1. 19
Chapter Nineteen
The Harvest and Beyond
Results Expected
Upon completion of this chapter you will have:
1. Examined the importance of first building a great company and thereby creating harvest
options.
2. Examined why harvesting is an essential element of the entrepreneurial process and does
not necessarily mean abandoning the company.
3. Identified the principal harvest options, including going public.
Teaching Pedagogies
There are four pedagogical options the chapter that you can consider when conducting
class sessions. These notes are organized to enable you to create whatever format and blend of
these teaching plans that you’d like. The four pedagogies are:
1. a lecture or mini-lecture
2. the traditional case study
3. the use of exercises or role plays
4. a combination of the above.
The syllabi earlier in this Instructor’s Manual (pages 28-53) also illustrate how some
instructors have blended the pedagogies.
Lecture Outline
I. A Journey, Not a Destination.
A. Among successful entrepreneurs, the challenge and exhilaration
is primary.
1. They also talk of the venture’s insatiable appetite for
cash, time, attention, and energy.
2. Most plan to retire, and most would do it again.
B. For the vast majority of entrepreneurs, it takes 10, 15, or 20
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2. years to build a significant net worth.
1. In 2002 there were as many as 3.5 million millionaires in
the U.S.
2. However, the real value of $1 million has declined due to
inflation.
II. The Journey Can Be Addictive.
A. For the entrepreneur, the huge workload, many sacrifices, and
possible burnout are real.
B. Maintaining the energy, enthusiasm, and drive to achieve a
harvest may be difficult.
C. Some entrepreneurs wonder if the price of victory is too high.
D. If the entrepreneur doesn’t enjoy the journey, the price may be
too high.
III. First Build a Great Company
A. Wealth and liquidity are results—not causes—of building a
great company.
B. Most successful entrepreneurs get their kicks from growing the
company, knowing the payoff will come if they concentrate on
the money-making part of the process.
Results Expected #1
Examined the importance of
first building a great company
and thereby creating harvest
options.
IV. Create Harvest Options.
A. A paradox: Build a great company but do not forget to harvest.
1. The advice: Keep harvest options open and think of
harvesting as a vehicle for reducing risk and creating
future entrepreneurial choices.
2. The text uses the example of Brian and Nigel and of
Nigel’s unethical approach to harvesting.
3. In a different case, a 100-year-old family business
refused an attractive buyout offer and, two years later,
was forced into bankruptcy.
B. By refusing to explore harvest options, owners may actually
increase their overall risk and deprive themselves of future
options.
C. The text identifies numerous entrepreneurs who sold their
company then pursued other dreams.
1. After selling Parenting magazine to Time-Life, Robin
Wolaner became head of Time’s Sunset Publishing
Corporation.
2. Craig Benson founded Cabletron, brought in new
leadership, then taught at Babson College; he has been
elected governor of New Hampshire.
120 Chapter 19

3. 3. After building Marion Laboratories, Ewing Marion
Kauffman became a philanthropist and sportsman.
D. Entrepreneurs go on to pursue philanthropy, public service, and
community leadership; some do so after harvest, some while
continuing to build their companies.
V. A Harvest Goal.
A. Entrepreneurs who have a harvest goal and craft a strategy to
achieve it are able to go beyond a satisfying job to create value
that can result in a capital gain.
B. Setting a harvest goal can:
1. Help an entrepreneur get after-tax cash out of an
enterprise and enhance net worth.
2. Provide a strategic focus that does not sacrifice
customers, employees, and products and services just to
maximize quarterly earnings.
3. Create a less stressful environment.
4. Open options with other entrepreneurs, bankers, and the
marketplace.
C. “Success breeds success.”
D. Society also benefits.
1. Harvest-worthy ventures provide impact and value added
in a variety of ways.
2. These companies contribute most disproportionately to
technological innovations, to new jobs, to returns for
investors, and to economic vitality.
E. The harvest process results in a recycling of entrepreneurial
talent and capital.
F. A harvest goal is a long-term goal of creating real value added
in a business.
Results Expected #2
Examined the importance of
first building a great company
and thereby creating harvest
options.
VI. Crafting a Harvest Strategy: Timing is Vital.
A. A recent survey found as many as 80% of companies only had
an informal plan for harvesting.
1. Only 15% had a formal strategy for harvest in their
business plans.
2. The remaining 5% had a formal harvest plan written after
the business plan.
3. Selling is often viewed by the founder as the equivalent
to complete abandonment of his or her very own “baby.”
B. Many founders consider selling only when faced with the
possibility of losing the whole company.
1. In a crisis the company is suddenly for sale—at the wrong
Instructor’s Manual 121

