    1. fredwilson

      oh man, you are now asking me to deal with real psychic pain

      1. markslater

        i’ll send you an abridged version and you can make the call

        1. fredwilson

          Please do

          1. markslater

            it will come from my (at) concavesports addy – look out for it

          2. markslater

            ok sent it fred – i guess if it were to be posted i’d get the wooden spoon!

    2. paramendra

      Pitching Fred, eh?

      1. markslater


  25. Bob Monsour

    Great piece Charlie. Thanks.Can you give any additional insight into why the VCs would insist on fixing the number of shares rather than fixing the price. Is there more to this than simply the (at the time) belief that the market will continue to go up and to the right? That combined with basic greed?

    1. fredwilson

      i suspect it was simply a bet that cobalt’s stock was going to go updoing that is playing with fire as they learned, charlie learned, and now we have all learned

    2. Aaron Klein

      It also could simply have been that’s what Cobalt was willing to agree to.While this doesn’t sound like a distress sale, it doesn’t sound like it was made from a position of strength either (being on bridge financing with escalating warrants).The acquirer definitely wants to do a fixed stock deal in most cases – they know up front no matter what their stock price is how much dilution they have to take to do the deal.

  26. RJ Johnston

    An inspirational AND educational story by an entrepreneur living in the same city as close relatives.. it does not get much better then that. :-)Thanks for sharing and good luck in your new venture Charlie!

  27. Robert Owens

    fantastic story – aircellcall will one day soon make you very happy!

  28. Scot Wingo

    Charlie – very interesting to hear the behind the scenes, I saw this unfolding externally and it sure is sausage making now that you’ve revealed the details.

  29. Ben Carlson

    Thanks for sharing!

  30. d

    What are escalating warrants?

  31. JLM

    No bullshit suggestion — whenever an entrepreneur contributes a story as useful as Charlie’s, I think that Fredland should pass the hat and buy the guy a bottle — hell, a case really but there is a recession going on now isn’t there? — of his favorite bubbly or whiskey to either wildly celebrate capitalism or to drown his sorrows.Charlie, name your pleasure or your poison!I’m in!JLM

    1. Tereza

      Or — we can each contribute an hour of free labor to Charlie, based on our respective skillset, applicable toward Charlie’s new venture.Think of it as virtual Pappy…..a mechanical Turk way of getting him to his next goal and thanks for the time he took to share.

      1. PhilipSugar

        I will be in Louisville on Wednesday Charlie…….I have met the owners personally and can pickup a bottle to drop off on Thursday. They are most proud of their Reserve Rye, although it is not for me.

        1. andyswan

          Phil let’s meet Wed for a glass of pappy….my treat. I also have a bottle of the 15yr you can take to my comment sparring-partner, Charlie….email me andy [at] andyswan.com

          1. Dave Pinsen

            Everything happens faster with this crowd: JLM makes the bottle suggestion, an hour later Phil Sugar generously offers to buy a bottle of Pappy himself, and eight hours later, Andy Swan kicks in the karma with his own generous offer for Phil and Charlie.

    2. PhilipSugar

      I will step up and bring a bottle of Charlie’s choice, and deliver it at the Deer Park Tavern (Edgar Allan Poe’s haunt) over a meeting which we’ve put off too many times.Everybody can agree to pay it forward, as this one is on me.

    3. fredwilson

      me too

    4. ian_peterscampbell

      Great idea. If you get something going please ping me and I’ll be happy to throw in some money.

  32. John Clyman

    Great story, Charlie.I would love if you could elaborate a bit on “run the company, get help with ops”. Given that there’s always more for startup founders and execs to do than there are hours in a day, I’m curious which parts of “run the company” you determined to be indispensable and what parts were “ops” that you could reasonably delegate.

    1. Donna Brewington White

      Great question!

    2. Stephen P

      22 years as CEO in a corporate structure, growing from a struggling small business to a substantial and very successful small business, and I can tell you that it would have been a much different story had I not run the company and left ops to a very talented COO. Wise counsel, Charlie. The corporate landscape is littered with failed CEO’s who got lost in the day-to-day details of operations. The two jobs are very, very different, just as is the third corner in the executive suite, the CFO.

