by W. E. Pete Peterson
Copyright 1993, 1998 W. E. Peterson
The Battle for Custody
Starting a software company in the 1980s usually involved four rounds of financing. In round one, the founders used their own money, and money begged and borrowed from friends and relatives, to do market research and write a business plan. In round two, the business plan was shown to private investors to raise money to finance development of the product. Once a product was developed, the founders went back to their investors, and perhaps to a few new investors, for more money to pay for round three, the product roll-out. If the roll-out was successful and customers actually bought the product, round four was the big pay off. The IPO, or Initial Public Offering, was when everyone who contributed money in rounds one through three sold some of their stock to the public to make a bundle. By the end of the four rounds, the founders normally owned less than one fourth of their company, but that was the price they paid for the chance to make a few million dollars right away.
SSI was not financed in the usual manner. Bruce and Alan skipped round one altogether--they went ahead with product development, having no idea of the size of their market or their chances of success. They financed round two, the product development, with their own work and some help from Orem City and Eyring Research. Don Owens was responsible for the product roll-out, and as with rounds one and two, he did it without asking investors for money.
Don Owens was a forceful salesman. He was about 6'1" and had a large barrel-shaped chest. He did not give the impression of being overweight, but looked like a guy who had played football in high school. He was gruff, stern, and not necessarily one to smile. Unlike Alan Ashton, who always flashed a big grin whenever you saw him, Don Owens was all business. He dressed well, drove nice cars, and had a beautiful wife and two good-looking children. He looked the part of the shrewd and successful businessman. He loved to wheel and deal, and he knew how to close a sale.
Although an amount of $1,000 was carried on the books as the money the owners originally contributed to start the business, not one of the three actually invested any of his own money in the company. The thousand dollar figure was pulled out of the air, because the real number was too hard to explain. As I understood it, the SSI bank account was opened with a check of $7,000 made out to Don from Levi Strauss; the money was a headhunting fee Don had earned for helping the jeans maker find a new employee. The $7,000 did not stay in the company for long, however. Within only a few weeks of the loan, Don was selling enough software from his home in California to pay himself back.
Don's first customer was Itel, his employer. Itel was in the leasing business, and one of the things they leased was Data General computers. They happened to use DG computers as well. In November of 1979 Don sold them a couple of copies of P-Edit, and later in March of 1980 he sold them SSI*WP. One customer was all Don needed to get going. Using Itel as his reference account, he began talking to companies with Data General computers, some of which were leasing clients of Itel. When one of them showed interest in the product, he would jump on a plane to close the sale. Each time he made a sale, he asked for a letter of recommendation.
Once he had a few of these letters, Don used them repeatedly to promote SSI*WP. He sent them to computer trade publications along with his press releases. As the publications began mentioning the new product, he sent the letters and a one page brochure to companies responding to the news stories. If a company expressed more interest after reading the letters, he had Bruce send them a demonstration copy of the software.
Don always tried to sell the product for list price, but he was not afraid to make a deal to close the sale. He was tenacious when it came to collecting the money, always extracting a promise of when the check would be in the mail as he made the sale. By June of 1980, Don had enough confidence in the new venture to quit his Itel job and move his family to Utah.
A few of the inquiries SSI received came from Data General's dealers. Data General sold some of its computers direct to customers and some through OEM's. The term OEM stood for Original Equipment Manufacturer, and it described a dealer that purchased DG computers, added some software of its own, and then resold the computer/software system. The added software, or added value, theoretically made the DG computer into something new and original. At the time DG did not want to sign resellers unless they added value to the DG product. I am not exactly sure why they formulated this policy, but back then the successful computer manufacturers were in control, and they tended to have a lot of dumb rules.
If a DG OEM showed interest in our products, Don asked them to pay full price for one copy and offered to sell them additional copies at a discount. The first copy had to be used in-house (in-house meant inside the company). The additional discounted copies could be marked up and resold to the OEM's customers. The amount of the discount ranged from 10-80%, depending on how the negotiations went with each reseller. The discounted copies sold through resellers soon accounted for about half of SSI's sales.
