Chapter 7 - The Secondary, February 3 - March 28, 2000 - Episode 3Listen to podcast
“Bon appetit,” says Joe. He attacks his t-bone with gusto. Joanne eats a trout very carefully, although she has been assured that it was both raised in the wild and deboned. Larry examines the mushrooms that surround his venison.
Franklin toys thoughtfully with some sort of ragout on wild rice. “We can do it with the shoe,” he says with his mouth full. Some ragout and a few grains of wild rice are attached to his lower lip.
“I don’t understand,” says Joanne.
“Go ahead,” says Larry. “No, wait. Joanne, the ‘shoe’ is the underwriter’s over-allotment.”
“I know that,” says Joanne after swallowing quickly.
“Just so we’re all on the same page,” says Franklin, “we granted Barcourt a standard over-allotment of fifteen percent of the shares offered. So they have thirty days to buy 450 thousand more shares at the offer price. Same kind of thing they had in the IPO, and they bought the shoe within a week of when we started trading. We’ve been divvying this up based on the offering but ignoring the shares in the shoe.”
“Aren’t they usually divided the same way as the rest of the offer?” asks Joanne.
“No law that says they have to be, as far as I know,” says Franklin. “I can remember other transactions where the shoe was handled differently.”
“So can I,” says Joe.
“So let’s establish that the shoe is entirely from selling stockholders,” Joe continues. “That gives us another 450 thousand shares to play with. If we say that another 100 thousand shares from the shoe go to the management pool…”
“Still not enough,” says Larry.
“Let’s start here,” says Franklin.
“I’m not agreeing; I’m just listening,” says Larry. “If I say ‘Okay’. It means ‘Okay, I understand the math,’ but it doesn’t mean I agree.”
“Right,” says Franklin. “So that makes the total pool for other selling shareholders 1.95 million shares. By the time the shoe is sold, we’ll each have over eleven percent. I can live with that, Joe? Joanne?”
Joe says: “I think I can sell my partners on that.”
“What do we have if the shoe doesn’t sell?” asks Joanne. “We’re back to nine something, right? We’re under ten percent. I can’t do that.”
“The shoe always sells, at least these days,” says Franklin.
“I don’t see Big Router accepting the uncertainty,” says Joanne. “We need a real ten percent.”
“Okay…” says Larry.
“Is this ‘Okay, you understand’ or ‘Okay, you accept’?” asks Franklin.
“This is ‘Okay, I have another idea that I think gets us all where we need to be’.”
“Go ahead,” Joe says. “Don’t know how many more numbers I can take.”
“First,” says Larry, “I can’t ask the other members of the management team to play this shoe game. Too complicated for too few shares.”
“That’s what I said,” says Joanne.
“You have lots of shares,” says Larry. “But I can solve your problem, too.”
“I don’t have a problem,” says Joanne.
“Okay,” says Larry, “you don’t have a problem. Will you please let me explain what I’m proposing?”
“Thank you. Since I can’t ask any other members of the management team to get involved with the shoe, Louise and I will have to take all the risk on that. Remember, we’re pretty much agreed that sixty-five thousand for Aaron and Frank Folger is right and 100 thousand for Donna…”
“I don’t agree that Donna has to get to sell 100 thousand,” says Joanne.
“She’s key to getting this secondary done and to our relationships with the financial community. It sends a bad signal if she gets less,” says Joe. “I think we should go with Larry’s recommendation on this.”
“So that’s 250 thousand shares for the rest of the management team…”
“Two-hundred thirty thousand,” says Franklin.
“Right, Franklin — 230 thousand,” Larry says. “I must be getting tired. So if we allot 500 thousand shares from the base offering to management, that’s 270 thousand shares for Louise and me. Less than four-and-a-half percent of what we have. I don’t like that, but in the interest of the rest of the team and with some upside I’ll take it.”
“But Big Router can’t take the risk…” Joanne objects.
“I’m getting to that,” Larry says. “Let’s give Big Router what it wants: ten percent from the basic allotment. That pushes the others down to only eight percent in the initial but they get compensated in the shoe. When the shoe goes, Louise and I get another 100 thousand shares to sell, which brings us over five percent and the rest goes to the other VCs so they come out just shy of eleven percent.”
“But then Big Router isn’t being treated like the other VCs,” Joanne protests.
“Which do you want,” asks Larry, “a guaranteed ten percent or to be treated like the other VCs? They’re willing to wait for the shoe. You’re not. Make up your mind.”
“Can I see it on paper?” asks Joanne.
“Not at the Harvard Club,” says Larry. “I’m tired, but we can go somewhere else.”
“No, just go over the numbers for me again,” says Joanne.
“I can buy it if we get to eleven percent after the shoe,” says Franklin. “That means that your share of the shoe is only seventy-five thousand.”
“Thanks a lot,” says Larry. “Joe?”