  33. yofrez

    Hi Charlie,I really like the post and appreciate you talking about a very personal time in your life. I do have a question about your bridge loan. I’m my experience bridges are generally only used when a company is trying to raise financing. The bridge simply holds the company over until the details of the term sheet can be finalized and long term financing can be secured. Therefore I was wondering if you were looking for financing when you took the bridge and why you left it outstanding for so long?

    1. fredwilson

      there are also bridges to sales

  34. Kevink

    Could someone explain the escalating warrants and the effect they had when the company was sold?

  35. Naao

    But actually how many percentage of clean gut startups reach to some reasonable level? My guess is 5%.

  36. Donna Brewington White

    Charlie — Great story! Thank you. Appreciate your honesty, but would expect nothing less from you. Loved your tips — brought it home.Once again I am struck by how many crucial fork-in-the-road decisions have to be made by a startup founder and each one so loaded — often without a lot of precedent to fall back on, not that you’d always want to fall back on precedent anyway.You raise a point that is much debated — whether a founder should retain the role of CEO or find someone better equipped for the role. Seems like finding a great COO is often the right solution and a win-win.Apparently, you regret your decision to hire a CEO. What do you think would have happened differently in the final outcome if you’d stayed at the helm? Is that even a fair question?Oh, and did I mention, that I loved your tips! Again, thanks. This is fantastic. (Okay, I’m gushing, but it’s warranted.)

    1. fredwilson

      tough callit’s great for the founder to have a business partner who can take the stuff off of their hands that they don’t enjoy and don’t excel atthe trick is defining the role and the responsibilities and who makes the final callswe’ve struggled with this issue more than any other issue over the years. we are very “pro founder” so we probably err too much on the side of trying to keep the founder in the drivers seat too longbut i wouldn’t have it any other way

      1. Donna Brewington White

        Haha! Had just posted a new comment to you ending with this: “Now all we need is for you to show up with a few choice comments after your long first day back.”And immediately the first new comment was yours! Love the coincidence!

      2. sigmaalgebra

        Something’s wrong here; something doesn’t ‘add up’.Yes, ‘information technology’ (IT), i.e., $200 four core processors with 3.0 GHz clocks working away with about 125 W 24 x 7 pumping out Web pages and ads, and similar price / performance advantages for disk space and bandwidth, hard work for low pay, can be wildly valuable. So, IT is a big, huge, historic advantage and business opportunity.In comparison, on Main Street of every village, town, and city, coast to coast, there are hard working entrepreneurs pumping out pizza, dry cleaning, lawn services, roofing, plumbing, dental care, tax returns, snow plowing, products as ‘big truck-little truck merchants’, etc. and doing fine as owner, CEO, COO, CFO, CIO, foreman, worker, and janitor, all without much of the advantages of IT.So, why, with the advantages of IT, should an IT startup be more difficult? That is, if a plumber can be his good CEO, COO, etc., why not some IT entrepreneur with a lot more in education, business knowledge, business experience, gross margins, etc.?When I was a prof in an MBA program, we considered many problems facing business, but getting the COO work done was not among the most challenging.For the COO work, at the beginning, call that job ‘office manager’. So, they interface with payroll, bookkeeping, accounting, legal, security, office cleaning, etc., handle HR record keeping, expense accounts, purchasing, and leasing, supervise customer service, etc. The US has many people who have been quite successful at such work in organizations from a few people to a few thousand people in business, government, academics, non-profits, and the military.E.g., to help support the family and her younger sisters, my mother dropped out of high school at 14 and took jobs. The first one was selling dresses in a basement, and she walked home, including in Columbus, OH winter, through the red light district, with cardboard lining her shoes. She rose quickly, and at 16 Lazarus offered to send her to buyer’s school in NYC. Eventually she finished high school with typing, shorthand, and bookkeeping in night school. Later she was secretary of the head guy in three relatively large organizations and had to do essentially all of those ‘office manager’ tasks.As the organization grows, call this person VP Operations and then COO.So, what’s the big strain in finding such people or getting such work done? Or, plumbers can do it, for electricians, maybe their wives do it, my mother did it. What’s the big problem?I know; I know: There is a claim that for a big, successful business, the level is much higher. Hmm …. I helped start one of the most successful companies in the world. I reported to the SVP Planning, whose office was across the hall from the founder, COB, CEO, and my office was across the hall from the SVP and next to that of the founder. I saw how nearly everything was done. Got to say, there were no supermen around. It was all highly fallible flesh and blood with lots of mistakes. Yet it is very successful, a ‘blue chip’. I saw lots of challenges to the company, and twice my work saved the company. But I didn’t see challenges in getting the COO work done. So, again, what’s the big problem with getting COO work done?Once I was in a hot part of GE IT. Talking with the division CFO, I saw that he had a big operation with lots of floor space and lots of people crowded in and rows of five drawer filing cabinets and stacks of paper from floor to ceiling. I asked him, “Is all this necessary?”. He smiled and said, “No, it’s not. It’s possible to do it all with just a checkbook.”I have some friends in business. One is from a famous, wealthy investment family and does projects. He’s still working on his first, big success, but he has had no problem getting the COO work done. His family has successful projects of wide variety with no problem getting the COO work done. On yacht trips, when they talk about business, it’s CEO subjects, not struggles with COO work.So, in a wildly promising IT startup, the founder, CEO has and keeps the ‘vision’, understands the core software because he typed it in with his own fingers, understands the server farm because he plugged it together with his own hands, understands the systems management scripts because he wrote them, understands the Web site because he wrote the HTML himself, got the user feedback and knows why the users are happy, understands the paying customers because he is the one who got them to send their money. Then for those COO tasks, initially he did them himself, but ASAP he hired an ‘office manager’.Again, where’s the difficulty in getting the COO’s work done?I don’t get it: If a Main Street plumber can do it, why not an IT startup? Somehow the big advantages of IT make the COO work a super serious problem? I don’t ‘get it’.I’d like to ‘get it’ or, even if I don’t and don’t believe it, at least get why others believe that the COO work has to be so tough.