Late in the summer of 1980 Don put together what was truly a big deal for SSI at the time. DCC, a communications company with offices in Memphis and London, was interested in writing its own word processor. DCC sold Data General computers, but instead of using DG's operating systems, it used an operating system of its own creation. Although SSI*WP would not run "as is" on DCC's operating system, Don convinced the company to take SSI's source code and use it as the basis for its word processor. His asking price was $100,000, and DCC agreed.
By the time I came in October, Don had enough reference letters and sales leads to insure a reliable cash flow. He had pulled off the impossible. Without raising any money and without spending a dime on advertising, he had successfully introduced SSI's products and established a reasonably good dealer network. The company was making enough money to pay decent salaries to its owners; to get them company cars; and to hire another programmer, a part-time bookkeeper, and a part-time office manager. (Alan chose a white Chevy truck with very few extras as his company car, which was very much in keeping with the 29 cent hot dogs he bought for lunch on his way from BYU to SSI most workdays.)
Bruce and Alan should have been elated with the success, but they were too tired to get excited. Bruce was still working fifteen hour days, six days a week, and teaching one or two computer science classes at BYU. Alan now had enough money to fulfill his goal of finishing his basement, but he was teaching a full class load at BYU and spending at least 40 hours a week programming for SSI. The new programmer, Dan Fritch, was hired not to lighten their load, but to write a new version of SSI*WP for another DG operating system called RDOS.
I was the sixth person to work in the business, and the first person to quit. On my first day there, the owners told me SSI did not withhold payroll taxes for any of its employees. Right then I decided to return to the dairy case. My first rule of business was to have a healthy respect for the IRS.
Bruce, Alan, and Don asked me why I was quitting. I tried my best to explain the differences between an employee and a subcontractor, as well as the problems they faced by treating everyone as a subcontractor. They listened closely to my explanation and asked a few questions about basic bookkeeping and accounting. These questions turned into a job interview for the position of financial manager. Later that day they offered me a full-time job for $24,000 a year starting November 1, with the promise they would withhold taxes from my paycheck.
I immediately abandoned the drapery business for the regular paycheck SSI offered. In theory, the drapery business paid each partner $1500 per month, but that happened only when we could afford it. To keep the business going, we had to keep our expenses in line with sales. The only way we could do that was to pay ourselves only if we had the money. To stay in the black, some months we paid ourselves only $750, and one month that summer we received nothing at all. $2000 every month was more than enough incentive for me to move to SSI. My brother and brother-in-law tried to keep the drapery business going for another two years, but they could not make any money, even with one less paycheck to worry about.
Although my business knowledge was limited to what I had learned at my previous jobs, I was still an expert compared to the owners of SSI. The situation reminded me of a saying I had heard in South America while on a mission for the Mormon Church, "In the land of the blind, the one-eyed man is king." Although the owners were very good at writing and selling software, none of them had much experience with running a business. Besides not withholding taxes, they had not held organizational meetings for incorporation and had no corporate books. While they each claimed to own one third of the company, they had nothing in writing and had not issued stock certificates. They had no business license (something Bruce discovered), and they had a bad habit of calling their expenses "miscellaneous," rather than keeping careful track of how their money was spent.
Until I came Bruce would spend twenty minutes or so every afternoon in line at the post office to mail out the information packets. Too impatient to follow his example, I bought a little food scale and some postage stamps, and with a postal chart from the post office, I set up my own little postal center in a closet at the office. This was a fairly remarkable thing in their eyes--to be able to mail small packages without standing in line.
Most of the things I did were very basic and easy to do. I found an attorney to write the by-laws and the minutes of the organizational meetings. I had stock certificates printed. I arranged for the owners to have wills written for themselves and their wives. I put together a monthly budget. I saw to it that a new phone system with a real hold button was installed.
It was not easy, however, to get the owners to withhold payroll taxes. Don had a friend who was an ex-IRS agent, and SSI paid him to give tax advice to the company. He disagreed with me about the owners needing to withhold taxes from their pay, since Alan and Bruce were teaching at BYU and Don always seemed to have something else going. The ex-IRS agent changed his mind, however, just one week before the end of the year, when he heard a rumor than all subcontractors whose last name began with an O, like Owens, would be audited. We paid the FICA taxes in a lump sum at the close of the year, and luckily, the IRS levied no penalty.