“I can sell it if we get eleven percent after the shoe. That’s my bottom line, too.”
“Joanne?” asks Larry.
She looks at Joe. No response. She looks at Franklin. He winks openly.
“Okay,” she says. “Okay. Just in the interest of keeping everyone happy.”
Larry leaves for home; Joanne heads for the ladies’ room.
“It worked out pretty much like we thought it would,” says Franklin. “Our boy’s pretty tough even without sleep, but this is about where we thought we’d end up allowing for Big Router’s sudden need for cash. I’m selling all my Big Router shares and everything else in that part of the industry, though.”
“Yeah,” says Joe. “It helps with him being on my home ground. Did you see his face when he couldn’t use his computer?”
“He was still pretty quick with his numbers, though,” says Franklin. “I knew he was cracking when he broke the silence after he bluffed with not doing the secondary. I wish you’d been able to shut Joanne up more, though. I think he was closer to walking because of her than the issues.”
“Women are genetically incapable of using silence as a negotiating weapon except against their husbands,” says Joe. “God bless ’em. Not sure she didn’t soften him up some though. He was grinding his teeth when she kept flipping back and forth between wanting to be treated like other VCs and wanting ten percent guaranteed.”
Franklin says: “She was dumb to give up part of the shoe, but maybe she’s right that she couldn’t have sold it to the idiots at Big Router Ventures.”
Franklin leaves shortly after Joanne returns freshened.
“Did you and Franklin plan that in advance like Larry said?” she asks. “I mean did you do good cop/bad cop on purpose? I really want to learn.”
“No,” says Joe. “Franklin and I didn’t discuss this in advance at all. It just worked out.”
“I hope I did the right thing,” says Joanne. “I had a really hard time convincing the investment committee at Big Router Ventures that we should sell any. It really is against our policy and they were afraid it would send some kind of signal that we know something bad about hackoff — I HATE that name. But, in the end, they bought the argument that we already have an outsized gain and that it doesn’t hurt to act like real VCs every once in a while. I was surprised, actually, that they gave in. If it goes way up, they’ll never let me forget it though. I hope you’re right that this is the right thing to do.”
“It’s the right thing to do if you want to be a VC even if does climb from here,” says Joe. “I’m not saying it won’t. Wouldn’t have left as much on the table if I lost faith in the company. But there’s a time to lock in some gain and this is it. Why do you suppose they gave in? Does that tell us something about Big Router’s quarter?”
“I can’t imagine we’re having a down quarter,” says Joanne. “Everybody buys from us, I haven’t heard anything bad. I do appreciate your mentoring, Joe. Thank you.”
Later that night, Joe makes two calls. One is to Harvey Maklin’s voice mail at Barcourt: “Hello, Harvey, it’s Joe Windaw. You’ll get a call tomorrow from Larry Lazard to talk you into letting selling shareholders do two-thirds of the secondary and all of the shoe. Except for the shoe part, that’s what we discussed earlier but, of course, don’t tell him that. Feel free to give him a hard time before you agree; it’ll do him good. Give me a call when you want to hit some balls. See ya.”
The second call is to his broker: “Sell all my Big Router at market and work off the Windaw & Wallar position in Big Router as quickly as you can. Very quietly. Thanks.”
Windaw & Wallar has a lot of Big Router stock because Big Router used its stock to acquire several companies which Windaw & Wallar has funded.
“How did it go?” Louise asks sleepily as Larry climbs into bed.
“Not too bad,” says Larry. “That bitch Joanne wouldn’t shut up and I had a raging headache and I never should have agreed to meet on Windaw’s turf at the Harvard Club and I know they set this up for when I was tired. Oh yeah, and suddenly Big Router wants to sell, too. But still, we’ll get about what I thought we’d get. You and I will sell 320 thousand shares. That would be only about forty-eight million, figuring the stock stays where it is and, of course, we have to pay taxes on that.”
“We should be able to get by. Good job,” says Louise snuggling up to Larry’s back. “Tell me in the morning how everyone got what they wanted when there wasn’t enough to begin with and now Big Router is selling, too.”
“Right, and remind me in the morning to sell all our Big Router.”
“You’re not selling them because they’re selling hackoff, are you?” asks Louise.
“No,” says Larry. “I think they’re going to have a bad quarter.”
Even later that night, a waiter at the Harvard Club calls his brother who happens to be a stock broker. “Sell Big Router,” he says. “They’re going to have a bad quarter.”
“Right, anything else, bro?”
“Ever hear of a company called ‘jerkoff’ or something like that?”
“Can’t think of one. Porn? Anything else you remember about them?”
“CEO is named Larry Lazard. I seated him. They’re going to do ‘second’ they said; that mean anything?”
“Yup. I got it. Lazard is head of hackoff.com stupid fucking name. Were they talking about a ‘secondary’?”
“Yeah. That’s it, a secondary.”
“Thanks for the tip.”