        1. Alex Murphy

          The big difference is scale.Plumbers, by enlarge, are not trying to go from an idea (hey there is this cool thing called a pipe, take a look at my napkin) to a 200 person take over the world business in 12 months.For every “fancy” dot com that you read about, there are 100 or more that have less than 30 employees where the founder is still micro managing the operations dreaming of one day selling for FBMillions … that isn’t going to happen … why? Because to scale at a very fast rate, when you don’t have a predictable model, and the business is still essentially an experiment is in fact very very very difficult.So its not that the COO or the CEO job is tough per se, it is the extreme amount of uncertainty combined with an extreme need for speed, and it is that type of company that gets VCs excited and that you read about here.

          1. sigmaalgebra

            I was mostly just asking why the COO’s job has to be seen as so difficult to fill.You wrote:”Because to scale at a very fast rate, when you don’t have a predictable model, and the business is still essentially an experiment is in fact very very very difficult.”Of course it is “very difficult”. And at times people do get involved in such things.But I don’t see that we have to assume that “you don’t have a predictable model, and the business is still essentially an experiment”. A startup doesn’t have to be such an example of taking off “on a wing and a prayer”. Instead, we can do good planning. There are many examples.The blue chip I helped start did essentially have “a predictable model” and wasn’t really “an experiment”. There was chaos, more than I thought necessary, but the COO’s job was mostly off on the side of the chaos.You ended with:”So its not that the COO or the CEO job is tough per se, it is the extreme amount of uncertainty combined with an extreme need for speed, and it is that type of company that gets VCs excited and that you read about here.”For the “uncertainty”, that is looking at large, empirical averages from the past. But for a given company, looking closely at its details, it should be possible to evaluate the uncertainty with reasonable accuracy and, then, proceed only when the uncertainty is relatively low. Again, for the Wright brothers, looking at the history of such efforts, their chances looked from small to zilch. But, looking at the wind tunnel in the back of their shop, their corresponding lift, drag, and thrust calculations, and their solution to the problem of three axis control, their chances of controlled, powered flight looked good. Then, with that success, they were able to sell their ‘flyer’ all around the world and make money. By WWII, Pratt and Whitney, Grumman, North American, Douglas, and Boeing were way ahead, but the Wright brothers had a good run for some years.It seems that I was taken as suggesting that AVC is also talking about Main Street businesses. No, I just used them as an example of part of business for a small business which is essentially the way they are at Series A time.I believe I understand something of what IT venture capital is about, say, building a company with $15 billion in annual revenue, most of that in annual pretax earnings, and the associated market capitalization, around the world, quickly, and then an exit. Still I don’t ‘get it’ on just why the COO of such a company has to have such a tough job or be so difficult to find. I see the CEO of such a company as having a much more difficult job being very difficult to fill.Indeed, it appears that now IT venture capital, for a Series A check of $1 million to $10 million, wants to see a Web site with ComScore numbers showing lots of monthly unique users, that number growing rapidly, and clearly an effort and a good chance to get some hundreds of millions of ‘engaged’ users. And they should also like to see in place a server farm architecture that can scale rapidly. Okay. Easy enough to understand. But on the day the Series A check is deposited, the company will likely still look a lot like, say, a Main Street business of a few people and an ‘office manager’ as in my descriptions of plumbing, etc.So, there’s an ‘office manager’ in place. As the company grows, call the slot VP Operations or COO. By the time the company has a few hundred