Powerstar Energy Storage Systems (“Powerstar”) was founded by Mr. Dave Simons (names and details changed for confidentiality purposes) to develop and build large format energy storage systems. Energy storage has become a subject of great interest to power companies and governments as the production of electrical energy moves beyond traditional hydro-dam projects and coal burning plants to solar collectors, wind farms, geothermal producers and tide generated electricity. Hydro-dam, coal and natural gas generators produce a predictable base line of power. Solar panels, wind turbines and other environmentally friendly energy production methods, do not produce a predicable flow of power. As a result, much of the energy produced by environmentally friendly systems is wasted. In the case of wind farms, it could be as much as 70%. The challenge for energy producers is to develop systems to store that energy.
Mr. Simons is a serial entrepreneur with several business startups to his credit, including an emissions testing laboratory, a biofuel producer, a next generation lubricant company, and a company that manufactures and sells an emissions control system used on large diesel engines. As with many entrepreneurs, some of Mr. Simons’ businesses have achieved greater success than others.
Mr. Simons became aware of the need for large scale energy storage systems. His research indicated that the industry was still in its infancy, and that even large enterprises such as Edison and General Electric had not been able to produce large format energy storage systems that proved economical. To Mr. Simons, it appeared as if the opportunity was wide open.
Mr. Simons research led him to believe that the key to large format energy storage systems rested on two key components—the batteries used in these systems, and the control and management system that charged the batteries when there was a surplus of energy being produced and discharged the batteries when there was a shortage of energy being produced. During the year Mr. Simons attended a conference on energy storage systems. At the conference he met Mr. Taylor, an electrical engineer and entrepreneur considered to be one of the leading experts in battery control systems.
Mr. Taylor received his degree in electrical engineering from the University of New Mexico and subsequently worked at the University of California’s Los Alamos National Laboratories (“LANL”). His tasks at LANL went from working on Department of Energy power projects ranging from a Geothermal power plant in the Jemez Mountains of the Santa Fe National Forest, design, and construction of instruments for astrophysics and particle physics research, on to research into a Laser controlled Nuclear Fusion reaction to generate heat and thus steam power. Mr. Taylor moved to Austin, Texas in the early 1990s and as an entrepreneur, built several successful electronics companies. He often appears as a guest lecturer at the University of Texas, speaking on engineering math for co-generation energy projects. Mr. Taylor is also the founder and owner of Earth Battery, Inc., under which he developed a group of intellectual properties known as the GridSystem “Smart Storage IP.”
During the year Mr. Simons and Mr. Taylor attended several conferences together and developed a personal and business relationship. Mr. Simons came to believe that the GridSystem energy storage management system was one of the key components needed to build large format energy storage systems. Consequently, Mr. Simons entered into an oral agreement with Mr. Taylor to combine forces, with Mr. Simons contributing his knowledge and expertise, and Mr. Taylor contributing his knowledge and expertise, to create Powerstar Energy Storage Systems with Mr. Simons as the president, and Mr. Taylor as the chief technology officer.
In February of the following year Mr. Simons, Mr. Taylor, and others, entered into a Founders Incorporation Agreement. Under that agreement a plan was set to incorporate a new enterprise, to name that enterprise Powerstar Energy Storage Systems Inc., to distribute stock to Mr. Simons, Mr. Taylor, and the other founders, to appoint Mr. Simons as president and Mr. Taylor as chief technology officer, and to commence the business of developing, and ultimately manufacturing, large scale energy storage systems. Under that agreement Mr. Taylor agreed to license the GridSystem technology to Powerstar, under certain terms and conditions that were supposed to be memorialized in a License Agreement, to be delivered and signed within 60 days of the original Founders Incorporation Agreement. Mr. Taylor agreed to fund the company with $80,000, but no terms and conditions were ever specifically agreed to as to what Mr. Taylor got for this money and when it was to be paid back.
As Mr. Simons lives in California, and Mr. Taylor lives in Texas, the working relationship between Mr. Simons, president of Powerstar, and Mr. Taylor, chief technology officer, was primarily conducted by phone and email. Mr. Simons spent much of the year developing various strategic alliances, presenting to possible customers, and searching for more funding. Mr. Taylor spent much of the year working with United American Technologies Inc. (“UETI”), a company that Mr. Simons contracted with to assemble the energy storage systems. Much of Mr. Taylor’s efforts were directed at overall systems design, specifying materials and components, and providing schematics to UETI so that UETI could provide pricing information on these large-scale energy storage systems.