My most enjoyable assignment during my early days at SSI was learning SSI*WP. Computers had changed a lot in the fifteen years since I had last touched them. Word processing had not been invented when I was a kid. A few seconds at the keyboard was all it took to convince me that word processing was magical. Writing was at least ten times easier with the computer. A year or so later, I would hear a Data General vice president say that a computer was at least as seductive as a beautiful woman, and I would understand what he meant. I was captivated by the computer.
The only hard part about learning SSI*WP was getting time on the computer. The company still used the Orem City computer for most of its programming. We had only a small DG computer (small in power, but large in size) in the office, and Dan Fritch, the programmer for the RDOS project, needed it to do his work. Unlike AOS, which allowed many users to run many different programs at the same time, RDOS allowed you to do only two things at once. Since Dan liked having P-Edit and the assembler running at the same time, running SSI*WP was an inconvenience. It slowed him down, but for a couple of hours each day he would use only P-Edit and let me use SSI*WP so I could get the letters and information packets out.
In January of 1981 I made what may have been my biggest contribution to the eventual success of WordPerfect Corporation. When the rough draft of the by-laws came back from the attorney, I noticed a three-fourths majority vote was required to elect or remove members of the Board or officers in the corporation. Given the distribution of the shares, this was the same as requiring a unanimous vote to make any significant change in the organization. On my own I asked the attorney to change the by-laws to require only a two-thirds majority, giving any two of the shareholders the ability to control the corporation. Don agreed to the by-laws without question. He cared little for small details.
I suggested the change because the owners did not seem very happy working together, and I was hoping to give the company a chance to survive if the three ever split. It was not in my mind to get rid of Don, but I wanted Bruce and Alan to have some leverage if a battle for control of the company were to take place.
The differences between the owners was substantial. Bruce and Alan did not like Don's habit of calling himself CEO of SSI, since the three had agreed to run the company as equals. They also did not like Don's tendency to oversell the product. I remember a time when a potential customer called asking Don if we would support footnoting in the near future. Don put down the phone (this was before we had a hold button), and asked Alan when footnoting would be ready. Alan thought it would take six to nine months. Don told the caller footnotes would be in the product in three months. Alan heard the response and was very angry--one of only three times I saw him angry in twelve years. Don defended himself by saying he knew the customer would like our product enough to wait patiently for footnotes, an assumption which turned out to be true.
Alan and Bruce were also a little discouraged with Don's frequent habit of declaring bonuses for the owners. There seemed to be a bonus for every occasion: a Christmas bonus, a spring landscaping bonus, a back-to-school clothes bonus. The most expensive bonus was the DCC bonus. When the first check from DCC came in for $40,000, Don declared a $10,000 bonus for each owner and a $6,000 bonus for Dan Fritch for helping with the project. After the bonuses were approved, Don remembered a $15,000 finder's fee owed to Verdugo Computers, one of our dealers, for introducing Don to DCC. After we received the big check, Don went ahead with the entire amount of the bonuses, even though that left us $11,000 in the hole on the transaction. Bruce and Alan were happy to take their share of the bonus monies, but they would have preferred to keep more of the money in the company.
The biggest disagreement between the three owners had to do with raising money. Don was impatient to get to round fou r and make a lot of money, but Bruce and Alan were not ready to sell stock to outsiders. Don seemed to be very discouraged to find himself stuck with partners who cared more about controlling their company and their products than they did about making money.
By the end of January I had done everything I could think of to make us financially legal and proper, and I was running out of things to do. Since I had time on my hands, Don made me a sales manager, even though I knew very little about selling software. I had never even heard of the word "schmooze," a process very important to the job. When you schmooze, you make friends and build relationships in the hopes of convincing people to purchase your product or influencing them to encourage others to purchase it.
After only four months on the job, I was beginning to feel comfortable around the computer. As Don suggested in my first interview, I was reading the trade publications for a few hours every night, and the acronyms, like RDOS, AOS, VM/CMS, and MVS, were starting to make sense. In my spare time around the office I was learning how to mount tapes, initialize drives, and install software. The hardest part was understanding all the new jargon. Years later I would understand that most of the terms were generally descriptive and very unimaginative, but back then I was afraid of misunderstanding something. "Mount a tape" meant to stick a tape on the tape drive. "Initialize a drive" was a command to wake up a disk drive so it would be ready to do some work. What seems simple and straightforward now was very confusing at first.
