FROM STARTUP TO SELLOUT

Selling a company usually is a financial windfall for the entrepreneurs who started it. The starting and process of selling the company, however, is no picnic.

Just ask George Kurtz, cofounder and former chief executive of Mission Viejo software security company Foundstone Inc., which sold to Santa Clara’s McAfee Inc. in August for $86 million. It was one of Orange County’s top M & A; deals last year.

The process of selling your company is “a marathon of hurdles,” said Kurtz, who negotiated with McAfee for about nine months.

“We would be at the altar and then the deal would fall apart. And then they would come back to us and rekindle talks,” he said. “It’s an incredibly hard thing to do and see it through. It shouldn’t be trivialized.”

It was early 2004 and Foundstone had been through a few tough years amid the economic downturn.

“There were times we were sweating,” Kurtz said.

Even so, Kurtz, who started the company in 1999, thought Foundstone had a good product. The company gained notoriety by publicly disclosing holes it found in Microsoft Corp.’s operating system that left computer users vulnerable to hackers.

When McAfee first contacted the company in early 2004, Foundstone wasn’t looking to sell.

“They felt the way we did,that security risk management was a good play,” Kurtz said about McAfee. “They were running into us in the marketplace and there was a lot of noise that it was a good product.”

While many of the details of the deal were secret, Kurtz did say that Foundstone’s board was split over whether to sell the company.

“We had some board members that thought it was a great,a slam dunk. Others thought we could be on our own,” Kurtz said. “I believed in the business either way. I thought there was a good opportunity to put it into a bigger organization. I thought it could be an interesting play and it was a fair offer. You have to consider the offer versus the future risk.”

There was plenty of risk.

While Foundstone had carved out a niche for itself, bigger companies, including McAfee, were looking hard at getting into its market. On top of that, smaller companies were starting up. The market had “gotten crowded,” Kurtz said.

But Foundstone’s software and services had drawn the attention of some notable clients, including Fortune 100 companies.

Foundstone makes a software tool that helps companies keep track of security updates needed for their software. Corporate computer systems can become complex and unwieldy to update,a process Foundstone is able to streamline with its tool. It also provides security consulting and classes on hacking to companies such as Cisco Systems Inc. and Lucent Technologies Inc.

In the end, Foundstone became a division of McAfee, still under Kurtz’s leadership. McAfee decided to keep Foundstone and most of its 130 workers in Mission Viejo. It also has offices in New York, Washington, D.C., San Antonio and Singapore.

The deal gave Foundstone access to McAfee’s global sales network,something that often is beyond the reach of a small company, even if it has a good product.

Kurtz sounds like a protective parent when he talks about Foundstone.

“I want to make sure Foundstone’s integration with McAfee goes smoothly,” Kurtz said.

It’s understandable,Kurtz went through a lot to build Foundstone.

A trained accountant, Kurtz started as an auditor at PricewaterhouseCoopers LLP in 1992.

“But I’ve always been a computer guy, pretty much since I was 10 years old,” Kurtz said.

He served time as an auditor before earning a Certified Public Accountant distinction. Kurtz then transferred to Pricewaterhouse-Coopers’ consulting arm. That was around 1993-94, just when the Internet was taking off.

“There was one guy I met who was running the security group (at Pricewater-houseCoopers),” Kurtz said. “I just had a natural curiosity in that. With that I managed to convince a few of the guys to put me on the security jobs.”

As companies became more connected to the Internet, Kurtz learned more about corporate computing through projects at PricewaterhouseCoopers’.

“There were no books on the topic,” Kurtz said. “I was learning as I went.”

In 1997, Kurtz left Pricewater-houseCoopers to join Ernst & Young International, where he was senior manager of the accounting firm’s security practice.

“I was able to do it nationally for all of Ernst & Young,” Kurtz said.

While at E & Y;, he met Foundstone cofounder Stuart McClure, who worked for InfoWorld, a technology industry publication.

“I was putting on a training class and he came,” Kurtz said. “I hired him into E & Y.;”

The two began to collaborate on a book.

“We put the concept together,he had some contacts in the publishing world.”

The two wrote “Hacking Exposed,” which received favorable reviews in the New York Times and Amazon.com.

“It was like having a great 800-page business card,” Kurtz said.

In 1999, McClure and Kurtz left E & Y; to start Foundstone.

“It had always been in my head (to start a company),” Kurtz said. “It was a great opportunity to be in business. We just got the bug.”

The company’s first office was in Parsippany, N.J., in the basement of a lawyer’s office,a friend of Kurtz’s.

“Those were real broken down rooms,” Kurtz said.

Another friend introduced Kurtz to George Clute, a partner at Seattle-based Olympic Venture Partners.

“He accepted the call because it was a courtesy call,” Kurtz said.

The two met at a club in the Minneapolis airport.

Clute liked the concept and Olympic agreed to provide $3 million in startup funding.

But Clute pushed Kurtz to move Foundstone to the West Coast, where it would be easier to keep in contact. Kurtz decided to settle in Orange County’s growing technology scene.

He got an apartment near John Wayne Airport that served as the company’s first headquarters here. Later Foundstone moved to a Mission Viejo office. The company attracted more than $17 million in venture funding, including Olympic’s initial investment, plus other funds from Riordan, Lewis & Haden; Banyan Capital Partners; Motorola Venture Partners; Articon-Integralis; Itochu Corp.; and Wilson Sonsini Goodrich & Rosati.