Even with the distance and focuses on different aspects of the business, Mr. Simons and Mr. Taylor were in regular communication. As the relationship continued to develop, Mr. Simons became increasingly frustrated with Mr. Taylor’s operating style. Mr. Taylor’s behavior included the following:
- Frequently missing conference calls
- Not answering emails and phone messages, sometimes for a week to ten days at a time
- Not clearing voice mail so no more messages could be left
- Overstepping his authority in discussing issues such as financing and strategic relationships
- Sending lengthy, essay type emails containing random musings and pie-in-the-sky thinking, often in the middle of the night
- Frequently complaining of headaches and other illnesses that would keep him from working
- Leaving important tasks to the very last minute, risking the possibility of missing critical deadlines
- Complaining of having tremendous workloads to keep him working seven days a week and sixteen hours a day, but not appearing to accomplish a great deal
- Monopolizing conference calls with long-winded diatribes relating “war stories” and detailed history on past events, or proselytizing on the future of environmental systems, energy development and batteries, most off topic or unrelated to the purpose of the conference call
- Asserting that his contribution to the business far outweighed that of anyone else involved, including Mr. Simons, and indicating disgruntlement that Mr. Simons and he owned the same percentage of the company
- Demanding immediately repayment of his loan to the company and refusing to negotiation any manner of reasonable payment plan.
Mr. Simons concluded that he could not work with Mr. Taylor and set out to get him out of the company. However, that proved to be impossible. Mr. Taylor wanted a huge sum of money to be bought out (far more than the company was worth). He scuttled many attempts by Mr. Taylor to raise money for the company. He also constantly threatened to file lawsuits against Mr. Simons, the other shareholders, and directors of the company. Mr. Simons had no choice but to abandon the company and was prohibited from trying to accomplish the same business with another company from the constant threat of lawsuits by Mr. Taylor.
Lessons to be learned:
In Mr. Simons case there are several lessons to be learned.
Document Everything – Mr. Simons agreed to give half his company to Mr. Taylor in exchange for access to Mr. Taylor’s technology and $80,000. However, no contract was drafted and signed detailing when and how the technology was to be delivered and penalties for not delivering the technology. Similarly, there was no note signed relating the $80,000 loan in terms of interest or repayment, and what would happen if the loan were not repaid.
Develop an Unwind Mechanism – Mr. Simon and Mr. Taylor agreed to form a company, and both become major shareholders, without having any mechanism to unwind the relationship, if the relationship did not work. Much like marriages, business partnerships don’t always work. The worst time to negotiate how to split up a company is when problems arise.
Choose the Right People – In discussions with Mr. Simons he will admit he worried about Mr. Taylor from the moment he met him, describing him as a “mad scientist.” But the lure of access to Mr. Taylor’s technology and the $80,000 loan overshadowed Mr. Simon’s common sense, and he entered a relationship with a dysfunctional person thinking he could figure out a way to handle the mad scientist down the road.
Don’t be Fooled by the Resume – Mr. Taylor had an impressive resume. He had experience in the field, he was a speaker at conferences and an educator. A good resume is no guarantee that someone will perform as expected, and sometimes people with great resumes are simply jerks.
What should Mr. Simons have done?
Mr. Simons made two classic business mistakes. First, he didn’t take enough time to get to know Mr. Taylor before partnering with him, and even when certain “red flags” arose, Mr. Simons ignored them because of his desire to get the technology and the money. He got the wrong person on the bus (or in the canoe). Executives work as teams, and in small and early-stage enterprises those executive teams must work well together. A “Mr. Taylor” can quickly sink a ship.
Second, Mr. Simons failed to get two major agreements in writing. It doesn’t matter how well you know someone, how much you trust that person, or how nice that person seems, major agreements need to be into contract form and signed. Handshakes simply do not work out well. In addition, those agreements need to clearly specify mechanisms to effectively manage situations where one party or the other fails to perform.