The last issue of Geller & Company’s Finance & Accounting View told the first part of the story of Kodeos Communications, Inc., launched in 2001 just as the telecom bubble was about to burst. While many of the high-tech ventures launched around that time are long gone, Kodeos not only survived, it was recently purchased by Finisar, an industry leader in the infrastructure that enables high-speed data communications for networking and storage applications. Finisar paid about $7 million in cash for the equity interests in Kodeos, with possible future payments of up to $3.5 million to the company’s equity holders and employees contingent on the achievement of certain milestones.

John Wyatt joined Kodeos in 2002 as CEO, a vantage point that afforded him a unique perspective as events unfolded. As with Part I of this series, Part II continues in John’s own words.

F&A: What were some of the most important things that made Kodeos an attractive acquisition to Finisar?

Wyatt: Finisar is one of the top-tier companies in the optical components/modules market, having come via the data-com application market segment. It, along with others, has been selectively acquiring new technology over the past year or so for strategic growth positioning.

Specifically, Finisar has been diversifying its business by building a telecom application market business to help balance its already strong data-com business. Kodeos is a telecom module/subsystem supplier with a strong and experienced engineering team, leading technology position and early positive traction with several top telecom system customers.

Perhaps a secondary consideration was that Kodeos has maintained a very lean and cost-efficient operation of about 20 employees. Our manufacturing strategy is based on outsourcing to contract manufacturers. This model is easy to integrate, especially into a larger company that already has manufacturing.

F&A: How pleased were you with the outcome of this deal?

Wyatt: Given the huge downturn and slow recovery that our industry has suffered in the past, I am pleased with the outcome. Many small companies have simply closed their doors, leaving employees without jobs and technologies without applications. I think the deal we reached with Finisar is the best we could expect, for Kodeos, for our investors and for Finisar.

The plan is for both Kodeos facilities (in New Jersey and Illinois) to continue to operate, with each aligned within functional teams of Finisar. Both sites will add engineers this year. The employees should see this as a seamless transition into a larger company with many more resources and support. The Kodeos technology is already being deployed, and new products are in development. This will continue and gain support from Finisar’s extensive worldwide sales team.

“Plan on extra time to complete the process. It always takes longer than everyone wishes or says. This is especially critical if your company has a limited funding runway.”

F&A: Did your diligence in arranging financing for Kodeos when it was an independent company play a part in making it more attractive when you decided to sell it?

Wyatt: We were always careful to keep the company lean and efficient so we would be most attractive to an acquirer. From its inception, we had funding for Kodeos from two lead investors, Highland Capital and Jerusalem Venture Partners. Early on, we had a line of credit, but we decided to pay that off about three years ago. So the company was debt-free. During the discussions around our acquisition of Intersymbol in early 2006, we also knew that a likely exit strategy was to be sold to a larger company. Therefore, we took care to negotiate the Kodeos-Intersymbol merger to include some additional cash.

F&A: On what resources did you rely for financial and other advice during negotiations and during the actual process of the sale?

Wyatt: We decided to keep our team small and to utilize known and existing resources. Our board of directors was in unison regarding our goals for selling the company. The effort was led by myself as CEO and by Michael Cyrus, our chairman. We conducted all the negotiations. I was heavily supported by Geller & Company, and our legal firm, Paul, Hastings, Janofsky & Walker, regarding financial due diligence and legal documentation preparation. Also, we set up a committee consisting of myself, Michael Cyrus and our two lead investors for purposes of quick decision-making during the negotiation process.

F&A: What advice would you offer owners of early-stage high-tech companies who might ultimately look to sell their firms?

Wyatt: There are several points to consider. First, it is important to have an exit strategy clarified and agreed upon by the board of directors and investors well in advance – at least 12 months. Second, know that there is a selling process involved, and prepare the team for the best presentation possible. Third, early and thorough due diligence will make the process much smoother, and it will help prevent extra work and delays. Fourth, once the selling process starts, be direct, reasonable and maintain good-faith relationships. Deals can be killed early on when parties try to play games with each other. Finally, plan on extra time to complete the process. It always takes longer than everyone wishes or says. This is especially critical if your company has a limited funding runway.

This concludes Part II of "The Bumpy Ride of a Successful High-Tech Startup," the story of John Wyatt’s involvement with Kodeos Communications from its early stages through ultimate cash-out. To access Part I of this series, click on this link.

For more information, please contact Jeff Biunno at jbiunno@gellerco.com.