1. What were the most critical choices faced by James Milmo early in the founding of Lynx? Do you agree with his decisions? The most important issue was equity stake. Milmo insisted that Curtis should work for 2 years before being fully vested whereas Milmo himself would be fully vested immediately. Furthermore, Milmo considered Pascal as a critical piece of Lynx and argued that the three founders should be equal partners in Lynx and therefore should each receive a third of its equity.
Pascal could participate in the Lynx as a co-founder with Curtis’ consent.
Finally, Pascal received only 25% of the company equity, and Milmo and Curtis each received 37. 5% of the equity, with Milmo’s vesting immediately and the others vesting over two years. At first glance, Milmo’s decision would be reasonable and pertinent. However, I think he should not have insisted the right to immediately vest. Even though he got the right, it was not likely for him to leave Lynx before the 2 year vesting period.
His assertion is likely only to provide distrust to his partners and potential investors.
In case of Pascal’s stake, even though the final agreement might be fair, Milmo was impetuous. He should have discussed the issue with his partner, Curtis, in advance before he made an agreement with Pascal. He stepped off on the wrong foot, which became another cause for the constant disharmony and mistrust between Curtis and Pascal. As we know, the absence of trust amongst team members is the first and critical dysfunction.
2. Has the founding team done a good job of structuring itself and building the Lynx organization? Three co-founders established Lynx with the triumvirate structure.
Milmo was President and Chairman, Curtis was CEO, and Pascal was CTO. Milmo and Pascal were appropriate for their positions, while Curtis, who had years of sales experience for VC-backed companies, was suitable for marketing or raising funds rather than CEO. Given the circumstances at the time, I think that they made the right choice as a start-up company. However, they should have considered that the triumvirate structure could cause dissensus, make decision making unclear, and deepen the abrasive nature of their relationships.
In that sense, I think that they should have clarified their role and responsibility, and that they should have prepared milestone for its structural evolution as the Lynx would grow. Human resource is one of the weightiest assets for a start-up company. In this aspect, they made right efforts to hire ‘Renaissance people’ and retain them, which effectively established a close-knit culture and overall moral within Lynx and provided another driving force for overcoming a series of crisis.
However, the problem is that the co-founders were very averse to turn-over and made excessive efforts for retention of its people, even to the extent of offering excessively large salaries to staffs who announced to leave Lynx. What’s worse, they were more likely to lose morale if a key person left. Although they stopped the excessive obsession of Renaissance people a bit late, it showed an example of poor administrative capacity within Lynx.
3. If you are James Milmo, are you going to fight back against changing your strategy, or are you going to agree to the change demanded by your board member? What factors motivated his demand? Should James have known this was coming? How could he have avoided the problem? The board required to cut off the RealCell distribution, take Lynx down to a “kernel” of a few people who would rethink its strategy, and make a dramatic strategic change, shifting from a consumer-focused company to a wireless enterprise company developing strictly business applications. Read about fashion marketing concept
This is because Lynx still could not make any profit, the advertising downturn had hit with full force, and the climate in the capital markets had changed. If I were Milmo, I would insist a gradual change in order to reduce the risk on business basis such as product portfolio as Lynx had established a good reputation not as an enterprise company but as a consumer-oriented company. In addition, dramatic changes might cause not a little confusion in the aspect of operation and organizational culture.
I think that as a president and founder, Milmo should have tried to sense such a change. After the departure of Curtis, Evans agreed to only 18 month commitment, which means that Lynx was scheduled to be like a ship without a captain before long. The company should have replaced the CEO position with before Evans left, leaving Lynx without executive leadership.
4. If you are James Milmo at the end of the case, what is your biggest worry? What can you do to manage that issue? Milmo and Pascal didn’t see eye to eye on things, and they argued about everything.
Things were rough as the problems between the two founders began to worsen, which might make Lynx go steadily downhill and threaten Lynx itself. For example, Milmo suggested to investing only $40,000 to test-market in order to identify new opportunities. However, Pascal disagreed with every ideas and proposals by Milmo as he was scared of getting burned again in the market. As Frank Lloyd Wright says, business is like riding a bicycle. Either you keep moving or you fall down.
Like this, from the point of view of Milmo, he worried Pascal, as a COO, was so preoccupied with financial number that Lynx might lose its competitive advantage over potential and current competitors and would be weeded out of the market. What are worse, it has become two sets of hands on the steering wheel, which is the worst way to drive a car. Without trust and productive conflict, they are not a team any more. I think Milmo had two options in order to deal with this issue. The first option is to make Pascal leave the company through a grant from the board.
If the first option would not be accepted by the board, Milmo needs to consider selling Lynx. Even though Pascal greatly contributed to broaden the breadth of product with the flexible architecture and fulfilled his role as a COO, I believe, it is time to go their separate ways in any way.
5. Summary The Tale of the Lynx is a Harvard Business School case study with the learning objective of surveying a wide variety of choices encountered by founders of a new venture and the long-term ramifications of those choices.
