A Fight for Cash at Terabeam

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
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Mr FSO 12/4/2012 | 9:19:41 PM
re: A Fight for Cash at Terabeam Seemingly the investors just dont seem to swallow whatever they are spoon fed anymore, and this is a typical example of what is happening across the communications industry as a whole.

Lets take a look at the FSO industry and the lessons learned and what happens when people can not see the wood for the trees.

Terabeam is financially the biggest, from an investment perspective, but certainly not a heavyweight on a paying customer front, certainly not in Europe, Middle East and Africa.

Terabeam and certain others went running to investors with a report from Stratergis which was the best piece of Comedy that most people in the FSO industry have seen in a long while,they sold the story, took the cash and started to play rocket scientist, set fire to the cash paying silly saleries hiring people who had no experience in the Free Space Market, nor did they talk to the market outside of the United States,the US has never been a hive of activity for Free Space up until the last six months.

The Terabeam products are not built for real world outdoor applications and the prices to the end user are not on terafirma for that matter, they have very stiff competition on a price per link basis in general , and when you take a look at the likes of the Optical Access T3000 , and the Fsona Sonabeam , the capability and construction quality, argument flies out of the window too.

If I was a shareholder and I have a friend who is, I would be concerned , it is clear that Terabeam is suffering from believeing its own hype, the products cost silly money and offer nothing more than there competition which in some cases is less than half the price for a like for like carrier grade solution.

The Board at Terabeam is wandering in the wilderness and it is no doubt that the shareholders are wanting heads on platters, and money back in there pockets.

Take PAV as a prime example , PAV has the record for FSO link deployment by a long chalk, the Company took investment,the investors were offered -ú25 Million GBP last year by another Company, The investment Company read the Stratergis report, turned there nose up at the offer, removed a winning management team that knew how to run a manufacturing and sales operation, put Neil Kelly CEO of Tricom UK in charge to spin and hype the company Terabeam style, this man was clueless to the FSO and wireless market in general, and generally out of his depth in technology manufacturing,then whoops a daisy , 12 months later the Company hits the wall nose first...

Optical Access saw the massive hole in the service provider model back in 2000 and changed its Optimesh service provider offering stance within three months, they are alive today fighting fit within the Global FSO market, with a range of point to point solutions, living off revenues.

When will Terabeam sustain itself....?

BlueWater66 12/4/2012 | 9:19:29 PM
re: A Fight for Cash at Terabeam This question is not directly related to the Terabeam Article. In their case, it seems like common sharholders and true Vulture Capitalists are trying to cash in on a stock gain.

But- I've heard of a number of start-ups that are shut down by the VCs mid-stream. They then pull back their investment. I've seen a lot of start-up terms sheets and I am familiar with typical investment terms. But I haven't seen language related to this. How is this done? If the preferred class pulls back their money, I would guess that they could be open to law suits from common stock holders and founders. I assume their is specific voting trust language in the investment agreement that forces common holders to agree with the decision? Anyone familiar with what these clauses are called and how they are structured?

This is just a general question. I'm aware of three start-ups that are currently struggling with this (thankfully not mine!). One of them will probably be merged with a smaller (yet successful) start-up. The new entity will assume the smaller company's name and the parent (with the money) will be essentially shut down. The other two are just going to be shut and the money returned. So, I'm curious about that process.
joestudz 12/4/2012 | 9:19:22 PM
re: A Fight for Cash at Terabeam <to a="" cash="" gain="" in="" on="" stock="">

What stock gain. Company is not public so do not believe there has been any stock gain.

Only gainers might be:
1. Founders and employees who have ownership via "sweat" equity
2. the guy who bought Lucent ownership at 25 cents on the $

Might be wrong, but believe everyone else will get back just a fraction of what they put in.