4. time, for the wrong reasons, and for the wrong price.
2. Most entrepreneurs find that securing customers and
generating continuing sales revenue are much harder than
they imagined.
C. The Harvest Window.
1. It is better to be selling as the strategic window is
opening than as it is closing, when valuations are high.
2. If the window is missed, changes in the environment or in
the market can collapse the venture’s value.
a. The text uses the example of an entrepreneur whose
real-estate business suffered after the stock market
crash of 1987.
b. After the dot.com bubble burst, technology and
Internet entrepreneurs saw their share prices
plummet while incurring a huge capital gain tax.
D. Crafting such a strategy cannot begin too early.
1. In 1989-91 banking policies that curtailed credit and
lending collapsed the value of companies such as “Cable
TV.”
2. In 2001 and 2002 major companies were forced to
declare bankruptcy in the wake of the dot.com and stock
market crash.
3. Failure to preserve the harvest option, and utilize it when
it is available, can be deadly.
E. Some guidelines in shaping a harvest strategy:
1. Patience.
a. A sensible time table for a harvest strategy is 3 to 5
years, and can be as long as 7 to 10.
b. Don’t panic as a result of precipitate events.
2. Realistic valuation.
a. Greed can be deadly.
b. Companies that hold out for a “better offer” may
find that buyers disappear.
3. Outside advice.
a. Although difficult, it is still desirable to find an
advisor who can help craft a harvest strategy and
yet maintain objectivity about its value.
b. People who sell businesses, such as investment
bankers, have as an incentive commissions during a
quite short time frame.
c. It can take an advisor years to implement a harvest
strategy.
122 Chapter 19

5. VII. Harvest Options.
A. The seven harvest options below seem to occur in the order
presented.
B. Capital Cow.
1. The high-margin profitable venture throws off more cash
for personal use than most entrepreneurs have uses for
spending.
2. The result is a capital-rich and cash-rich company with
enormous capacity for debt and reinvestment.
3. The text uses the example of a health care-related venture
that used its excess capital to buy back company stock
and return to its closely held status.
C. Employee Stock Ownership Plan.
1. Employee stock ownership plans have become popular
among closely held companies as a valuation mechanism
for stock for which there is no formal market.
2. An ESOP is viewed as a positive motivational device
because it creates widespread ownership of stock among
employees.
D. Management Buyout.
1. In a management buyout (MBO), a founder can realize a
gain from a business by selling it to existing partners or
to key managers in the business.
2. Financing can be arranged via banks, insurance
companies, and other financial institutions.
3. However, the managers who want to buy out the owners
usually do not have the capital.
4. MBOs typically require the seller to take a limited
amount of cash up front and a note for the balance.
a. The seller is totally dependent on the ability and
integrity of the buyer.
b. The new management may grow the business
rapidly and show little profit along the way,
devaluing the seller’s return.
E. Merger, Acquisition, and Strategic Alliance.
1. Merging with a firm is another way for a founder to
realize a gain.
2. The text uses the example of two founders who merged
their computer training firm with a larger company.
a. The larger company had a larger customer base and
an internal need for computer training.
b. The two founders retained a 20% ownership and
obtained employment contracts and capital
advances of $1.5 million.
Results Expected #3
Identified the principal harvest
options, including going public.
Transparency Master 19-1
“Harvest Options” gives the
seven principal harvest options.
Instructor’s Manual 123

