Pacific-Tier Innovators

I first met Mark Fishburn at the Convergence Technology Council (CTC) in Calabasas, California. Mark was a director in the organization, and had very strong ideas about networking and Ethernet. Going beyond the standard role we all play at professional networking venues, he distinguished himself from the group by presenting a passion for teaching others, and presenting his ideas in language nearly anybody could easily understand. Mark was always easy to find at CTC meetings, as he was the center of the largest groups of people who wanted to hear what he had to say.

Mark is a true innovator, and generates a lot of inspiration among CTC members with his visions and thought leadership in a variety of technology and business-related topics. I met Mark in Tarzana, California, to learn more about his vision related to Carrier Ethernet, as well as to gather some advice for entrepreneurs.

Pacific-Tier: Mark, tell us a little about yourself. How did you come to the San Fernando Valley, and what do you do?

Mark Fishburn: I worked at US companies for many years when I was in London, and one day I said I could fix a (problem) in the US headquarters, and they said “OK.” So I came across as a corporate officer in a company called Retix. I worked with them for a while, and then started my own company.

So that was my business, a software company, and then back into data communications, and worked for a company called NetCom Systems, which then became a company called Spirent.

Pacific-Tier: You’ve been involved with the Metro Ethernet Forum for quite some time. What interested you about the MEF?

Mark Fishburn: Well it actually goes back some time to my interest in Ethernet, and the world of Ethernet from the very early days. in 1982 I installed my first Ethernet system while working for Xerox, and that was in Paris. it was one of the very first Ethernet installations.

And as a result of that I gathered a great interest in Ethernet. In the old times, working for an Ethernet test-equipment company, we put out on e of the first fiber Ethernet products, and a few years later one of the first copper Gigabit Ethernet products.

And so it went on. I was intimately involved as chairman with the 10 Gigabit Ethernet Alliance, and the Gigabit Ethernet Alliance before that. It became apparent this was all triggered by the definition of fiber Ethernet. It really reached out beyond the boundaries of local area networks to the metro network.

That really paved the way for Ethernet services to be provided by service providers, and not just live inside the LAN. That was really the initial foundation of the Metro Ethernet Forum/MEF.

It was all about, really advancing the adoption of optical-based fiber Ethernet.

Pacific-Tier: I guess that brings us up to your current venture, which is CENX. Can you tell us anything about CENX?

Mark Fishburn: Sure, let me just give you a bit of background, because it is all really very connected.

In the substantiation of the MEF it became clear there were many different technologies that were or could be connected together using the Ethernet as a ghost in the machine.

And thus were born Ethernet services. And in 2004 carrier Ethernet was created and defined by the MEF by providing ubiquitous services worldwide independent of the service providers providing them, and also the equipment it is connected on.

And that really led to development of the need to have global connections between the service providers who are providing these Ethernet carrier services.

Although I say that in a sentence, it actually took about eight years to transpire and it led to a business that in 2009 has become about a $20 million global services revenue.

At this point in time, as these networks have grown, there is a requirement to connect more of them together in a way which preserves the differentiation of the service providers and creates a global (Ethernet) interconnectivity.

That really led to the formation of our company CENX (Carrier Ethernet Neutral Exchange) which was established to created, effectively a service-level interconnect between the service providers worldwide, and negate the enormous cost and pain in making those connections possible.

Pacific-Tier: Excellent. It’s kind of a sketchy economic environment, a tough time for businesses. What drove you to start a new business in this tough economy?

Mark Fishburn: Well, there are some areas that grow in spite of the economic downturn. The areas that grow are those that potentially save cost, or those that are pushing the envelope and generating more revenue.

Carrier Ethernet is such an animal. It (the industry) grew somewhere around 33% last year in America alone. So while the economy is growing people look for significantly more economic ways to effectively use the same old applications, while paving the way for new applications data driving mobile technology.

So, in this economy to do that was both a natural, and almost necessary step to advance this industry. And as such it was pretty natural for those people who realize this to be attracted to our company, to invest in it, and to meet that need.

Just like anything else, if you have a sufficiently difficult problem, and there is a need to solve it, it save money, and helps make money for people, and makes their job easier, then it’s a very compelling case.

Pacific-Tier: You’ve been a director with the Convergence Technology Council of California/CTC here in the San Fernando Valley (Los Angeles) providing thought leadership and help to a lot of people who are members. What advice do you have for people who may be having trouble with their jobs, been laid off, or are young graduates getting ready to enter the workforce – is there hope for entrepreneurs and those getting ready to jump into the technology industry?