employees, need a COO up to that work, but, again, the US, coast to coast, is awash in people who have successfully performed the COO functions in organizations up to a few thousand people in business, government, academics, non-profits, and the military. In my example from GE, the division had some hundreds of people, but the CFO believed he could do his part just with a checkbook.Uh, how to grow a server farm quickly? First need a suitable architecture. Second, need the software written for that architecture. Third, can call HP, Cisco, etc. and have them ship boxes with software installed and ready to plug in and power on. Fourth, need a colocation site with the usual high end functionality in power, cooling, security, etc., and, say, some 10 GbE connections. Can get a few times $1 billion in annual revenue just that way, that is, before getting own server farms(s). So the COO has to handle the paper shuffling for such a server farm; a COO who has handled an organization of a few thousand people should be able to do that.I can understand chaos. I would believe that the VCs are interested in high ROI, quickly, and see chaos as hurting such success, not helping it, always unwanted, and not always necessary.I hope my company doesn’t encounter chaos: I want my COO slot to be easy to fill and the COO not much involved in any chaos that does happen.

        2. fredwilson

          why do so many marriages fail?

          1. sigmaalgebra

            Taking that question, actually, an important question, even for business, literally, 🙂 !!!, at one point I actually worked, quite hard, to understand the answers and found some succinct ones that explain nearly everything I saw, most of it too grim to mention. I got my best background from a famous E. Fromm book. Finally it all made sense. Pretty? No. Understandable? Yes.As I post below in answer to Charlie, I am beginning to conclude that the reason for the difference in how difficult it is seen to fill a COO slot is due to differences in the view of what the COO’s work is: (1) As I outlined above, I’m taking the view that the work is routine with limited scope. (2) Another view would be that everything in the company reports through the COO.Then with case (1) the COO slot should not be so difficult to fill. With (2) the marriage analogy could be closer.For me, I’m eager enough to delegate, but I want my COO doing the routine work and want the rest reporting to me and not through the COO.I’m still only 60% through Omar Bradley’s book. He answered so many of my questions in the first 60% that I have reduced motivation to read the rest! I have mixed admiration for Bradley, but, net, he was darned successful. Well, at one point, a division was a mess, and he was assigned to clean it up. He did. In weeks. The work didn’t involve any relationships comparable to marriage. Yes, such a division has a lot of COO type slots, but Bradley was successful, quickly, with what he was given.Basically he (1) organized the work, (2) delegated it, (3) did lot of monitoring to know what was going on, and (4) expected people to do their work. When something broke, he saw why and fixed it. Sometimes, but not always, the fix involved replacing people. He did try to select people well, but to a huge extent he had no such opportunity. He was able to be successful with essentially the people he happened to have. There are more considerations in business management, but relationships much like marriage should be minimized.Yes, higher up, it was possible for personal relationships to play a larger role: FDR liked Marshall; Marshall, Ike, and Bradley were close; Patton was respected, admired, and feared but a bit out of the club; Nimitz fit in well and was surprisingly effective (e.g., Midway, the charge through the central Pacific, enabling the B-29s, and supporting at Iwo Jima and Okinawa); MacArthur was partly fighting his own war independent of what anyone else thought and did not like Marshall. Halsey was determined but a buffoon. Spruance was more effective and worked well with Nimitz. There was one quality universal: Courage. They were NOT afraid to die and were willing to see their equipment destroyed and their men killed. One of Bradley’s views was that US men and material were “inexhaustible”; true, but not the only consideration!

