While I was working on the player and Pedram was working on the Pono music store, a drama was simultaneously unfolding among some of the company’s management that I had little knowledge of at the time. John Hamm realized that the company needed to raise more funding and had been searching for investors ever since he arrived. After the successful Kickstarter campaign, he increased his efforts and was slowly making progress.
FINDING AN INVESTOR
Spending was steadily increasing to build the music store and all it entailed, and to prepare for manufacturing the player. But we had no budget for marketing, nor plans beyond fulfilling the Kickstarter orders. John met with potential investors who might be willing to make a substantial investment, perhaps three or four million dollars. After several months of effort, he brought in a private investor who agreed to invest four million dollars. One of the conditions of the investment would be that the composition of the board of directors be changed to reflect the new ownership.
The board had the same makeup as in the beginning, still without any members with experience running a technology startup. Hamm and the new investor made their proposal to the board for the investment and a corresponding board change, explaining that such a change was normal and customary to reflect the new ownership.
Hamm also requested that Rick Cohen, who was still serving as a personal lawyer to several of the board members as well as to the company, would need to choose one or the other role, since it would be a conflict of interest to do both.
Behind closed doors, according to Neil and Elliot, Cohen painted a negative picture of the investment offer to the board and told them that Hamm was likely trying to take control of the company and was intentionally removing those board members closest to Neil.
The confrontation escalated quickly, and some on the board thought that Hamm presented the investment and board changes as a take-it-or-leave-it offer. Hamm later told me that he suggested to the board that they get another legal opinion to understand that these changes to the board were just good governance. However, neither Neil nor Elliot recalled that suggestion.
HAMM OUT
The outcome was that the board decided to request Hamm’s resignation and replace him with Rick Cohen, the company’s attorney, as CEO. Unlike Hamm, who had built many companies from scratch, and advised and invested in others, Cohen had much less experience in this area. Although he managed his law firm, he would now be leading a company, which required a completely different set of skills.
In my subsequent discussions with Neil and Elliot, both agreed that they made a serious error in supporting this change. Elliot, in retrospect, thought Cohen had overplayed the issue and that he and Neil were both overly influenced by him. Elliot explained, “Both Neil and I were out of our element.”
They said that they had a lot of respect for Hamm and should not have terminated him; instead, they should have just turned down the investment offer. Elliot said that’s what he had intended to do, rather than look for duplicity and side-dealing, and was not convinced of the accusations that Hamm was taking over the company. His only fear was that Neil would have much less power and influence, and, ultimately, Elliot believed he had to do what he thought was best for Neil.
Neil is also very loyal to the people that he works with. In this case, his loyalty extended to his board members, many of whom were his friends and had been investors from the start. Neil also had some concern about bringing on new people who might not share his vision.
These management changes further impacted the viability of the company, as it was one of the only opportunities that we ever had to bring in a sizable investment and to have the company run by an experienced CEO.
Hamm had been a no-nonsense, fast-moving CEO, sometimes a little brash and cocky, but very smart and experienced. He was always thinking ahead and thinking big, and his use for the investment was to staff up marketing and sales, begin a second-generation product, and try to purchase one of the new streaming services, leveraging some additional investors. As I saw it, his failing was that he didn’t effectively convey his plans to the board, explain them, and develop support beforehand. He had found the board to be less experienced than those he had worked with and his patience had worn thin.
From the board’s position, Hamm was asking for some of them to step down without adequately explaining the context and without the board having a full understanding of Hamm’s long-term vision for the company. Neil now believes that losing Hamm was a pivotal moment for the company and regrets what happened.
The change of CEOs could not have occurred at a worse time. Cohen had become CEO during the fall of 2014 at the time we were preparing for production and delivery of the player and the launch of the music store, and a few months before we’d attend CES in January for our official introduction.