Which is exactly what Drury did, never forgetting to emphasize the speculative nature of comparing StockMaster's illiquid stock with the stock of public companies. "He presented a fair evaluation of what they were doing and didn't hype the story at all," says John Dunning, a member of the Angels' Forum, who subsequently invested in StockMaster (though he declines to disclose how much he put in). Including Dunning, StockMaster amassed 55 investors for its first round, which was completed last April at $2.50 a share for $3.2 million -- approximately 8% of the company.
Of the 92% of StockMaster equity not issued in the first round, Torrance still held 70%. He hopes to take StockMaster public later this year and expects to keep more than a 40% share -- which is a lot more than he imagines he would have had if he'd gone the VC route a few years ago.
Retaining equity has given StockMaster an edge not only in recruiting but also in making acquisitions. Last year the company acquired one business in exchange for stock and another for a mix of stock and cash. Still, Torrance and Drury have several regrets about how they conducted their first round of financing. "We picked a fixed end date for the round because we thought we had to," admits Drury, who has since learned to cap an investment round at a dollar amount rather than a date. In StockMaster's second round, for which shares are valued at $3.60, the company is shooting for $10 million. Drury also learned how to arrange StockMaster's offering so that if the company is acquired before its IPO, investors will receive an additional payout. But he learned too late of a better way to protect investors. If he could have changed the provisions for StockMaster's second round, he would have included a preferred-stock provision giving all the second-round investors the option of choosing the acquisition price or the share price plus 50%.
Although he's pleased with the networking it took to lure the 55 investors, all of whom put in between $50,000 and $300,000, Drury wishes StockMaster had channeled more effort into recruiting outside board members. (At press time, John Stephens was the only investor who had joined the board.) Then there are the managerial headaches of handling 55 investors. Drury has morphed from CFO into investor-relations manager. "Investor relations has turned into a half or a third of Drury's job," laments Torrance.
In an effort to attract board members -- and reduce its investor maintenance -- StockMaster is considering VC firms for its second round of financing, even though that might mean less equity and control for the management team. "There's always a trade-off," says Jim Nolen, a finance professor at the University of Texas at Austin. "With 55 small investors, no one has enough of a chunk to force an issue. The question is, What else do the VCs bring? It's worth a lot to have someone like Kleiner Perkins opening doors for you. I'd rather own 20% of a big pie than 50% of a smaller one."
Torrance is still debating what the company will do, but he can be certain about at least one thing: StockMaster is at long last shaped like a classic Internet company. In the past year it's swelled to 60 employees, a number that grows by the week. Each day, Drury gets "a steady stream of calls" from across the nation as news spreads about StockMaster's path on the IPO fast track. With the increased spending on infrastructure and advertising, StockMaster now has one other thing in common with standard Web companies: it's no longer profitable.
That's OK with Torrance, who still remembers his glee when StockMaster received its first check, four years ago. "We got $27,000 that month selling ads," he says. Back then, of course, his wife's credit card funded StockMaster's debt. Because of Drury's legwork and his own staying power, Torrance believes that StockMaster faces a much brighter future. He also believes he'll personally pocket more cash this way than he would have under different financing circumstances. And that, ultimately, is this grad-student-turned-entrepreneur's bottom line. "In the end, the thing that matters most is creating value," he says, "for me and my wife."
Ilan Mochari is a reporter at Inc.
HOW YOUR CFO SHOULD RAISE MONEY: WHAT THE EXPERTS SAY
Jim Drury considers himself one of a new breed of chief financial officers: those who actively network to raise money in addition to handling the paperwork. Some members of Drury's capital-raising network gave their thoughts on his approach:
Dana Frankfort is the president of Frankfort Simmons Capital Management Corp., in Los Angeles. He is a StockMaster angel who's since referred other prospective investors to the company. "Obviously, they're not the first in their space, which is one reason I wanted to meet them personally," Frankfort says. "I felt if I could sit down with management and learn how they'd build the company differently, it would either swing me or it wouldn't. So Drury's strategy of bringing it directly to us appealed to me. It was a little unorthodox that they did it that way, cutting out the middleman. Usually, to get information you have to go through the VCs or some other intermediary."
Suzanne Gueydan is a manager at PricewaterhouseCoopers in San Jose. She advised StockMaster on accounting issues related to selling stock. Drury is "constantly evaluating what the impact of what he does will be on future IPO-related disclosures," Gueydan says. "He's very proactive about it, whereas a lot of people are more reactionary. Most of the time, clients just want to be told the answer and want us to do it. ... He asks questions before finalizing things, whereas a lot of my start-up clients get themselves in trouble, and then I have to work my way out of it. He knows enough to know what he doesn't know. A lot of people in the Valley think they know exactly what they're doing all the time and don't want to admit when they don't."
Naoki Shimazaki is a partner at Morrison & Foerster in Palo Alto. He used to work at the law firm Pillsbury Madison & Sutro, where he helped draft StockMaster's stock-purchase agreements. Says Shimazaki: "Drury was more sophisticated in financial terms than most guys we deal with who have tech or marketing backgrounds. He has a finance background. ... It's hard to generalize, but you get a lot of guys who just want the lawyer to get stuff done and don't care for explanations. ... In the Valley, lawyers have become very busy the last few years, and I think that, in being so busy, it sometimes can become like doctors' appointments, where you can't ask questions because of time pressure. Often it's a choice of using the time for explaining or getting something done."
John Dunning is a principal at CrossFire Ventures, in San Jose. He is also part of an investors group called the Angels' Forum, through which he was an early investor in StockMaster. Dunning says: "Drury is easy to get ahold of, which is important in this market, since angels don't have a lot of time to study people. Many people give out phone numbers, but he gave out three numbers and an E-mail address and always responds. He always answers every question and never hesitates. That he always had good answers was also impressive; he was ready to do this with facts, data, and presentations. ... Most start-ups don't have a CFO, but because StockMaster has been around and they've been profitable, they had one. CFOs have to be ethical, honest, and clear, and he's got that. He had all the documents you need, which most people at the angel stage don't. And he can really share a story."
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