5/26/2002

Hartford Business Journal

Editorial Director

Dear Sirs:

The following is an article I authored for Upside Magazine in 1992; this was right after I assisted the Eastern Airlines Pension
fund in its takeover of the Interand Corp. The fund had been under the management of Hawthorne properties, and had placed 20
million as a direct investment into Interand. Interand had badly mismanaged this private placement, and had all but failed. It
should be noted that Interand was a going business, with sales of 19M/yr. You may remember them for their “Telestrator”, a
screen writer used by Jack Madden on the CBS ‘Chalk Talk’, postgame football show.

Hawthorne had hired me to review the IP of Interand, and find ways to recover the investment. Before that could happen, we
would have to oust the in-place executive team, and “Raise the Black Flag”, over Interand, so the sale and licensing of assets
could proceed. The accession would consummate after we had asserted control over the IP experts through a combination of deal
making and coercion, moving the physical IP assets, and driving off the management through a combined leverage move
comprising both psychological and legal maneuvering (Interand was a NASDAQ entity, so we had to initiate an expedient proxy
battle in record time).

Technology IP is very unlike Real Property. It is ephemeral and hard to defend, especially in situations where the actors are
poised to disperse, the corporate entity dissolve, and the stockholders are in a mindset to take the loss. In these situations, raising
the Black Flag is easy - if you don't make any overt moves to ‘create value where none existed’.

If the Hartford Business Journal needs a great technology sector writer, please consider me. I will gladly send you my complete
portfolio of analyst research and industry writings, upon request.
Sincerely,

Alan Wilensky
My article:
 Raising the Black Flag -
Rescuing technology IP assets from foundering corporations
By Alan Wilensky, for Upside Magazine

The ‘90’s were a tumultuous era for the shuffling of IP assets. The height of the dotcom era was the beginning of its very
demise, and companies public and private were being melted down and restructured daily. One dynamic of particular note
distinguished in this maelstrom was that of IP takeover sans corporation. This singular strategic move became particularly
common when clear separations between technical and executive management existed. In the months prelude to a corporate
failure, technical management, the keepers of the IP, may often feel like a game piece tossed between competing interests. Little
do they know that n failure mode, when a company is stripped to its very britches, they and their subject matter expertise (SME),
is all that is truly salvageable. This stark truth is not lost on the non-technical executive management, who in the last days and
weeks may seek to concoct deals not in the interest of the stakeholders, SME’s, or even their own honor.

Indeed, it often falls to those outside the corporate circle to rescue the remaining IP assets of the venture, and those who paid
dearly through their true creative labor, the SME’s. Often couched in the guise of 'bargain hunting’, bottom feeding, takeover, or
any number of names connoting the assertion of leveraged control over distressed assets, this action of IP takeover sans
corporation is often the only way to save the real and essential core of remaining value in a technology venture.

A number of established facts and feelings are usually in place before a black flag is hoisted over a dying company. Foremost is
the feeling within the company that, ‘it’s over’, and moreover, ‘this was all for nothing'. For those who have contributed their
creativity and skilled engineering or scientific labor to the enterprise, this feeling is compounded by fears of IP misappropriation
by the non-technical management; those most often at fault for the failure. The SME group is rightfully concerned that a fire sale
will deprive them of their birthright, and the IP that they labored for sold like the office furniture. It is against this backdrop
where other supporting cast members frolic in the shadows of the tragedy, i.e., cessation of salaries, shady deals, and locked
doors.
It is in this scenario, prior to total dissolution and the casting to the wind of the most important human elements of the venture,
that a benevolent actor can enter stage left and raise the Black Flag. The name may sound like piracy to the undeserving
executive stewards who have failed the venture, but to the hardworking SME’s, it is nothing less than putting things right.
Black Flag actions consist of the following cardinal elements:
ƒ Winning the loyalty of the SME
ƒ Establishing a cohesive and defensible IP strategy
ƒ Allowing the old venture to die of natural causes
ƒ Challenging the former executive management to defend the venture’s IP if necessary
ƒ Making a strong case to the venture’s shareholders to call for executive accountability
ƒ Finally to offer, if necessary, a fractional royalty on sales to a fund benefiting the venture’s stockholders
The first three of these elements in the black flag process are obvious; the last three are sometimes unnecessary, or conditional,
depending on the maturity, and grip on reality held by the former management. A discussion of the psychology reigning at such
times, in such places, helps to orient us.
Segregated management, those removed from the SME corps, have the most to lose in a corporate failure. Last minute grabs for
the tangible IP for back door sale to competitors is not unheard of. These managers know that they are in a weak position, unable
to effect the outcomes, and further unable to support IP lifted from the SME corps post venture. Conversely, the hard working
SME, engineer, programmer, etc., most probably uncompensated for months or weeks, is justifiably concerned about the fruits
of their labor being misappropriated.
The friendly takeover of IP and the winning of SME loyalty is the first step in raising the Black Flag. By doing this, the position
is taken and the field is set. SME’s have resigned their positions, and the takeover entity is providing remuneration. R&D
schedules and product finishing for market can recommence, along with resolving IP legal issues (not a big deal if all else goes
well). Once the IP is out of the hands of the management and the SME’s cease attending their old positions, the first blow has
been struck. Do not disclose your plans to the ex-management! (That goes for your new SME’s, too).
Forge ahead by getting the product into production, or better by license; licensing has an added benefit of redirection. Channel
Partnerships also add layers of indirection. By establishing your new venture as a place in which the IP becomes a performing
asset, you create a legally defensible IP platform. After establishing SME loyalty and a defensible IP strategy, it is time to let the
old venture die a natural death, or to play a supporting role in its euthanasia.
Far too many fine technical teams fall victim to incompetent management hiding behind the imprimatur of an MBA. These
management teams will ride a company down to the dregs, amazingly exerting residual authority over the SME’s. The key to
flying the Black Flag at this stage is to move the technical team and isolate them from any further contact with the old
management. Formal resignations are the gold standard here, as this puts the case on record.