6. 3. In a strategic alliance, founders can attract needed capital
from a large company interested in their technologies.
F. Outright Sale.
1. Most advisors view outright sale as the ideal route
because up-front cash is preferred over most stock, even
though stock can result in a tax-free exchange.
2. In a stock-for-stock exchange, volatility of the
purchaser’s stock price can decimate the value of the
deal.
3. Often the acquiring company wants to lock key
management into long-term employment contracts.
G. Public Offering.
1. Having one’s venture listed on one of the stock
exchanges is appealing for many entrepreneurs.
2. Yet taking a company public may be far more time and
trouble that it is worth.
3. After the stock market crash of October 1987, the market
for new issues of stock shrank.
a. In 1992 and into 1993, the IPO window opened
again.
b. The SEC tried to reduce issuing costs by adopting
Form S-18 which reduced disclosure requirements.
c. Regulation D created exemptions from regulation
for some companies.
4. The cyclical pattern repeated itself again during the mid-
1990s into 2002.
a. From 1995 to 2000, the IPO markets exploded.
b. Once the NASDAQ began its collapse in March
2000, the IPO window virtually shut.
c. Few signs of recovery were evident in 2002.
d. Depending upon the IPO market for a harvest is a
highly cyclical strategy.
5. There are advantages to going public.
a. Public equity markets provide access to long-term
capital, while meeting subsequent capital needs.
b. Founders and initial investors are limited in the
timing and amount of stock they can dispose of in
the public market.
c. It can take several years after an IPO before a
liquid gain is possible.
d. A public offering contributes to the marketability
of the products.
6. There are also some disadvantages.
Text Exhibit 19.1A
“Number of Recent IPOs”
shows the cyclical fluctuations
in the number of IPOs per year.
Also:
Transparency Master 19-2
“Number of Recent IPOs”
(Text Exhibit 19.1A)
Text Exhibit 19.1B
“Recent IPOs ($millions)”
shows the cyclical nature of the
IPO market based on value of
the offerings by year from 1996
to 2001.
Also:
Transparency Master 19-3
“Recent IPOs ($millions)”
(Text Exhibit 19.1B)
124 Chapter 19

7. a. Survey results show that the focus on short-term
profits and performance results was a negative
attribute of being a public company.
b. Public companies lose some of their operating
confidentiality.
c. Costs of public disclosure, audits, and tax filings
are ongoing.
d. Management has to be careful about the flow of
information to avoid insider trading.
7. The Paul Tobin/Boston Communications Group, Inc. case
at the end of the chapter identifies the key components of
the IPO process.
H. Wealth-Building Vehicles.
1. The 1986 Tax Reform Act severely limited the ability of
a private company to make large deductible contributions
to a retirement plan.
2. An owner can still contribute up to 25% of his or her
salary to a retirement plan each year, an amount that is
deductible and grows tax free.
VIII. Beyond the Harvest.
A. A majority of highly successful entrepreneurs accept a
responsibility to perpetuate the system that treated them so
well.
B. Entrepreneurs contribute to the self-renewal process by:
1. College endowments.
a. Entrepreneurs are the most frequent contributors to
college endowments, scholarship funds, and the like.
b. College buildings and facilities are often funded by
entrepreneurs whose successful firms enabled them
to make major gifts of stock to their alma mater.
2. Community activities.
a. Entrepreneurs often reinvest their leadership skills
and money in community activities.
b. These entrepreneurs lead fund raising campaigns,
serve on boards of directors, and devote many
hours to volunteer work.
3. Investing in new ventures.
a. Post-harvest entrepreneurs also reinvest in the next
generation of entrepreneurs.
b. Successful entrepreneurs know that perpetuating
the system is vitally important.
C. Innovation, job creation, and economic renewal are all results
Instructor’s Manual 125

8. of the entrepreneurial process.
1. Government does not cause this process.
2. Entrepreneurs, investors, and hardworking people in
pursuit of opportunities create it.
3. The marketplace and society are once again allocating
rewards to entrepreneurs.
IX. The Road Ahead: Devise a Personal
Entrepreneurial Strategy.
A. Goals Matter—A Lot!
1. Two anchors of the entrepreneurial process are
preeminent:
a. A passion for achieving goals.
b. A relentless competitive spirit and desire to win.
2. These two habits drive the quest for learning, personal
growth, continuous improvement, and all other
development.
B. Values and Principles Matter—A Lot!
1. The values of Ewing M. Kauffman provide guidance:
a. Treat others as you would want to be treated.
b. Share the wealth with those high performers who
help you create it.
c. Give back to the community and society.
2. A fourth principle can be added: Be a guardian and a
steward of the air, land, water, and environment.
3. It is possible to combine a passion for entrepreneurship
with a love of the land and the environment.
X. Seven Secrets of Success.
A. There are no secrets.
B. As soon as there is a secret, everyone else knows about it, too.
C. Happiness is a positive cash flow.
D. If you teach a person to work for others, you feed him or her for
a year, but if you teach a person to be an entrepreneur, you feed
him or her, and others, for a lifetime.
E. Do not run out of cash.
F. Entrepreneurship is fundamentally a human process, rather than
a financial or technological process.
G. Happiness is a positive cash flow.
Transparency Master 19-4
“Seven ‘Secrets’ of Success”
lists the “secrets” discussed in
this section.
XI. Chapter Summary.
126 Chapter 19