          2. fredwilson

            the CEO/COO relationship has to be very personal and very trusting ifit is to workthat’s why i compare it to a marriagethey fail a lot

  37. Alex Murphy

    Charlie,This is a great read.Epic Tips:Tip: Sweat the detailsTip: stay away from riots after getting fired from your startup.Tip: run the company, get help with ops. Tip: they’ll like you when you winTip: try to take over the world.Can’t wait to hear more about your new venture.

    1. fredwilson

      i loved the “stay away from riots” one. that was new for me and i don’t see a lot that is new in the VC business any more

  38. andyidsinga

    wow.. I love this! (still reading).Charlie/Fred/Anyone – Can you say a little more about the paragraph “That Series B deal was nuts … Tip: don’t create the wrong incentives.”.I’m totally lost on what that all means.Thanks!

    1. fredwilson

      structured all wrong. valuation was too high but the VCs got the better deal because it was a participating preferred so they got a double dip and downside protection which came in handy when the M&A deal price collapsed

  39. Donna Brewington White

    Love the addition of case stories. How perfect that you started with Charlie. Thank you, Fred.Reading through the comments, this really has the feel of sitting in a big room throwing out questions and responses. (lecture hall? pub?)Now all we need is for you to show up with a few choice comments after your long first day back. Welcome back, BTW.

  40. Peter Beddows

    Charlie: As many others here have already observed, this is a very well laid out outline of your experience which clearly affords a number of teachable moments, some of which have already been addressed here. Thank you for sharing so openly. This is a history that is well worth reading.One aspect that particularly struck me was your observation: “Tip: run the company, get help with ops.” Right in that one tip alone is an incredibly critical solution to a challenge that is probably missed by many; not only those in a founding/startup situation but also, in my own experience, by many in small to medium existing enterprises that should be doing well but are actually struggling as often as not because their CEO does not “have help running ops” never mind also not having help perhaps in running other aspect of the business that should/could be effectively delegated to advantage.Back in August 2010, Fred posted “What a CEO Does” in MBA Mondays http://www.avc.com/a_vc/201… that included a very thoughtful addition in the Comments added by JLM based upon his own 30 years of experiences as a (successful) CEO. This was complimented by an additional MBA Mondays (Guest) post by Matt Blumberg on Sept 6th “What a CEO Does (continued)” http://www.avc.com/a_vc/201….Both of these posts on CEO functions and responsibilities plus the added comments really do show the value and importance of, as a founder, not falling into the trap of being a “Jack of all trades, Master of none” with apologies to any Jacks reading this.While the Founder must be the keeper and proselytizer of the vision and reason for the business, that effort can quickly become lost or misconstrued without realization until too late if the Founder/CEO becomes overwhelmed and/or distracted with the inevitable minutiae of day to day operations and general business activity management (I still remember a CEO who insisted upon deciding where a Temp’s desk should be placed ~ the Temp was not even involved in any activity directly under that CEO’s purview) let alone miss important decision points by being unaware of inadequate understanding and experience to make relevant cogent decisions that can critically impact the future well being of the enterprise and its participants.

    1. Donna Brewington White

      One of the best traits I’ve seen in a CEO (or any executive) is humility — an accurate assessment of one’s self — which is actually at the core of true confidence — and serves as the foundation for leading a highly functioning team.On the other hand, some of the most anemic teams have been the result of a CEO with either an over-inflated ego, lack of self-awareness and/or deep-rooted insecurities.Observing the former is always a bit exhilarating.