Removed the creative element from the control of management weakens the old structure. If management wishes to sally forth
with IP in freeze dried form (documentation, code listings, schematics and engineering drawings), they will need new hires; an
already weakened corporate entity with outstanding debt will 99% of the time fold completely before reconstituting a new
technical team. Pressure from the creditors will take its due toll...with our help.
The Black Flag is raised higher toward the pinnacle by communicating the abdication of the creative team to two very crucial
parties - the creditors and shareholders. This is a delicate matter best applied with the touch of a classical harp player; during this
phase, make use of the services of an experienced strategist. Credible analysts, under the guise of market research duties can
often ‘drop the hint’ to creditors without compromising the overall endeavor. Back at the coal mines, things are heating up for
the old management. The technical team has not been showing up; G-d knows what they are up to. Creditors, somehow divining
the inside track of the corporations dirty laundry, are leaning harder and with renewed vigor.
Now, the stockholders begin to foment a witches brew of discontent. It is vital to communicate to the shareholders that their
investment has been squandered by their chosen management thus far; any capitulation to the management to supply additional
funding for IP defense will net them nothing. A message loud and clear must be communicated, ‘....to this point, your investment
is lost, your technical team is gone and beyond reach, creditors are at the door, and this is where your management has led you’.
Credible analyst services are again called for to seed the shareholders boiling self righteous discontent. A seed is planted to start
the shareholders on the road to considering an action against the former management for breach of fiduciary duties, among other
possible actions. The actual suit going forward is not material to the Black Flag action - they are a pressure play.
Now, we wait, for time is on our side. During the ensuing months, our technical and creative team has been doing the work
under our new guidance. The former management is under a hailstorm of pressure from vendors and shareholders. If we play our
cards right, and refrain from creating value where none exists, by making offers too early and too easy, we shall prevail. A
critical juncture is reached in 30-90 days; the management has made its decision whether to defend their IP, or not.
If the management is hard headed, and plans to raise hard capital to mount a legal action, they will have to over come the
following obstacles:
1) They will have to discover the new entity, not easy to do when you are broke
2) They will have to raise legal fees, retainers...also very difficult
3) They will have to content with creditors, and loss of shareholder confidence
4) They will have to face, eventually, that your new venture is far better able to defend the IP based on performance of assets,
especially if you win over the shareholders with grant of ongoing royalties
If the shareholders even raise the possibility that they will move against the management, things will get very easy from here on
in. Now is the time to offer token walking money to the old execs, and to proffer a royalty deal to the shareholders. Barring this,
the day-to-day work of making those acquired assets perform can continue unabated.
This is messy business, but the players are not free from blame nor consequence. The unfortunate shareholders of the old entity
may be initially dismayed at the Black Flag approach, but if a diplomatic tack is taken, they will come to understand that they
will fare far better with your new entity in charge. Of course, they retain no rights whatsoever, and their corporation will
undoubtedly file for bankruptcy protection. In the end, your Black Flag maneuver will benefit the true heroes, the creative and
technical team members who shed blood, sweat, and tears toward making the product a reality, all in the face of incompetent
management.
When all is said and done, those who raise the Black Flag, are often the guys in the White Hats !