9. Instructor’s Manual 127

10. Answers to Study Questions
1. Why did Walt Disney say, “I don’t make movies to make money. I make money to make
movies”?
Creating and building a venture requires cash, energy, enthusiasm, and drive to succeed.
The enjoyment of the journey is as important as the financial returns. If the entrepreneur doesn’t
enjoy the process, the price of victory is too high.
2. Why is it essential to focus first on building a great company, rather than on just getting
rich?
Wealth and liquidity are results—not causes—of building a great company. Most
successful entrepreneurs understand this. They get their kicks from growing the company,
knowing the payoff will come if they concentrate on the moneymaking part of the process.
3. Why is a harvest goal so crucial for entrepreneurs and the economy?
Entrepreneurs should keep harvest options open and think of harvesting as a vehicle for
educing risk and for creating future entrepreneurial choices and options. Having a harvest goal
can help an entrepreneur get after-tax cash out of an enterprise and enhance substantially his or
her net worth. It can provide a strategic focus that does not sacrifice customers, employees, and
value-added products just to maximize quarterly earnings. It can also create a lighter work load
and less stressful environment.
Society also benefits. Harvest-worthy ventures provide impact and value added in a
variety of ways. These companies contribute most disproportionately to technological and other
innovations, to new jobs, to returns for investors, and to economic vibrancy.
Within the entrepreneurial process, the seeds of renewal and reinvestment are sown.
Recycling of entrepreneurial talent and capital ensures continued private responsibility for
economic renewal and individual initiative.
4. Define the principal harvest options, the pros and cons of each, and why each is
valuable.
A “capital cow” is to the entrepreneur what a “cash cow” is to a large corporation. The
high-margin profitable venture throws off more cash for personal use than most entrepreneurs
have uses for spending. The result is a capital-rich and cash-rich company with enormous
capacity for debt and reinvestment.
Employee stock ownership plans have become popular among closely held companies as
a valuation mechanism for stock for which there is no formal market. An ESOP is viewed as a
positive motivational device because it creates widespread ownership of stock among employees.
In a management buyout (MBO), a founder can realize a gain from a business by selling it
to existing partners or to key managers in the business. Financing can be arranged via banks,
insurance companies, and other financial institutions. However, the managers who want to buy
out the owners do not have the capital. MBOs typically require the seller to take a limited amount
of cash up front and a note for the balance of the purchase price. If the purchase price is linked to
the future profitability of the business, the seller is totally dependent on the ability and integrity of
the buyer. The new management may grow the business rapidly, spending on new products and
people, and showing little profit along the way. This can devalue the seller’s return.
Merging with a firm is another way for a founder to realize a gain. In a strategic alliance,
founders can attract badly needed capital from a large company interested in their technologies.
128 Chapter 19

11. Most advisors view outright sale as the ideal route because up-front cash is preferred
over most stock, even though stock can result in a tax-free exchange. In a stock-for-stock
exchange, volatility of the purchaser’s stock price can decimate the value of the deal. Often the
acquiring company wants to lock key management into long-term employment contracts.
Pursuing an initial public offering, having one’s venture listed on one of the stock ex-
changes, is appealing for many entrepreneurs. Yet taking a company public may be far more time
and trouble that it is worth. The market for new issues has boomed and collapsed several times of
the last few decades. After the stock market crash of October 1987, the market for new issues of
stock shrank. From 1995 to 2000, the IPO markets exploded. Once the NASDAQ began its
collapse in March 2000, the IPO window virtually shut. Depending upon the IPO market for a
harvest is a highly cyclical strategy.
The advantages to going public relate to the ability of the company to fund its rapid
growth. Public equity markets provide access to long-term capital, while meeting subsequent
capital needs. However, it can take several years after an IPO before a liquid gain is possible.
There are also some disadvantages. Survey results show that the focus on short-term
profits and performance results was a negative attribute of being a public company. Public
companies lose some of their operating confidentiality. Costs of public disclosure, audits, and tax
filings are ongoing.
Other wealth-building vehicles exist. The 1986 Tax Reform Act severely limited the
ability of a private company to make large deductible contributions to a retirement plan.
However, an owner can still contribute up to 25 percent of his or her salary to a retirement plan
each year, an amount that is deductible and grows tax free.
5. Beyond the harvest, what do entrepreneurs do to “give back,” an why is this so
important to their communities and the nation?
A majority of highly successful entrepreneurs seem to accept a responsibility to renew
and perpetuate the system that treated them so well. The American system of opportunity and
mobility depends in large part on a self-renewal process.
Entrepreneurs contribute to the self-renewal process in several ways. Entrepreneurs are
the most frequent contributors to college endowments, scholarship funds, and the like. College
buildings and facilities are often funded by entrepreneurs whose successful companies enabled
them to make major gifts of stock to their alma mater.
Entrepreneurs often reinvest their leadership skills and money in community activities.
These entrepreneurs lead fund raising campaigns, serve on boards of directors, and devote many
hours to volunteer work.
Post-harvest entrepreneurs also reinvest in the next generation of entrepreneurs.
Successful entrepreneurs know that perpetuating the system is vitally important.
Notes on Case
“Paul J. Tobin”
Preparation Questions
Students are asked to consider the following questions:
1. Evaluate the situation and harvest options for BCGI.
Instructor’s Manual 129

