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Optical/IP

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
www.lightreading.com
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SS7 12/4/2012 | 9:09:56 PM
re: A Fight for Cash at Terabeam This company wasted and contiues to waste millions......Its almost criminal.
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.

DW
dietaryfiber 12/4/2012 | 9:19:09 PM
re: A Fight for Cash at Terabeam BlueWater,

You may be mixing a couple of topics, so I thought I would help make sure all the bases are covered.

1 - Liquidation (or for that matter Corporate Sale) is often tied with preferences to people in the VC community. This was mentioned elsewhere.

2 - Performance based funding is now in vogue. Some companies are raising money on the basis that they perform to a plan. Money that was raised in the round could be pulled back (actually never given) if the plan is not met.

3 - The Shareholders are given voting rights or not based on the corporate bylaws. So, voting rights often are with the VCs. The shareholders own the company and what they say goes. I see no basis for legal recourse under this situation. It would be hard to imagine that any shareholder would make money in majority of these situations.

dietary fiber
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!

RO
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.
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!
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.

Liquidate!
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.
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.

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