Technologies often have multiple applications some of which are not obvious in the beginning. Companies seek alternate uses for technology as this leads to additional products targeted to a new group of consumers. It takes some degree of imagination and creativity to find new uses or sometimes it takes dumb luck. A recent discussion with an investment banker in New York centered on their having identified a new application for technology in a failing public company.
The banking group managed to accumulate enough equity to gain control of the company. They negotiated a series of agreements to clean up debt and resolve outstanding employment agreements. They further regained the licenses from a university holding the patents on the underlying technology. The next steps would be to complete studies documenting the new use for the technology. This has all the makings of rags to riches story. Alternatively, the new application may fail to pan out and the company eventually disappears. This creates an opportunity for a complete turn-around and new value creation. It also means some investors take a risk on a greater value tomorrow versus what is available today.
The situation highlights issues of realizing potential gains today versus waiting for tomorrow’s promises. This also is an issue with holding equity in your startup. Sometimes opportunities come along for an exit but the price is not quite to your liking. Maybe you are holding options well above water or receive a by out offer but believe the price will go higher; remember the Facebook offer to buy Snapchat. The real gains of today are interesting but the greed factor of potential for future gains cause you to hold off.
This happens repeatedly in companies where the employees believe they have a great technology and should have an even greater value in their equity. Possibilities exist that the future of the technology rests on an undiscovered application or that the technology fails to deliver. The company may experience great competition or be purchased by the competition. Some events drive up the valuation while others lead to a decline. It is not possible to accurately predict the future so savvy investors will adopt a strategy of taking cash off the table by selling equity in increments when possible.
As for the technology, the ability to resurrect a company by finding a new application for the technology can lead to great returns. The company mentioned trades as a penny stock. Any successes would drive performance to higher values and potential great returns. Turning a company around has many of the same issues as starting up a new entity. The process also comes with problems that must be cleared up.
For entrepreneurs, the important lesson to learn is that finding a way to take some funds off the table by selling personal equity helps secure personal stability. The decisions you make when you are not concerned about making your rent payments are different from those when you must be ultraconservative because you are concerned about your salary.
This article has two key messages: 1) consider alternative applications for your technology, there may be a winning combination you missed in the original design; 2) consider taking advantage of converting equity to cash and taking a little off the top. You may miss a future great increase, but you may also miss a big drop if things do not go well.
You can follow Taffy Williams on Twitter by @twilli2861 and you can email him with questions at firstname.lastname@example.org or contact him via company contact info in the website. More Startup information is contained in his personal blog.