Mark Fishburn: I would say absolutely. I think this is a great time to start a new venture. If you look at every great new venture, this has been repeated many times. In all the great companies that were founded – they weren’t founded when the economy was good, they were founded when there were significant problems that gave people an opportunity to really look at the idea that necessity is the mother of invention.

It’s like anything else, there are tremendous opportunities, still driven by technology, or different social climates driving the way people communicate now, rather than the way they did before. So within technology is really an unlimited opportunity for people to look at an issue, or to realize their dream and go for it.

Pacific-Tier: Young people today, they have technology diffused into their education, and into their childhood and youth at a rate that we never had in our middle-aged years. How do you feel about the youth today? Are they going to be able to take this thing that we’ve built and make it better?

Mark Fishburn: I kind of look at it a little differently. I think in a way they are driving it. Because if you look at somebody who is multi-tasking, if you look at the corporate world of maybe a couple years ago, well when you were at work you were at work. When you went home you played.

It’s become so blurred that the distinction between work, collecting information, entertainment, and communications, it is going to happen in a way that is connected 24 hours, and I think that young people today are living in t
he world of communications – in a way that they communicate with each other, in a way they focus, in a way that they are constantly multi-tasking and moving towards whatever is the next and most convenient way to gather.

So I believe that the youth of today is programmed into this multi-processing environment that they have, and that it’s way (young) people operate, doing multiple things at the same time, is the way of the future, and I believe that people who have been brought up in the world with mobile technology and communications, texting and talking, thinking and playing – all of those at the same time. I think all of those things are the wave of the future.

I think entrepreneurs who connect to that will do well.

Pacific-Tier: That’s very encouring. Thank you today for your counsel, great advice, stories, and great talk!

Mark Fishburn: Sure – can I add one more thing?

Pacific-Tier: Of course!

Mark Fishburn: I would say that one of the things that really led me to doing this was the realization that a lot of people would fear to go into something new like this, or to start a new job. But the alternative is unpalatable. Surviving until you die is no way forward. And I believe that if you are passionate about something that you really have nothing to lose by trying it out.

If you don’t do that, you might regret it forever. So I would say, just go for it.

You can contact Mark at mark@cenx.com

Check out the entire Pacific-Tier Communications Innovators and Entrepreneur Series

I first met Matt Hiles while he was director of business development with Looking Glass Networks in Los Angeles. As a customer looking for telecom services, navigating the providers, technologies, and deal structures can be confusing. Matt took the time to explain all aspects of the business, cost structures, and how he would get us a great deal – while still making money for his company. Matt stood out alone from a world of "wheeling and dealing" telecom sales people, unique in providing the customer a level of confidence they were getting the best product, for the best price, with the best service.

Pacific-Tier: Today we have Matt Hiles, managing partner with Mosaic Networx. Hello Matt! So tell us a little about yourself, how did you get into this business?

Matt Hiles: I started in telecommunications right out of college, and I’ve been in the business, in one form or another, since – which is about 20 years. I’ve been in a variety of telecommunications, voice, and service providers. I’ve also spent a period of time in the data center side of the industry as well.

Pacific-Tier: now you are with Mosaic Networx. Can you give a little background on Mosaic. What are you, what do you do, and what type of business problems do you solve?

Matt Hiles: Mosaic Networx is a carrier neutral, data services provider. We provide a supply chain management service primarily for enterprise companies, but secondarily to wholesale providers and telecommunications providers. From a supply chain management perspective we provide a value add in three functional areas which are pricing, procurement, and provisioning.

What we’ve found is that, in the enterprise space, there is a lack, or need in one of those areas. Typically all of those areas. Where enterprise decision-makers and IT managers don’t have the depth and breadth of knowledge of the telecommunications providers and options that are available.

So we price them, then procure them, provision them, and then manage them ongoing on the back end.

Pacific-Tier: Well, that’s pretty cool. So who is your market, who would be your customer?

Matt Hiles: Our customers are small, medium, and we even have several Fortune 500 companies. We have a strong vertical in the financial services market. Specifically we work with the low-latency, high frequency trading guys. We’ve also worked with public wholesale companies who may not have the buying power we have, so we add some pricing value for those types.