An analysis and overview to the company reveals a small organization that was initially formed by 2 partners, James Milmo and Doug Curtis, with the intent of introducing an untapped method of on-line real estate listings. During the development phase of the idea, two large real estate companies beat them to market a similar real estate service so the company focus was redirected to developing advertising supported screen savers for handheld wireless devices such as Palm Pilots and cell phones.
The new direction warranted a technical component the company did not possess so Milmo used his network of acquaintances and contacted Javier Pascal about his interest in the company. At first Pascal was utilized in a viability research capacity but after a short time was ready to commit full time attention to the company. This was the catalyst for the first major issue for the company’s partners. When the company was established, the founders agreed upon an equal split of the equity.
Although. Curtis would need to work for 2 years before being fully vested whereas Milmo, as the original founder, would not have to wait and would be fully vested immediately. Even though this arrangement is questionable in regards to the affect it had on the perceived good will between the partners, it was agreed upon. When Pascal was invited to join the company, Curtis felt that he was merely a ‘generic engineer” and should only receive engineer equity of 5% rather than considering him an equal founder.
Milmo however considered Pascal to be a critical piece of the company and that he should share in total equity that the founders shared. Eventually, Curtis agreed that Pascal would be one of the founders but would only receive 25% of the company equity leaving 37. 5% for Curtis and Milmo. Even though the terms were finally worked out, the damage to the good will between partners was done. First, if there was a requirement for vesting, Milmo should have applied it to himself as well for the perception of equality.
There was little to no chance he would leave his own company prior to the end of the 2 year vesting period so there was no risk involved but Curtis would have seen it as a gesture worthy of true partnership. Second, the addition of Pascal should have been fully discussed between Curtis and Milmo prior to offering the position to Pascal. All the terms, especially the equity cut and his standing as a founder, should have been worked out between the two existing partners to avoid issues of mistrust and non-unity of direction.
If there was not an agreement regarding this, then a different candidate (engineer) should have been considered. By bringing Pascal into the company, there was automatic tension ill will within the ranks of partners that was never resolved and only grew worse as time passed. Another issue facing the young company was selecting a VC that was not entirely stable. Early Advantage Capital was undergoing internal conflict which was creating distractions and prolonging the financing activity. The VC finally made a $500K bridge loan to Lynx to get them going and form the board of directors.
However, the representation on the board from Early Advantage was ineffective due to the rotational nature of the membership due to the turmoil they were experiencing. From this bridge loan, the partners were able to start paying themselves a salary for their efforts. It was discovered by Milmo that Curtis was actually paying himself more than the partners agreed upon. This event in any other circumstance would result in immediate termination and possibly legal action but instead, Milmo handled the issue privately between Curtis and himself, never telling Pascal so as to avoid any more animosity between them.
This was an extremely poor decision by Milmo because it effectively placed him in the middle of the two conflicted partners. Placing him into a position where he would have to act as the mediator any disagreements between them, which was exactly what happened until Curtis’ departure. The choice of establishing a triumvirate was a questionable move by the partners, especially given the abrasive nature of their relationships. Milmo was frequently placed in the mediator role between Curtis and Pascal in order to facilitate any form of productive decision making.
In addition, this form of organization would have an affect on the employees later in the life of the business. Although decisions were made based on the triumvirate, there were actual corporate positions assigned to each partner; Curtis was assigned the position of CEO (chief executive officer), Pascal was the CTO (chief technical officer) and Milmo was President and Chairman. Perceivably, Milmo and Pascal were well suited for their positions however Curtis’ strong suit was in marketing not executive management of a technology organization and he became an impediment to raising money.
This eventually raised concerns by some of the VC’s and Curtis was ousted from the company. He was offered other positions but they were considered demotions and Curtis’ pride prohibited him from accepting the lower position. After the departure of Curtis, the triumvirate concept still remained by the inclusion of Clark Evans as the interim CEO. Evans agreed to an 18 month commitment but Milmo felt that Evans would want to stay after the term of his contract so there was not a search for a permanent CEO.
This was a mistake. Evans held up his part of the agreement and after 18 months left, leaving Lynx without executive leadership and no point man for the employees to take administrative issues to. The company was unable to replace the CEO position. One of the most critical issues besides the ones mentioned above was that of selecting staff for the company. It was important to the founders that they selected a certain type of staff basically categorized as renaissance people. These eople are highly motivated by new concepts and use their creativity to establish new and undiscovered ways of doing things. Although Milmo felt it was important for him to have the primary hand in the hiring process, obligations of the company forced him to hire an individual to perform the task. This individual carried out the task using the same philosophy as the founders specified. The leadership condition or lack there of, caused issues for many of the staff that needed some form of structure.
The staff was there because they liked the founders and the work they were involved with but there was still the need for a clear organizational leader and a CEO decision maker not a triumvirate. The founders were very averse to turn-over and took great measures to ensure retainability of staff, even to the extent of offering excessively large salaries to staff that announced their desire to leave the company; sometimes paying certain staff more than they paid themselves.
Along these lines, the founders originally assigned lower salaries to themselves with a longer range goal in sight. They felt they were helping the company by not extracting capital that could otherwise be used for operational costs. The proper way the partners should have approach this was to pay themselves the true market value on paper, and what ever the company could not pay them in cash, the books would show it as an owed amount guaranteeing them adequate compensation for their efforts.