Despite my inexperience, I became a traveling salesman for SSI, because we had more companies interested in our product than we had people to travel. For my first trip I was handed an airplane ticket and a reservation at the Hyatt and told to visit a law firm in Phoenix to answer a few questions and pick up a check. I made it to the law firm, answered the questions, and picked up the check without a hitch. When I later made it to the hotel, I was elated. I was not sure before I left home if I could figure out how to rent a car or check into a fine hotel, but I did it. I was awed by the adventure and especially by the beauty of the Hyatt Regency. I had a lot to learn.
In February Don asked me to go to Europe to train a new dealer in Holland and to meet with potential dealers in Switzerland. This was truly an adventure for me. In the seven years I had been married, I had spent only one night away from my family. Unfortunately, the trip was not all excitement and fun. I arrived in Europe in the middle of winter, and the dealer in Holland worked me sixteen hours a day. I did not see any sunshine for one whole week, because they picked me up at the hotel at 7:00 a.m., in the dark, and delivered me back at 11:00 p.m. Staying in the hotel was lonely and boring. I lay awake for hours each night staring at the ceiling, because the TV programs were all in Dutch and I had not brought enough books to read.
The trip on the train through Germany and on to Switzerland was beautiful, however, and somehow I found my way to the right hotels and eventually to the DG office in Zurich. I would have felt good just getting to all the right places at all the right times, but, luckily, I was also able to sign up a dealer from Bern and return home with a check in my pocket for $5,500. That was quite an accomplishment for someone who had never traveled abroad or read a train timetable before.
Although SSI*WP was available only in English at first, we had plans to create many international language versions. As we found dealers in various countries, we asked them to translate the program menus and help files into their native languages so we could develop versions in those languages. We sold the translated programs with English documentation, and in some cases we worked with our dealers to publish a translated manual. The fact that DG customers had few word processing choices made our job fairly easy in Europe.
We were rapidly becoming a big fish in the little DG pond. Businesses with DG computers had few choices if they wanted to do any word processing. They could purchase SSI*WP or they could purchase another computer. The other computers were called dedicated word processors (because the computers were dedicated to doing only word processing). Since the cheapest dedicated word processor sold for about $15,000 per station, our software, which could be used by anyone on the DG computer, was a bargain at $5,500. Our problem was not price. Our software was obviously much cheaper than the cost of another computer. Our problem was convincing customers that SSI*WP could fit on their DG computer without greatly affecting its performance. At the time, most of the computers used in business were purchased for accounting purposes, and the accounting departments were very jealous about giving others in the company any time on them. If SSI*WP slowed a computer down or, worse, if it ever crashed a system, we lost a sale. We were much like a guest, allowed to stay only as long as we were quiet and did not cause any trouble.
The profit margins in the software business were very different than those in the drapery business. With many competitors in the drapery business, we had to price our draperies within 20% of our cost to win half our bids. If even one customer did not pay us, we lost a lot of sleep. With almost no competition in our small software niche, we had no trouble collecting thousands of dollars for a product whose materials cost so little. Although there were other costs for development, marketing, and overhead, we were still working on much better margins than most businesses, including many which are illegal.
As the year progressed, revenues grew and so did the number of people in the company. Dan Lunt, who had done some contract programming for the company in 1980, came to work full-time at the start of the year. By summer we had a receptionist and a part-time person to make tapes. We also started hiring a few BYU computer science students to work part-time. Our small offices behind the donut shop had filled up.
By the summer of 1981 we were starting to get a little competition. Our most aggressive competitor was a company in northern California which sold a product called TIPS, an acronym for Text Information Processing System. By coincidence, the founder of the company was a classmate of Alan's from the University of Utah PhD program. Our other competitor was Data General, which was marketing a product called AZText. Although both were inferior, run-off products, we worried about TIPS because the company's salespeople seemed to stop at nothing to make a sale, and about AZText because it had the support of Data General behind it. Once DG had a product of its own, we were considered a renegade and no longer officially sanctioned.
