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Chapter 7 - The Secondary, February 3 - March 28, 2000 - Episode 10

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"Jesus Christ," says Larry after he hangs up the phone, "I don’t believe it.  We’re stuck managing to quarterly results. How many case studies did we look at in B-School like this? Management optimizes for the quarter and loses the company. This sucks."

"We wouldn’t be here if you hadn’t told the analysts to expect an operating profit this quarter," says Donna.

"No one cared if it was this quarter or next quarter or even the quarter after that."

"You gave them that guidance, not me," says Larry  "You’re the one that talked to Braxton."

"This is bullshit, Larry; you know you told me to make the guidance specific. You would have opened the window and shouted it out if I didn’t tell Braxton that."

"Well, look, you didn’t put up much of a fight. You want this secondary to price high every bit as much as I do, maybe more."

"Yeah," says Donna. "I do need this to succeed more than you do. I’m only selling 100 thousand shares not 320 thousand. I’m locked out of the shoe.  You’re the one getting the big bucks even at today’s price."

"Right," says Larry. "You’re only going to make ten million bucks. I’m so sorry you’re getting stiffed. Now do you want to stop whining and figure out what we tell Frank to do about the quarter or do we just let him figure it out himself? Maybe we just don’t worry about the quarter until it’s over. The secondary’ll be priced by then."

"It’s too late not to worry about the quarter," says Donna. "We have Frank’s email."


"I mean if we sell this secondary based on guidance that we’re going to have an operating profit this quarter - guidance that you and I have been saying we’re comfortable with - and then we DON’T have an operating profit, after the stock tanks the investors line up to sue us. I know how it works; my husband’s in the business. But usually management doesn’t make it as easy for the plaintiff’s lawyers as we’re about to. So the question is: What did we know when? If we were just stupid, if we had no possible way to know, if we were affected by a war or a plague or something, then maybe we get away with a settlement that’s not too bad. The lawyers get some money but the plaintiffs get coupons or something. But we’re in it deep.

"The first thing that happens once the suit is filed is all the email gets subpoenaed. There’s this nice note we have here from Frank. ‘Dear Larry and Donna: We’re not going to make the numbers. So sorry. Frank. PS: Now you know and you’re on the hook.’ That’s what he might as well have written. And in case you’re even thinking of deep-sixing Frank’s email - and putting ourselves completely at his mercy, by the way - where do you think he got the numbers? He can’t add two and two by himself, so there were probably fifty emails today and ten people involved in Accounting and Sales putting those numbers together that he sent us. So what do we do now, Mr. CEO?"

"For one thing," says Larry, "we don’t panic. And we stick together or we’re both fucked, as you just pointed out so eloquently."


"We only have two choices," says Larry. "Obviously, we can change the guidance now that we have Frank’s letter. That pisses people off. That tanks the stock. But I don’t see how we get sued since we didn’t hide anything."

"We’ll get sued anyway," says Donna, "but probably we could win. But don’t kid yourself; there is no secondary if we change that guidance. Barcourt’ll pull it so fast your head’ll spin. Their analyst is left high and dry. They can get sued. No way we do a secondary if we change the guidance. And we need to do that secondary. We need to get some more cash into hackoff and we need to take some money off the table ourselves. It’s time we made some money."

"Okay, that’s just one alternative," says Larry. "The other is to make sure that we do have an operating profit. And that means we do some of the short-term shit that Frank is recommending even though we don’t want to so we make the numbers. We hold our noses and we do what we have to do. Certainly won’t be the first management team to have to scramble to deliver what they promised. Hopefully, we don’t have to do this again."

"Hopefully you don’t give any more stupid guidance," says Donna.  "Okay. How do we make the numbers?"
"The easiest thing, seems to me," says Larry, "is you ease up some on those companies who haven’t closed their financing yet; let Frank book some of those sales. You figured out that’s where the problem is. And Frank’s right, if some of them go south, it doesn’t really cost us anything. Not like we have a cost of goods or anything."

"We pay commission to the fucking salesmen," says Donna. "That costs us something. Are you gonna take the commission back if the customer ‘goes south’?"

"Sure, why the hell not? That’ll discourage them from trying to book just any old shit."

"No it won’t," says Donna. "They’ll still throw shit up against the wall to see if it sticks. Doesn’t cost them anything to try, so they’ll do it. Worst that happens to them we take the commission back - if you REALLY do that, which I doubt. Anyway, booking crap isn’t going to solve our problem."

"I sure as hell WILL take the commission back. But why doesn’t this solve our problem? You’re the one who said we’re on plan except for not booking enough of the little stuff."

"Three reasons," Donna says. "One is that even if we allowed all these ‘pre-financing’ companies, we haven’t turned down enough of them that we’ve been getting to make up the gap. For some reason Frank hasn’t told us - probably doesn’t know - new companies aren’t coming in as fast as they did. Two is that we have no real way to value the companies if they haven’t even closed one round of financing, so we can’t book a hell of a lot of revenue from the equity they give us. That’s just one of the reasons we have a rule against equity deals for these wannabes. And three is it’s almost the end of the quarter. We just can’t nickel and dime to a profit in the last two weeks. We’re too far behind."

"Okay," says Larry, "then we gotta run a quarter-end sale and close some of the big ones in the pipeline. That’s what you’re saying."

"I guess. We really don’t want to train customers to wait until the end of the quarter to get a deal. I’ve audited companies that get in that trap and it really sucks."