BlueWater66 12/4/2012 | 9:19:20 PM
re: A Fight for Cash at Terabeam Yup. Because it is an all Common deal, the original founders and the Vulture who bought the Lucent portfolio have figured out that they can transfer some of the increased valuation from later rounds back into their own pockets. In their case, it is a stock gain. But, they're tanking the company to get at the money.
laserbrain 12/4/2012 | 9:19:19 PM
re: A Fight for Cash at Terabeam Lucent put in $450 mil. of this ~$600 mil Terabeam has landed. If Rieschel (at 22%) is the largest stockholder, let's say LU got 20% equity. This guy buys LU's stake for $.25 on the $1.00?! No way. That means he would have put up $100 mil of his own money. My guess is that he paid waaaay less, maybe $10mil. (LU sold its 2000-employee INS services division for less than $50mil.)

Now, the company has ~$225 mil left. Probably burning $5mil/month. Our hero is entitled to $45mil. How they ended up as common, I can't imagine, but it's brilliant! They're just divvying up LU's money!

The third round guys will get burned, but they'll walk away with something.

The only alternative is to cut down to 100 or so employees and build a profitable enterprise, but I don't think they have the guts to do it.

WiFiGuyCA 12/4/2012 | 9:19:16 PM
re: A Fight for Cash at Terabeam Interesting editorial Mr. FSO -

I just couldn't resists commenting on "they (Optical Access) are alive today fighting fit within the Global FSO market, with a range of point to point solutions, living off revenues." quote;

A friend of mine in the industry commented that you could buy a newspaper/mailbox at Home Depot, an infrared transmitter from a child's "My First Electronics Kit" from Radio Shack, duct tape some Saran Wrap over the front for "weather protection", slap an Optical Access sticker to the side - and you would have not only have saved $15,000 or so off of the original..... but end up with a piece of hardware that looks JUST like it as well!
lightmaster 12/4/2012 | 9:19:15 PM
re: A Fight for Cash at Terabeam Bluewater,

Generally the board of directors in a startup controls enough of the stock to make any decisions on the fate of the company. The common stockholders get to "vote", but their votes don't mean anything if they only control a minority of the shares. Of course, the BOD can't just vote to take the money and go to Maui for a vacation. In most cases, I don't think they are technically voting to "pull back" their money, but to liquidate the company. It just so happens that they have liquidation preferencese. In effect, it's not different than if the company was liquidated in a "fire sale." The VCs get paid first, then the commons stockholders if anything is left.

The VCs are supposed to be maximizing the returns to their limited partners (i.e. the people who put the money into their fund to invest). Sometimes the best thing to do is pull the plug, but they often don't because it is an admission of failure. I know this sounds cold, but putting it off 6 months until the money runs out doesn't help the workers that much. (I am not a VC, by the way)

Sometimes the "merger" of a company with money but no future with a company with more of a chance of success is a good idea, but sometimes it is just the path of least resistance and embarassment to the the VC. It is less embarassing with respect to the first company, and allows the second company to burn cash longer without having to justify more investment to the limited partners.
rjmcmahon 12/4/2012 | 9:19:11 PM
re: A Fight for Cash at Terabeam How they ended up as common, I can't imagine, but it's brilliant! They're just divvying up LU's money!

Today's NYT had an article about 275,000 LU retirees and how their pension benefits are supported by the current employee base of 35,000. It's also worth noting that one of six US citizens is over the age of sixty and the ratio is of senior/worker isn't going to let up anytime soon.

So the brilliant ones, or more accurately the ones who care enough to commit, will help solve these problems. And it's hard see how the single minded goal of going after the cash helps.
realoptics 12/4/2012 | 9:19:11 PM
re: A Fight for Cash at Terabeam Mr. FSO:

Please stop bragging for Optical Access(you made a striking impression that you work for that F***ing company), Optical Access has not paid to many of its vendors, they bought components, used them and never want to pay. They would claim they are short of cash and basically it is a lot of trouble to get the money back. Can't even belive this is happening in America for a company that is part of a publically traded company, MRV, they shall be shamed and do the right thing at least once, shut up!

DarkWriting 12/4/2012 | 9:19:09 PM
re: A Fight for Cash at Terabeam Dude,

You must be in Engineering. Not to excuse the practice but every company out there is playing the slow/no payment trick right now.

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