As the summer wore on, Don did not come into the office more than a few days a month. He spent a lot of his time traveling in search of investors, even though Bruce and Alan told him repeatedly they did not want to sell additional shares. When he was in the office, he pushed hard for new features, so we could stay ahead of the competition. He was also very negative about the future. Don told me he thought we were headed for hard times, because of our limited resources. More than once he talked of the need to raise money, hoping Bruce and Alan would change their minds. Don thought we might be able to sell part of the company for $3 million so each owner could walk away a millionaire. I wondered if he actually believed that our business would slow down, or if it was an excuse to sell enough shares to outsiders so that Bruce and Alan would end up owning less than half the company. I think Don expected any new investors to vote with him and let him to control the company.
Don also started a new company with his wife and a friend from Washington, DC to sell terminals and printers to the federal government. When he did show up at the office, we wondered if he was selling software for us or selling terminals for himself. When he traveled, we wondered if we were paying for our expenses or his expenses.
As the months passed, the level of tension increased. Coming to work was a nightmare. Don would get upset if he was not involved in every sale, but it was difficult keeping him involved when he was not around very much. Bruce threatened to quit a number of times, because of the contention. Shouting matches were common.
In early fall, Don asked me to move to Boston to become the East Coast sales manager. My primary duty was to build a closer relationship to DG, and I was to be paid a commission on all sales in the East. The job looked attractive because it got me away from all the stress and contention. I was tired of being the person in the middle, trying to be loyal both to Don and to my brother-in-law.
We quickly sold our home to Dan Fritch, and soon I was back in Boston looking for a house to rent or buy. I was there for about four days, when I started to have strong misgivings about the move. As I would drive around trying to find a good place to live, tears would stream down my face for no reason at all. I finally decided it was a mistake to move, so I called the office to see whether I would still have a job in Utah if I returned. The extra money did not matter. Boston was not the place for me and my family at that time. Dan did us a great favor by letting us out of our agreement to sell him our house.
In November, Alan and Bruce decided it was time to ask Don to leave. They were tired of the fighting and felt they had plenty of excuses to end the relationship. They called our attorney for instructions. The attorney put together a script for a special meeting of the Board, which was much like the meeting I would attend years later. I was at the meeting to take minutes, with instructions from Bruce to kick him under the table if he lost his nerve. When Bruce and Alan confronted Don with their complaints, Don was very repentant and promised to improve. Even though Alan and I kicked Bruce in the shins repeatedly, he gave Don another chance.
When Don promised to do a better job of working as a partner in a team, I am sure he meant it. It was, however, difficult for him to change. Don was used to running things and he enjoyed being President and CEO of a successful software company. He was good at what he did and probably felt like he was judged by the wrong standards. He likely felt that his results should have outweighed any of his perceived shortcomings. I believe his personality was such that he could not work well with only one vote out of three, especially when Bruce and Alan had the other two votes. To Don, Alan and Bruce were programmers and intellectuals, not businessmen.
Despite Don's promise, conditions in the company did not improve. Just after Christmas Bruce and Alan called another meeting of the Board to tell Don they did not want him to be an officer in the company any more. They were willing to pay him as a consultant for one year if he would help with the sales that were pending, but they did not want him coming into the office any longer. Surprisingly, Don agreed to their proposal, and the motion to remove him as an officer in the company was passed unanimously. Don probably thought Bruce and Alan would regret their decision and ask him to come back in a few months. He may have thought he was in a no-lose situation. The consulting contract paid him almost as much as his salary, and he still owned one third of the company. If the company was successful, he would make money. If the company had trouble, he might have a chance to regain control of it.
We finished 1981 with sales of $850,000, more than double the $400,000 of the previous year. We had no idea how well we would do in 1982, but we were not too worried about the future. The struggle for custody was over, and Alan and Bruce were in control of their company and their products once again.
All in all, Don's contribution to the company was worth all the fighting. While I never understood why he was so eager to sell out, I did admire his ability to sell a product without spending a lot of money. A week or two after he left, I mentioned Don's departure to a customer and tried to explain what had gone wrong. The client, who was a little older than I, stopped me short and would not let me say anything negative about Don. He told me that some people are better at starting a business than they are at running a business. He said that Don should be remembered for what he did, not for what we felt he should have done.