Although the close knit group was great for team-building and overall moral, the founders felt that the opposite would be true if they started losing key people. They felt it would have the effect of draining the moral and spirit of the company leading to more staff departures. This group of people were becoming increasingly difficult to manage because of the general nature of renaissance individuals. They are highly motivated when the work is new and challenging but when a routine sets in they become restless and begin looking for other opportunities.
Many of the staff changed jobs within the company or left all together creating instability and inconsistency in management. Eventually, the founders stopped catering to the wants of those employees that were dissatisfied and the result was a company that began to gel and could be counted upon to be there through the thick and the thin. Although this approach was a bit late, it was clearly the right way to go with the company to ensure its life. In the first round of financing there was one point of contention between Lynx and the VC. The deal was considered “ratchet” deal in that if lynx was able to hit their established milestones, the valuation of the company would increase allowing for a larger amount of venture cash however, if they missed the milestones, they cash distribution would decrease and the VC would in turn end up owning a larger percentage of the company. This arrangement did not align properly with the founder’s original design of the company but to bring the financing to a close, they agreed to these terms. In light of the need for capital to begin the business, it was the right decision by the partners.
Lynx faced its biggest challenge when a news story broke that several large technology companies were collecting sensitive customer information and using it inappropriately. Lynx, although not guilty of these actions, was implicated in the accusations. The report had a devastating effect on the company’s reputation and momentum and forced them into damage control mode focusing on public relations and regaining its rightful reputation. It seemed as though the more the company protested and claimed it innocence, the more it reinforced the company name in a bad context.
Instead of fighting this battle with increasingly damaging results, Lynx decided to take the “ultra high road” with its functionality and distribution of its software. However, the experience made the founders a bit apprehensive about going all out in an aggressive fashion in the market. This was a mistake because it allowed several competitors to make distribution deals and capture a large share of the market originally explored by Lynx. The company should have stuck to its formula of success and let the facts speak for themselves.
During the next round of capital fundraising, Lynx decided to go with a VC that actually bid the company with the lowest value and only received luke-warm reviews from its references based upon the initial interest the company showed Lynx and the fact that they needed to close on financing fast. They rationalized that it would be catastrophic if they went with a different company (Morgan Stanley, Tyler Ashland among others) and the VC decided to pull out before full financing was realized. This is poor scenario to base this kind of business growth decision on.
The possibility of the selected VC pulling out prior to full financing was just as real as any other VC that was under consideration. The fact is, money is money and when trying to build capital and grow the business, the proper VC to select is the one that values the company the highest, receives the lowest percentage of ownership and provided the best terms and amount of capital and RazorsEdge did not fit that criteria. This decision caused the board to question the management decisions of Lynx and could possibly affect their chances of future capital fundraising efforts.
In addition to all the downsides listed above, Lynx was also required to eliminate one of their seats on the board creating a minority representation of the founders on the board and transferred true decision power to the investors. This is poor company management regardless of the business you are engaged in. Lynx began its search for a new CEO by employing the services of a professional headhunter. The job was particularly challenging for the representative of the executive search firm because Lynx was a “weird company without a concrete business plan.
In addition, they had yet to turn a profit. They determined after a year that the search was futile and decided to adjust their own responsibilities within the company. While all this was happening, one of the VC’s went into receivership with the Small Business Administration (SBA) which now made the second largest shareholder the U. S. Government. The consultant was happy to take a “hands off’ approach to the company business due to a lack of experience and knowledge of the industry which played in the Milmo and Pascal’s favor.
It created a 4 person board consisting of both founders, VC RazorsEdge and VC Novell ( who was partial to the decision point of the founders) effectively creating a perceived majority of the founders again. The company began to realize profits and several options regarding the disposition of the VC’s were beginning to open to them. One of the options was to buy out the VC’s preference clause of $29. 5M but it was determined too complicated a process and virtually impossible to value such an offer.
Another on was to buy out the shares of the SBA but the other investors took to long to make the decision and the window of opportunity closed. Finally, they decided to pursue an equity carve-out for the management team which would protect them from exiting with nothing for their labors in the event the company fell into a forced exit from the market. But, the problems between the two founders began to worsen creating a barrier to productivity and threatening the very existence of the company. Consensus was next to impossible between the two founders creating a large amount of animosity.
Milmo wanted to begin aggressively testing the market to identify and exploit new opportunities but Pascal, who was now serving as the Chief Operations Officer, disagreed with every attempt by Milmo to move the company into an aggressive business posture based upon his fear of getting burned again in the market. Consensus meetings turned into shouting matches with nothing being accomplished except totally exhausting both partners. Basically, Milmo equated the company and its current state as two drivers both with their hands on the steering wheel but wishing to go different directions and fighting each other every step of the way.
At a point such as this, it is time to consider selling the company and going their separate ways. The failure came from not defining a clear management structure right from the start which would be the baseline from which all business plans and growth strategy would flow. It would have established stability of purpose and function at the very creation of the company and established the standards under which the company would operate. The founders did a poor job of structuring the company right from the beginning and basically sealed its fate before it ever spent or made its first dollar.