A group of investors at Terabeam Corp., a startup developing free-space optics (that's the stuff that sends bits flying through the air with lasers -- see The New Reality of FSO), have banded together in an effort to oust the board of directors and force a liquidation of the company’s assets.

The group, which (ironically?) calls itself “Friends of Terabeam,” says it's fed up with how the company is being run and they’re looking for a way to cash in on their shares before it’s too late.

During the company’s board meeting last Friday, board member Richard Hedreen expressed the group’s concerns to the rest of the board. No formal proposal was put on the table, and no vote was taken to replace the board of directors, says Gary Rieschel, another board member and executive managing director of Mobius Venture Capital.

“I think the effort is dead in the water,” he says. “A special committee has been formed to review the concerns, but I don’t see much else happening here.”

Meanwhile, representatives for the Friends of Terabeam are keeping their mouths shut. While they would not comment for the record, a representative for the group has said they are working with the company and are pleased with the results so far.

While it’s not uncommon for venture capitalists who have poured money into a startup to want to cash out and cut their losses, what’s unusual about the Terabeam situation is that the charge is being led by the founder and ex-CEO, Greg Amadon. He founded the company in 1997 and served as CEO until 2000, when he hired his replacement, Dan Hesse, who still serves as CEO.

“The interesting wrinkle here is that a founder is proposing this,” says Peter Wagner, a venture capitalist with Accel Partners. “Usually in such a move, common stockholders, such as founders, get nothing, because the capital would go first to the preferred stockholders, who supplied it.”

Unlike most startups, Terabeam never offered preferred shares to investors, according to Rieschel, who has a 22 percent stake in the company, the most of any shareholder. All the investors are common shareholders, which means that in a liquidity event, all shareholders would be treated equally based on the number of shares they own.

This situation is what supposedly spurred Amadon to organize a group of investors to cash out their shares. Terabeam has raised a total of $526 million, and it currently has roughly $220 million of it left, says Lou Gellos, a Terabeam spokesperson. Amadon, who owns about 10.5 percent of the company’s 135 million shares, says he would like shareholders to be able to decide for themselves whether to cash in their shares, which could still be worth about $1 per share, according to the Friends of Terabeam.

But Amadon, who declined to comment for this article, isn’t the only one who would benefit from this liquidity event. Bruce Hauptman, a private investor who recently purchased his 15 percent stake in Terabeam from Lucent could stand to triple or quadruple his investment, say those familiar with the situation. Neither Lucent nor Hauptman has publicly disclosed details of the transaction, but it has been reported that Hauptman only paid $0.25 per share for his stake in Terabeam.

“Bruce is a rational financial investor who bought these shares very cheaply,” says Reischel. “Cashing in the shares looks like a good way to take advantage of that.”

Hauptman was unavailable for comment.

The latest activity marks another chapter in a long and controversial history for the startup, originally funded by Lucent Technologies Inc. (NYSE: LU). In fact, the company was dogged by debate from the very beginning (see The Truth About TeraBeam ).

Of the $526 million Terabeam has raised over the past five years, Lucent contributed $450 million. This investment, which was made in 2000, included cash, certain research and development assets, intellectual property, and free-space optical products, says a Lucent spokesperson.

In September of 2001, Lucent and Terabeam agreed to terminate most of the existing arrangements between them. As part of that agreement, the 30 percent interest that Lucent held in the venture was exchanged for a 15 percent interest in Terabeam early in fiscal 2002. On September 30, 2001, Lucent wrote off $328 million, which accounted for most of its investment, goodwill, and other acquired intangibles in the company. This was included in Lucent's fiscal year 2001 business restructuring charge.

Terabeam officials say they are not willing to give up on the company just yet. In the past 18 months, it has cut its burn rate dramatically, reducing its headcount from a peak of 540 employees to 280 as of September 2002 (see Terabeam Scales Back and Terabeam Lays Off). One of its venture capital investors, Ray Conley of Oak Hill Capital Partners, even bragged to Light Reading earlier this month that the company could last into 2006 or 2007 (see Buckling Down for 2005).

The company has also changed its strategy from a service provider model to an equipment provider model. This summer it announced the acquisition of a radio frequency equipment supplier called Harmonix (see Terabeam Takes Another Flight Path). The company plans to offer a suite of products in both the free-space optics market and the unlicensed radio frequency market.

“We’ve got over $200 million in the bank, and the company has done an excellent job in cutting spending,” says Gellos. “We’re in a better position to weather the storm than some of our competitors. So why would you want to pull out when the promise of the company is about to take off?”

— Marguerite Reardon, Senior Editor, Light Reading
www.lightreading.com