Pacific-Tier: I’ve noticed you are based in Long Beach, California. Other people in your company are scattered around the United States, with diverse locations for your primary management team – does that provide you any challenges?

Matt Hiles: I imagine it provides some challenge, although It would be hard to quantify them. We haven’t really seen them. I think where we’ve done an outstanding job in is finding the right people.

We have 18 personnel in the functional areas in the company, whether its finance or operations, or on the sales side as well. So the distributed environment that we have seems to work out just fine.

Would we have a little bit more camaraderie in a common office? Probably.

Pacific-Tier: So it’s rather tough economic time right now. We’ve had kind of a sketchy run over the last year. What motivated you to start up a company in the last year or so and how do you feel about being an entrepreneur in a tough economic environment?

Matt Hiles: So, I suppose that timings everything, right? We didn’t know we would start a company in a tough economic period. But, the economy notwithstanding , I think there is always business. And for innovative entrepreneurs who can go out and create value for customers, provide them an outstanding customer experience, then good or bad times I think you can be successful.

Pacific-Tier: So what advice do you have for other entrepreneurs, graduates who are looking at a tough economy, what advice do you have for other budding visionaries and entrepreneurs?

Matt Hiles: I think you have to have an expertise. It doesn’t make a lot of sense in my mind to venture into an area as an entrepreneur where you don’t have years of background and can consider yourself a subject-matter expert. I think that is (not being a subject-matter expert) a recipe for disappointment.

But somebody who has spent their time in a corporate environment, learning an area, and then able to translate that into, you know, a startup environment, then I’d encourage them to be entrepreneurs, and entrepreneur owners.

Pacific-Tier: That’s great advice. Give a little pitch for you company. Where do we find you?

Matt Hiles: You can find our company at Mosaic Networx, and the domain is mosaicnetworx.com . if you would like to reach us we’d be happy to hear from you.

Pacific-Tier: Thank you very much for the time!

Here is the entire AUDIO recording of the interview

"More than 90% of startup companies around San Diego compensate the founders and senior staff with stock options, grants, or restricted stock" advises Mike Kinkelaar, Partner at Procopio, a San Diego Law Firm.

Mike joined three other panelists discussing "Sweat Equity" and senior management compensation at the San Diego Software Industry Council’s Entrepreneur’s Forum Thursday evening in San Diego (SDSIC).

Sweat equity refers to "the efforts of executives or other shareholders into a company. This does not include money that is put into a business, which is financial equity. It is the time and knowledge that an individual or a group of individuals put into a business to make a result." (BusinessFinance.Com)

The panelists represented a very diverse group including lawyers, a couple of serial entrepreneurs, and a CPA who was very familiar with assisting start up companies and their executive compensation plans. Those members were:

• Joe Perohit, serial entrepreneur and CEO of EcoLayers
• Mike Kinkelaar, partner at Procopio
• Daniel Cunningham, serial entrepreneur and CEO at DPC Corporation
• Timothy Willis, CPA at Mayer, Hoffman, and McCann P.C.

Who deserves Sweat Equity Compensation?

The panel discussed this is great detail during their panel discussion, as well as during the Q&A session following their panel remarks. After a bit of debate, the panel and attendees finally settled on the following model for sweat equity compensation (SEC):

• Those who contribute to the company in early stages who are willing to accept ownership and shares in the company rather than pure cash compensation
• Avoid SEC grants or compensation for mercenaries, or those who may leave the company as soon as their shares are vested (Joe)
• Those senior people who are already financially stable, and will be able to stick out the early phases of the company without a desperate need for cash (Mike)
• Younger people, newlyweds, new home owners, YUPPIES with expensive tastes in cars, etc., are not generally good candidates for high levels of sweat equity, as they will have a need for higher levels of cash, and will probably not be able to stay in a startup for a long period of time while waiting out the valuation of their potential stock shares
• Those who offer a very unique contribution to the startup company. This could include engineers with the intellectual property needed for the company’s product, or those who are needed for the founders to go to investment bankers and the market for additional development funding

Understanding the Types of Startup Sweat Equity Compensation

The panel introduced and discussed four major types of SEC, and went into a bit of detail on the descriptions of each. While there are obviously clear legal and financial descriptions available for each category of SEC, it was refreshing to hear the panel paraphrase those categories.

