Peter Adkison Presents…

Blog Entry 2, Wizards of the Coast, Equity Distributions: Part 1

Rick Marshall’s blog does a great job describing the early years of Wizards of the Coast; he does such a good job that it took me a couple of weeks to figure out how I could supplement it with anything new. But the part of the story few people saw clearly is some of the interesting background about the legal and financial establishment of the company.

When I started Wizards I knew nothing at all about business. I was raised in a family of modest means. My father was a preacher, my mother a housewife, and my grandparents farmers and carpenters. Growing up in that kind of environment, I picked up many of the attitudes blue-collar people often have about the white-collar business world: that it’s mainly corrupt, that unethical business practices are common, and that anyone wearing a suit outside of church should not be trusted. I don’t blame my family for this; it’s just the perspective I inherited from them and they inherited from their ancestors. But it meant that I never had much interest in business or in making money for its own sake. Sure, I wanted enough money to take care of the people who were important to me, but the main thing I wanted to do was make games.

So when I started Wizards I was operating with a knowledge deficit compared to most entrepreneurs. Fortunately I immediately realized I had better get smart on this stuff in a hurry, and I started reading all sorts of books about how to start your own business, how to write a business plan to woo investors, how to get the appropriate licenses and pay taxes—all that sort of stuff.

Because we knew we’d have to raise money by selling equity in the business, I realized pretty quickly we’d need an attorney. Since I had a built-in distrust of “suits,” instead of looking for a good law firm I enlisted the aid of someone I knew: a guy I’d played wargames with as a kid, with my dad. (Rather than use his real name, I’ll refer to him as Jeff.) Jeff ran a one-person office out of his trailer in a sketchy part of Tacoma. I was too naïve to see the signs; even when someone else pointed out the huge pile of empty liquor bottles in the back of Jeff’s trailer, I was too nice to judge him for that. After all, Jeff hated big business, distrusted money, and was a champion for the working class: my kind of guy! So I retained Jeff, and he helped us organize all our legal formation documents, including articles, bylaws, shareholders’ agreements, and subscription agreements for raising money from investors.

Fundamentally these documents were okay. It’s not like we formed the company illegally or anything. But as a practical matter, the documents were not attractive to investors. The emphasis on “Here’s how we’ll protect the little guy who doesn’t usually get a voice” went over like a fart in church with investors. I don’t really resent Jeff for this. He saw an opportunity to form a corporate government in an idealistic way, and I’ve made peace with that. But the world of business is ever practical. If you want money from investors, you need to make yourself attractive to them. That’s why the process of raising money is sometimes colloquially called a “beauty pageant.” A couple of years later there would be all sorts of corporate drama as we had to go back in and rewrite the articles and bylaws to make them more suitable for a productive business environment.

But the real problem for me personally was that Jeff never explained to me the concept of “founders’ stock.” You see, there’s a particular opportunity that happens only at the moment when you start a company, when the founders can simply reward themselves with as much stock as they like. A typical founder might start with some large percentage of the stock, such as 60–80%, and expect that percentage to decline over time as other investors come in. In a company that’s bootstrapped up mostly from cash flow, the founder might end up with a pretty hefty ownership position at the end, maybe even 51%. On the other extreme, if the company requires lots of capital and there are sophisticated investors involved, the founder might end up with only 3–5%.

So I started Wizards without knowing about founders’ stock, mistakenly believing that if I wanted to increase my shareholdings I’d have to invest capital or earn it through sweat equity (getting paid in stock instead of cash). When I eventually learned the truth of the matter, the window had passed. The good news is that I got by without a cash salary for the first three years (1990–1993) by keeping my day job as a “rocket scientist” at Boeing, so I earned a decent amount of stock that way. And for several years after that (1993-1999), I earned good stock-option awards up until the sale of the company to Hasbro. What helped significantly is that we never had to take on professional investors (VCs, private equity firms, and the like). We did raise what seemed like a lot of money, about $300,000 in total, but compared to the half-billion dollar payout for the sale, the investment dollars were miniscule.

The result was that I still ended up with an ownership percentage of about 4% (after my divorce). The odd part was that instead of starting with a large position and seeing it whittled down, I started with essentially a null position and worked it up. Very odd, but it worked. I also think the board of directors in those later years understood how I got shafted and helped me out significantly on a couple of occasions.

Rereading this, I realize that this story might sound like sour grapes, and perhaps some of you are thinking, “What an idiot!” But, no, I’m not bitter in the least. That’s life; these things happen, and it was a valuable learning experience. I share it because, well, it’s a part of the history here. And yeah, I’m an idiot. If you keep reading this blog, you’ll see that proven again and again! But we’re all idiots. We do dumb things: we trust people we shouldn’t, we make decisions based on emotion without regard for logic, or sometimes logic without regard for emotion. It’s the human experience, and the story of Wizards of the Coast is a very human story.

In my next blog entry, I’ll talk more about Wizards of the Coast stock distributions and delight you with some heartwarming tales. And in that story, you’ll get to see me do some things really well—another aspect of the human experience, thankfully!

Peter D. Adkison
May 25, 2013

2 Comments

  1. lihimsidhe
    June 25, 2013

    So it sounds like the ‘Social Network’ of the CCG world. Did Jeff also not know of fouder’s stock or is the lesson here he did and took advantage of the situation?

  2. Danny
    June 25, 2013

    Hey Peter,

    Great story with some great lessons. I went through some similar experience with my last company. I thought I could simply buy the stock of my “partners” in the company when they weren’t pulling their weight. Ended up just selling my shares to them and exiting the company.

    Also 4% for half a billion isn’t so bad :)

    What kind of games are you working on nowadays?

    Regards,

    Danny

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