SM: What happened after you realized the second round of financing was not going to be available for Sandcastle?
WH: I then made a decision to have the company acquired instead of pressing forward. At that point it was viable. Fortunately, I made that decision before we ran out of money. We still had enough money in the bank to execute a strategy to get the company acquired. That began with us finding somebody who was willing to pay for the company.
Once we had somebody who was willing to pay for the company, even though the amount was low, we were able to work up a chain of potential acquirers in order to get acquirers who were able to purchase the company for a reasonable amount. We ended up getting Sony, Adobe, and Microsoft all interested and all gave us offers. We ended up selling for something around $4 million to Adobe in 1997.
SM: Were the terms of your seed investment such that you could make some money on the sale?
WH: There was a very interesting moment where the liquidation preferences in the contracts between me and Mohr Davidow were for three times the initial investment. They had invested $300,000. Interestingly, as it was written in our contract, the liquidation preferences excluded the scenario in which the company was acquired. That is a scenario which is not unlikely and is actually what happened. The preferences for their seed investments did not include that amount.
This setup an interesting negotiation where my attorney looking at the early series documents for the early series documents told me the three times multiplier did not apply. I did not even realize that term was in there. I am pretty sure that our investors thought it was a mistake.
SM: When did the liquidation preference kick in? What was the assumption?
WH: In a sale of assets. Terms are much more difficult today. We had an interesting negotiation because I did not know if they knew what the contract actually said. I still don’t know because I have never asked them. When I brought the acquisition offer to them for their approval as shareholders they offered a compromise of two times I accepted the compromise. I never found out if they offered that compromise because they realized they only had a legal right to one time or if they were being nice and asking for less than they thought they had a right to. I did accept the two times deal because I thought it was fair.
SM: Interesting. That is a great story. What did you do after you sold the company?
WH: I went to work for Adobe for a year to make sure they got their value out of the acquisition. I ran their dynamic video products such as Premier. After a year at Adobe I left to start another company, There.com.
SM: What was There.com?
WH: It was a virtual world company.
SM: That was pretty early for a virtual world company.
WH: It was contemporary with Second Life. When I started There.com I was not going to repeat the same mistake I made with Sandcastle, meaning a creating a company that could not be big enough. Starting a virtual world company, and the business case of a virtual world company, is a dream scenario. Close your eyes and imagine a world ten or twenty years from now. People are going to be socializing on the Internet in a visual interactive way. They are going to do a lot of the same stuff they do in the real world over the Internet. If we could make the virtual world operating system for that activity, I felt we had the chance to be a very large company that people would remember a century later.