12. 2. How should Paul think about the process? What should he do with the RFQ
(Exhibit N)?
3. Evaluate the deals struck in 1990 and 1992 (Exhibits H and K.)
4. What do investment bankers do? How do they make money?
5. What should Paul do, and why?
Note especially the reference to several exhibits, and emphasize to students the
importance of spending additional effort on these as they will drive much of the analysis and
discussion.
Harvesting Strategies: Strategic Sale or IPO?
This two-case series addresses both the strategic sale and IPO option. They occur in the
peak capital markets of 1995 to mid-1996 and are in the cellular telecommunications industry. As
a founding shareholder and director, the text author, Professor Jeffry Timmons, had intimate
knowledge for the development of the case and teaching note. The first case (Tobin) traces the
development of a venture capital backed start-up in 1990 to the late summer of 1995, with
annualized revenue approaching $40 million. GTE Sylvania is expressing serious interest in
acquiring the company. Tobin, the founder/CEO, gathers valuation books from leading
investment banks in preparation for the November Board meeting. The valuations are in the $55
to $90 million range, the upper end for an IPO. The major decision is what to do and when.
The second case (Boston Communications Group, Inc. in Chapter 20) is just prior to the
early February 1996 Board meeting. It reveals some due diligence by a Director and the CEO that
significantly changes the valuation ranges originally proposed by the investment banks to the $210-
300 million range! This is a stunning development that provides enormous learning opportunities.
Use of the Paul I. Tobin Case
This case enables students to examine the anatomy of the harvest concept, particularly the
strategic sale and IPO process, in great detail. The sequential nature of the case and the startling
valuation changes thoroughly challenge students to reexamine all of their knowledge and beliefs
about the IPO process and the role and veracity of the investment banks.
The case is complex and requires substantial preparation, but is packed with learning. It is
effective with undergraduates, MBAs, venture capitalists (Professor Timmons uses it in
Kauffman Fellows Program modules), and practitioners.
Positioning and Objectives
One of the most important concepts for entrepreneurs and suppliers of capital is the
harvest. This case takes us through the anatomy of the process and explores the minefields and
breathtaking vistas along this journey. It requires careful preparation and attention to the details in
the exhibits noted in the preparation questions.
The learning focus and content issues in the case explore and examine:
• Value creation and value realization through harvest and exit strategies, and
inherent conflicts between the various constituencies, especially investors and
management.
• The nature and sensitivity of capital markets timing.
• Valuation methodologies and the selection of investment bankers.
• Managing and orchestrating the harvest process.
130 Chapter 19

