Friday, June 15, 2007

Founder and Management Equity at IPO: A Rugged-ly Handsome Story

I remember taking a look at Rugged back when I was a VC. As a manufacturer of outdoors telecom network equipment for harsh environments, Rugged got a lukewarm reception from VCs who were then more interested in software than equipment. Now, their ability to secure other forms of funding has yielded results: this week, having given away only 25% of the company to strategic investors, the team finds itself with a successful IPO priced at $13.00 a share, raising proceeds that (unlike other recent smallcap IPOs) will be used for growth, not to retire debt.

A quick read through their prospectus shows that management sacrificed base salary for solid equity stakes in the Company: the founders (including the CEO) retained 15-20% of the company. The CFO holds approximately 1.5% of the shares pre-IPO, while the rest of management received what appears to be between 0.05% and 3.00% stake.

With annual sales just under $30 million, approx. 110 employees and only a few million in net profit, Rugged is a good benchmark for similarly-sized companies in executive compensation. Management teams, take note: here, the non compete provisions match severance paid (as they should): the CEO and CFO would 24 months severance pay and matching non competition period, while other management agreed to 12 months severance and 12 months non compete.

Data points to remember.

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