• Stock/ownership grants. This is really straight ownership of the company. Each stock grant has value, and presents a voting right for the company. This should only be considered for the founders, and possibly one or two C-Level executives. Grants are considered as income to the IRS and state.
• Stock options. Given more freely to employees. Most often these are incentive grants, either allocated as a signing bonus, or as additional compensation for better performance. Vesting period is normally around 2 years, at which point the employee is eligible to purchase ownership in the company.
• Warrants. Normally only issued to financiers and banks – not recommended for employees or senior management. This is legally considered a form of stock option.
• Non-Incentive Stock Options. This is more on the line of friends and family options, and given to those who would not normally receive an option based on performance or other incentives.

Of course there are other forms of stock, ownership, and management of those forms of equity distribution, however the above are those most commonly used as tools by startup companies to provide additional ownership incentives to owners, employees, investors, and financiers.

Setting up Your Sweat Equity Compensation Plan

All panelists were in violent agreement on a few major points. The main point is to ensure you consult with a lawyer when legally setting up your SEC plan. Mike emphasized this is not a lengthy or expensive process, as all reputable law firms have this plan on the shelf. With the number of startup companies emerging each year, law firms deal with the SEC plan as a routine part of the startup process. It is well-understood, simple if done up front in the startup process, and not difficult to understand.

Additional points made by the panel included:

• Consult with a local small business bureau. Most cities or counties have a very good group of volunteers and professionals happy to assist startup companies with their structure and compensation planning.
• Keep your legal documents as simple as possible.
• Make sure your SEC documents are complete – do not defer items to a later, this will nearly always result in unforeseen tax and legal issues.
• Set up the volume and percentages of shares allocated to grants, options, and warrants at the beginning, again even if you do not plan to allocate right away.
• Ensure the founders and early stage recipients of SEC fully understand the compensation plan, as most problems and legal disputes with ownership and options occur with founders or senior SEC recipients who leave the company, are disgruntled, or have other issues with the founders.
• Establish a qualified stock option plan as quickly as possible – even if you do not plan to use sweat equity compensation in the early stages. It is best to have this legal framework in place from the beginning.
• Do not allow accelerated vesting of shares for other than founders or C-Level executives. This may result in a potential buyer finding the cost of acquisition much more expensive due to the ownership of shares becoming a higher cost to the buyer.

Some Additional Considerations Concerning Employees

Most employees do not understand the concept of stock options, grants, and taxation. Many employees do not understand items as simple as grants being considered income, and options being considered something for which you eventually will have to pay tax.

There are many people who get hung up in the percentage of a company they will own due to grants and options. They do not understand that the only value to stock ownership percentages is when the share gives you the power of vote – and that vote is only useful when it has value within the articles of incorporation, or when it is not overruled by the board of directors.

Many people still believe that percentage ownership is the highest priority, when they should understand the only value of shares is actually when you are receiving distributions (unlikely with a startup company), when you sell your vested and common stock shares, or when an equity event (sale of the company) results in a new ownership "buy back" of your shares. The only value of shares is when you sell the shares and receive cash for those shares.

Dilution of share percentage ownership in a company is normal, and expected. This will only become more apparent as the company continues to grow, receives additional investments, is acquired, or becomes a public company. In short, control by a small group of in
dividuals will be diluted if the company is successful.

Employees must also fully understand the tax implications of all categories of SEC. many states, including California, allow the employee to either pay for the value of an option or grant up front, or defer to a later date. Many, many young employees who do not understand the concept of stock options find themselves with huge tax liabilities when their options vest. This should be explained and clear to employees up front so they do not both have a shock, as well as become disgruntled and ineefective if they are hit with a bad tax situation.

There were many more topics discussed, impossible to codify into a single blog. However a great panel, great audience, and a good use of a Thursday evening in Southern California.

The SDSIC is a great, Aggressive Organization Helping Entrepreneurs and the Tech Industry in San Diego

Silicon Valley – keep your eyes open to the south. San Diego is a very robust technology community, and organizations such as the SDSIC are focused on making it grow. There are many retirees from US and international companies settling in the great communities surrounding San Diego, and many of those successful people are starting to give back to the community through organizations such as the SDSIC.

There is a great energy in the community, with very bright people being pumped out of schools such as San Diego State University and the University of California at San Diego. Both schools have robust tech programs, and both are well-respected on a national and global scale.

Another "Well Done" to the SDSIC, thanks to the panel, and we’ll see you next time (check out the SDSIC schedule at http://www.sdsic.org/events.aspx

John Savageau, Long Beach