"Shouldn’t be too much of a problem for us," says Larry. "For better or for worse - this time I think it’s for the better - we sell to new customers every quarter. Not like we’re selling them computers or routers or something and have to come back every quarter looking for new orders from the same buyer."

"I hope you’re right," says Donna. "I mean I hope the word doesn’t get around that hackoff runs quarter-end sales."

"We don’t really run a sale," says Larry. "I’ll be very clear on that. I’ll just give Frank some price discretion and tell him to use it very carefully to close a few elephants. Costs us a little money in the long run but should bring the quarter in where we need it to be. And also you should look again and see if there are some of those little guys in the queue that you can let through and pick up some change."

"You gonna tell Frank this?" says Donna. "You gonna explain the rules to him? What’re you gonna tell him about us letting them book the wannabes?"

"You think I have to tell him anything about that?" asks Frank. "They’re still submitting them. You could just approve a few and then stop approving them when the quarter’s in the bag."

"I’ve got to tell my people something," says Donna. "They know the rules and now I’ve got to tell them to do something they know is dumb. Also, you were going to tell them that commissions are reversible on these. I knew you’d chicken out on that."

"I’m not ‘chickening out’ on anything," says Larry. "I’ll tell him we’re doing a pilot program. Gonna take a chance with a few of the best of these - you decide which, not him - and we’ll see if it works. The rules are: they still need Accounting approval and commissions are reversible. Unless it’s some kind of huge success, we’ll dump it next quarter but I won’t tell him that yet. ...I’ll call him now. You wanna be on the call or a fly on the wall?"

"I’m going to call my husband," says Donna. "I’ve had enough of Frank for one day."

"See ya… Wait a minute. All this quarter stuff reminds me. Did I tell you to sell your Big Router stock?"

"No," says Donna, "you didn’t. You get a hot tip from Joanne Ankers?"

"No," says Larry, "but I have heard they’re not gonna have a great quarter either. Of course, I don’t mean the ‘either’ part. I’m ‘shaw’ we’re gonna have an operatin’ profit, padnuh."

"See y’all," says Donna.


Email, March 23 - 24, 2000

From:    Frank Folger
Sent:    Thursday, March 23, 2000  10:01 PM
To:        All Sales
Subject:    End of the Quarter


I know you all know how important it is that we make our numbers this quarter. I’ve been working with Larry to find ways to make this more profitable for you and a SLAM DUNK.

First the profitable part. There’ll be a TEN PERCENT kicker on commissions for everyone coming in at or above quota! This is your chance to really make money. But you got to make quota. Almost don’t count.

Now the SLAM DUNK part:

We’re having a QUARTER-END SALE. Make SURE your prospects KNOW that. Make SURE they ACT on it. Contracts MUST be signed by March 31 to count. There is NO SLACK. YOU and YOUR CUSTOMERS MUST ACT FAST. Do it! I will automatically approve any discount up to 20%. Try not to do more than that but, if you need more to close, come talk to me.

We are now going to be able to book sales to customers who haven’t closed their first round of financing yet. I made sure management heard your concern about that. We still need approval from the bean counters but the difference is now we’re going to get the approval.




From:    Frank Folger
Sent:    Thursday, March 23, 2000  10:15 PM
To:        Oliver Stonewell
Subject:    ihudson


Why haven’t I seen the paper on this yet? I’m getting nervous. Their CEO and I tee off tomorrow at 1PM. USE THAT to get the contract signed.

Also you know it makes a big difference to the secondary that we get a press release out on the signing ASAP. Don’t let this fuck up the close but as soon as you’ve got their John Hancock on the dotted line it’s your job to make sure they give us permission. I couldn’t get you extra comp for this and I know it doesn’t put any immediate money in you pocket - except it WILL make the stock go up - and I got a promise from Larry which you can trust me to remind him of that we’ll be thinking about the press release when it’s time to do your next option grant.

I’m counting on you, buddy. GO DO IT.


From:    Oliver Stonewell
Sent:    Friday, March 24, 2000  9:02  AM
To:        Frank Folger
Subject:    RE:  ihudson


The extra discount you authorized yesterday did it! iHudson is closed. They faxed me the paper. Had to go to 25% but I know you wont have a problem with this.

Am working on the press release now but the buyer is not all that close to PR. Obviously I’ll do what I can but it’s going to be hard. I’ll certainly earn those extra options.

Hit em hard this afternoon.


From:    Donna Langhorne [mailto: donnal@hackoff.com]
Sent:    Friday, March 24 , 2000  9:40 AM
To:        Larry Lazard
Subject:    FW: End of the Quarter


I assume you haven’t seen the email below I’m forwarding to you from Frank. The fucking idiot declared an end-of-quarter sale.

And says we’re going to approve all the shit wannabes he brings in.

And looks like you approved extra commission for those assholes.

And you probably don’t know that Oliver gave iHudson another 25% off on top of the 50% we already gave them. And that one was supposed to be already in the bag.

I’m really not happy with all this. Maybe you’ll explain to me why Sales gets to run the company.

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Hello, this is the wrong person:

You think I have to tell him anything about that?" asks Frank. "They’re still submitting them. You could just approve a few and then stop approving them when the quarter’s in the bag."

Shouldn't that be 'asks Larry '? Other than that, this is GOOD STUFF!

Good catch. Thank you very much.

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