      1. Peter Beddows

        You are so right on here Donna: Very astute observation.Regarding “On the other hand, some of the most anemic teams have been the result of a CEO with either an over-inflated ego, lack of self-awareness and/or deep-rooted insecurities.” we could not agree more. In fact that’s exactly what brought about the demise of a recent client; we’ve seen this in a few other client situations down through the years.Even with all of our skills in diplomacy and persuasion, we have found that we are rarely in a position with clients to effect positive change under those conditions unless we are called in by the board/stakeholders and the “change” is a replacement of that CEO because …. “things always go the way the boss wants them to!”To Charlie’s tip: “get help with op’s” we have even come across situations where a CEO of doubtful skill hired someone to help with ‘ops who was a virtual clone of himself: Suffice it to say, that does not work either. Goes back again to my post and your own experiences regarding “Team Meritocracy? Team Diversity? ~ Can the former be achieved if the latter is a constraint?” http://bit.ly/brYxyp

  41. Mark Essel

    It’s not often you get to read your favorite post of the year in the first week. Absolutely generous and human tale of business. How bizarre it must have felt at the time, glad you came out of the other side stronger.And that new thing is something wonderful from what I saw.

  42. seankelly

    Charlie given the deal structure with DFJ would you do the same again or look around for better terms?

  43. ian_peterscampbell

    Thanks Charlie for the post and thanks Fred for hosting it. This is a great article and I’ll look forward to more of them.Charlie, given that you don’t regret taking the deal with your investors for the round that included escalating warrants, but also given that you think it was not the best possible outcome, what would you do differently if the same situation occurred today?Regarding letting a stake ride I’ve heard some advice that sounded reasonable recommending always picking up half the stakes and leaving the other half. Does that still feel too aggressive to you, and would you recommend moving all the equity when you have a chance?

    1. fredwilson

      sell half and let half ride is a good strategyi strongly suggest everyone take real money off the tableletting it all ride is a bad idea

      1. Steve Krupa

        The “upside” of stock can be super-enticing but the essence of M&A is to maximize value. Owning the stock of the acquirer long-term is a separate investment decision. Focus should be on certainty of value (which includes speed to liquidity) and tax efficiency and there are many structures designed to achieve that goal.When considering a stock offer keep in mind that the acquirer likely believes its stock is at least fairly-valued (maybe even over-valued), otherwise other financing alternatives would be more appropriate, like borrowing the money and paying cash. This once again highlights the informational asymmetry of all investing – Caveat Emptor applies to both the Buyer and Seller – so you have to do your due diligence on the Buyer’s business – no exceptions.W/r/t “Escalating Warrants” – the implied message of a bridge loan is that investors are edgy, and this is not a great place for a founder or a management team to be in. My tip is to avoid needing a bridge loan. You have to attract permanent capital and long-term support from your investors.Thanks for the post Charlie/Fred – very cool.

  44. daryn

    This was a great post, Charlie. Thanks for writing it, and thanks Fred for lining these up.As far as the plummeting stock price goes, is it common/heard of to do a stock-based deal yet fix the deal on price not a number of shares based on the price that day?I was, by the way, part of an acquisition in September 2001. The acquirer stock was around $36 that day, and hit below $5 within the next year. Fortunately it was an all-cash deal, and it just made it all the easier for us employees to walk away from our hiring grants/options/espp 🙂

  45. kagilandam

    Thank you very much for the New Year gift to the Fredlanders. Your tips were great… real great.I really loved the following reply …”there are a lot of stories out there where the expectations and hopes of entrepreneurs don’t match the outcome they helped to shape.”

  46. Don Corbett

    Hi Charlie,Thanks for sharing your story with us a warts and all tale for all involved in start ups.Best of luck with the new venture. I signed up earlier ;)Don

  47. paramendra

    Charlie, I feel like I just got introduced to you after reading your comments forever. Your best piece of writing ever at AVC. I was opposed to the idea of guest posts at AVC. Now I am not so sure. Great tips. You got sense of humor.”Founders love to take risks, but we’re notorious for taking stupid risks with our own money.” Also true of Al Pacino. The dude blew away most of his money when he approached the official retirement age. I guess he really wanted to get back to work!

  48. paramendra

    I am voting this the best MBA Monday post so far. JLM, you got competition.

  49. Ben

    An intensely honest and insightful article. Likewise, really appreciate the responses to the comments too.You mentioned three factors that diluted your stock: “escalating warrants, management shakedown, and the timing of one of the dips in Cobalt’s wild ride in 2000.”Do you have any idea about how important each of them were relative to one another?

  50. Laurel Touby

    Charlie, I’m curious to know who your legal counsel was at the time.

  51. Marco Janeczek

    Charlie, very interesting story. Congratulations on your achievements.