13. • Deal structure and deal consequences.
• The role of CEO, directors, venture capitalists and investment bankers in the
process.
Class Discussion (1 to 1½ hours)
A. Opener and Votes
• One vote will anchor the discussion. Should BCGI:
Go Public ASAP ________
Strategic Sale ASAP ________
Build more value for 2-3 years _______
• What should Tobin do? How should he think about this process?
This is a good opener to focus immediately on a discussion and analysis of the basic
decision. The votes will drive the discussion and provide a basic layout for your chalkboards with
pros and cons for each of the three areas. What value has and is being created? When will this
value be created? Here the big issue is, is it too early for a harvest?
The discussion needs to be pushed beyond the first layer of pros and cons to an
understanding of who and how the decision will actually be made. Pose this as a question. The
discussion should look to the role and motivations of the venture capitalists who control the
Board and majority ownership at this point. A good probe here is: What might be their IRR
requirements and what has to happen to the valuation for them to achieve this? Their timing
requirements, e.g., what is the age of the fund? If it is nearing its natural life expectancy (10 to 12
years typically) ,then there is additional pressure beyond IRR targets to achieve liquidity in the
portfolio companies such as BCGI.
What are the company’s capital requirements?
This discussion gets at the rationale and motivations for an IPO. If the company doesn’t
need the capital, then why will it go public?
What should Tobin do with the exhibit about a “request for quotation” from EASEL
Corporation’s IPO?
The EASEL RFQ has been included in the case, along with evidence that Tobin and
Kahn actually met. It is here to get students to examine it carefully, in order to understand the due
diligence and preparation by the company. It highlights which questions are important when and
why they are included, in order to reveal the bankers competence and motivations. A good
summary question after this discussion is: When might an RFQ like this be a brilliant tactic, and
when might it backfire? Thoughtful students will quickly put it in the capital markets context of
how hungry underwriters are for new business at the time. Clearly, the first half of 1991 (EASEL)
was dead compared to l996.
The discussion can transition to a generic question: Who should be a public company?
This topic can explore the criteria investors look for in IPO candidates, e.g. typically $20 to 30
million or more in revenues, several quarters of profitability, substantial growth prospects,
excellent management team, etc. This is an excellent point to revisit Text Exhibit 3.8, “Criteria
for Evaluating Venture Opportunities,” to link the start-up to what is attractive in the public
markets for initial offerings. One can quickly see the logical extension.
B. Additional Discussion
Instructor’s Manual 131

14. Timing issue: When should BCGI sell or go public?
The timing issue is a major one always. Here the students need to pay close attention to
the data on the capital markets and the timeline associated with the completion of either a sale or
IPO. The revelation that from today it takes 6 to 9 months under favorable capital market
conditions to complete an IPO and at least 6 months for a sale is important for them to grasp.
Push one or two students to say what they believe the market will be, and what is the basis of
their reasoning? What are the implications? The sobering answer is we do not have a clue what
the market conditions for IPOs will be in 3, 6, 9 or 12 months, just witness the NASDAQ collapse
in 2001.
The issue of building value over the next 2 to 3 years is important here. The business plan
financials show that most of the value creation is 3 to 4 years hence, e.g. 2000 when sales reach
$200 million. It poses a serious conflict between investors who want to cash out and management
who know the company is cheap now vs. in 3 to 4 years.
Valuation issue: What is the company worth? When? To whom? How do they get to the numbers?
This part of the anatomy lesson will focus on the valuations presented in the exhibits by
the investment banks. There is quite a range here, and this raises many issues regarding the
methods and logic for arriving at a valuation. Numerous methodologies are included in the
exhibits, which are worth examining and discussing in detail. The essence here is to see ranges
and the nature of comparables and how, at the end of the day, the valuations are driven first and
foremost by what is happening recently in the capital markets. This latter issue turns out to be key
in the second case. Be sure students note and understand the comparable companies that BCGI is
positioned with: basically plain vanilla order processing, billing, and related service firms such as
ADP.
Role of Investment Banks: What do they do? How do they make money?
This can be a revealing discussion of the economics of the investment banking business.
Larger commissions and fees are earned on IPOs and merger work than on any other piece of the
business. Research is a loss leader.
Deal Structures—1990 vs. 1992: What happened here and why?
The two exhibits are very valuable to examine since they reflect a major change in the
deal structure, precipitated by a failed initial business strategy. Of prime importance is getting
students to figure out who gets what under each deal, and what has to happen for the VCs and for
management to achieve a home run on the investment. The put-call arrangement was crucial in
preserving upside for management. What must the investors believe about the company’s future
prospects and ability to achieve its financial forecasts if it agrees to the 1992 deal? What are the
consequences and implications for both investors and management if the company meets or
exceeds its projection; and if it falls considerably short? Students who analyze this carefully will
figure out that the new deal enabled management to realize a major upside if, and only if, they
performed very well.
Transition to Second Case in Series— Boston Communications Group, Inc. (BCGI)
Teaching Tip: Read the first paragraph in the BCGI case in Chapter 20 aloud to the class.
They will be stunned by the revelation that the IPO valuations have suddenly increased by two- to
threefold to $200-300 million! How can this be? How could this happen? Why did this happen?
Challenge the student: “As you contemplate these issues in the BCGI case for the next class also
come prepared select an underwriter and define specifically what you believe should be the
132 Chapter 19

15. number of shares and offering price for an IPO.” This is a very effective technique if you have
not tried it, to rivet students attention on the next class and to motivate them to prepare.
Special thanks to Professor William Sahlman for his contribution on this case series and
the Theory and Reality of IPOs.
Instructor’s Manual 133