  52. J.R. Sedivy

    Charlie – Thank you for taking the time to share your story and learning experiences – It seemed like an exciting yet stressful time. I enjoyed the realism of your story (sleeping on your attorney’s floor) and tips!Fred – Thanks for starting the case studies – I think this is really valuable information that doesn’t make it to the textbooks or most MBA programs.

  53. ErikSchwartz

    I have a friend who has a Yahoo! logo tattooed on his ass.

  54. paramendra


  55. Tereza


  56. Peter Beddows

    Do you mean he tattooed his Mule or his posterior? Perhaps this is just a bit of Americana ~ American language difference versus British! Anyway, if it was placed on the latter, perhaps that was a prophetic move on your friend’s part given where one places one’s ass/arse generally at least once a day? lol

  57. PhilipSugar

    It is the standard when taking a bridge round….once you’re at that point, you really just have to do what you do….the interesting thing in this case is that I’ve never seen it work out, and have the company make a great (I know not for you) exit.

  58. Matt A. Myers

    Exactly. It’s the light and energy from the new ideas and discovery that overshadows the past horrors in a blinding kind of way. The pain of the past is certainly is a driving force and becomes the strength of the future — I like that a lot. 🙂

  59. Donna Brewington White

    Spoken like a true entrepreneur! You, sir, have the gene. No wonder you are serial.And I SO had to reblog that statement!

  60. abhic

    Thank you for a very revealing look at yet another fact of an entrepreneur’s journey.I had the exact same question as Steve. But a bit more – as a fair/transparent founder, what do your ideal employee options look like today?

  61. ShanaC

    thank you

  62. mike gilfillan

    $40 down to $2.39. You’re not the only one :). I traded some equity for ICGE stock (remember them?) during my 2nd round and held on for the same “don’t catch a falling knife” ride. OUCH!

  63. Tereza

    You kidding? He’ll rapidly smoke out the fake low-value ‘helper$’

  64. PhilipSugar

    Yes and anybody who has read about wife, that is where she put herself through nursing school while working the 5 to closing shift 5 nights a week at the Townie Bar.Doing that and getting to Clinical’s at 6am 5 days a week makes her a much tougher person than I.

  65. fredwilson

    nice answer. we could probably raise real money here at AVC

  66. fredwilson

    it is a great case study so thank you for sharing itthere are so many entrepreneurs who believe that dealing with VCs is a rigged game where the VCs always get the best of entrepreneurs and your story shows why that is a common perceptionhaving lived through similar situations, i understand why DFJ got the terms they got and why they ended up with a very good deal and you ended up with a pretty bad one.but that doesn’t mean it was fair and i would hope that if i found myself in a similar situation i might have done some things differently. the older i get, the more wins i get under my belt, the more i want to do right by entrepreneurs because it is people like you who create our opportunities to invest and make moneyone thing for sure comes out loud and strong in this story and that is keep your capital structure drop dead simple and try as hard as hell to stay aligned between the entrepreneurs and VCs. when you make things complex, you lose alignment and it is almost impossible to craft win/win situations

  67. andyswan

    Charlie hits on an interesting phenomenon in entrepreneurs….the inability to heed the red light of risk. Speaking for myself, I’m almost positive that I “back myself into a corner” on purpose. I’m just not comfortable at the top of a hill.This pattern of “win big, lose medium, get hungry again and repeat” has defined my life since I was 9 years old, and has served me well so far. But it is clear to me that to be great, one cannot let hunger fade, regardless of his feast. And this, for me, is the challenge of a lifetime.

  68. reece

    Charlie – amazing story. Loved reading it. Excited for you in round 2!Fred – perhaps this becomes a monthly feature on AVC?

  69. Donna Brewington White

    Tip: Keep it simple!

  70. Alex Murphy

    Charlie,Fred’s comment leads me to a question … do you think that DFJ ended up coming back with escalating warrants etc since they helped you out on the debt side during the series A?At the end of the day, as you said, you had a good exit, you have been able to do some interesting things since then and now you are on to Act II. All in all, not so bad.I guess what I am really asking is how do you feel about DFJ since they played two very different roles in the evolution of your company.[yes, that is really two questions :)]

  71. paramendra

    “…. keep your capital structure drop dead simple…..” For a while now I have wanted to write a blog post called Who Owns The Company. And I have wanted to write that before I read up on the details of the VC business which you have to do before you go to the negotiating tables. …. But now I am close to doing it since I am close to having a company of my own. Great Recession over, immigration humiliation over, etc. Great team in tow, 4 people.So who owns the company? 🙂

  72. Alex Murphy

    you should have gone for delivery 😉

  73. fredwilson

    you have to do what is best for the companythat is always my mantrai know that the law says you need to take care of shareholders, and ido follow the lawbut in a pinch, i always like to think about what is best for the company

  74. fredwilson

    DFJ is a good firm. this story could have been written about me backin 1999/2000 too.

  75. fredwilson

    what is the company is hard but critical to figure out

  76. Dave Pinsen

    Great post, Charlie. You deserve a lot of credit for your candor, generosity, adherence to your principles, and commitment to doing what’s best for your company and your employees.Next time you end up with a big position in a publicly traded company though, please consider hedging. This post has a link to a free version of the hedging app Portfolio Armor. If you ever need a hand using it, feel free to reach out.

  77. fredwilson

    ego and pride will keep you hungry when you’ve got plenty of money

  78. fredwilson

    +1 for Jerry

  79. Donna Brewington White

    This reminds me of a quote by David Ogilvy that I recently read:”Hiring people smaller than you, creates a company of dwarfs; hiring people bigger than you, creates a company of giants.”I’d say that it goes beyond “hiring” and has to do with what you actually let them do once they are hired — which is what you state in “make them as powerful as possible.”

  80. Mark Essel

    “founders tend to research a lot more than they need to, and that takes a ton of time”Amen to that statement. I believe it’s paranoia driven need to know. The fear of making a dumb mistake and crashing your startup becomes great enough that it distracts you from taking action, any action and moving on.

  81. baba12

    Were the past years not based on reality?I think it would be interesting if you could share the details of what transpired in the Vegas casino when you signed your term sheet, and the details of what was on the term sheet.Did you at that moment in time think given the circumstances, it was the fairest deal that was available or were you in a bind signed the first term sheet that was made available to you.

  82. Himanshu Sahani

    This is a deep one. Thanks in helping me understanding what keeps people going even when they have hundreds of crores in their bank.

  83. markslater

    i agree charlie

  84. Peter Beddows

    True that, but ultimately it also goes beyond just who and how you hire (http://bit.ly/brYxyp), it also goes to being clear from top down on the Vision and Purpose of the business and it also goes to being very clear with all team members about their respective functions, obligations and responsibilities within and to the team as well as about the expectations that all other team members have of each other as co-members of that team, does it not?For example: A Superbowl winning team is a superbowl winning team only because they all were clear about, and shared, the same vision and purpose AS WELL AS also knowing intimately what their respective responsibilities were and what part they were expected to play in achieving the win as well as being “trained” and experienced in their respective roles. It’s just another business!

  85. sigmaalgebra

    Right. I fully intend to delegate the COO work before it takes up a significant fraction of my time.

  86. sigmaalgebra

    Charlie,Thanks. That’s closer to what I have thought. The “light” and “darkness” are also clever, succinct, and likely on target!Right: As the founder, I can’t be spending much time on COO tasks.So, the issue here is how difficult it is to fill the COO slot. Apparently the main difference is what the COO is supposed to do. I outlined what I thought an office manager, VP Operations, and COO should do. Then, in my view, the rest reports to me and NOT through the COO.But if the everything reports through the COO, then, sure, the COO slot would be difficult to fill.

  87. PhilipSugar

    That would be Kentucky Derby Season and I am a Kentucky Colonel.

  88. Fernando Gutierrez

    In fact I think that in Spanish the only difference is the j/h thing (our h is a bit harder than your h, but there is not a clear equivalent). The middle of the word should sound similiar to English. If you need any help with Spanish write me to gutierrezf (at) gmail (dot) com.

  89. Aaron Klein

    That kind of bridge financing is probably more accurately called “tunnel financing” – and the longer it goes, the deeper the tunnel gets. :)Charlie, great story. I’ve been an admirer of your real world experience for a long time, but this full readout of your Chilisoft experience was incredibly valuable.