The Washington Investing column in the June 28 Washington Business section incorrectly said that Matthew S. Pittinsky, chairman of Blackboard Inc., is a student of Arthur E. Levine, president of Columbia University's Teachers College. (Published 6/29/04)

It was just like the good old days when Washington educational-software maker Blackboard Inc. went public at $14 a share the week before last and the stock immediately jumped to more than $20.

The initial public offering June 18 made Blackboard's two founders instant millionaires, gave venture capital investors a sweet payoff and raised flags that investors sometimes ignored during the last tech boom.

Blackboard is, without question, the most successful local tech company to go public since the tech bubble burst in 2000. The company dominates the college educational software business. Hundreds of higher education institutions use its software to link students and professors so that students can, say, call up a professor's lecture notes on their computers. Blackboard teeters between profit and loss but revenue totaled $92.5 million last year and is increasing more than 30 percent a year. It is moving into high schools and overseas markets.

But one of the lessons of the tech bubble was that good businesses don't necessarily make good investments, even after a hot IPO. The IPO documents issued by Blackboard raise two issues that could affect how the stock performs over the long term.

First, Blackboard insiders hold more than 20 million shares of the company's stock, which can be sold in the future.

Second, Blackboard's board is dominated by insiders: Chairman Matthew S. Pittinsky, President Michael L. Chasen and three of the venture capitalists who put up the money to get the company off the ground. The company has two outside directors, but one is Pittinsky's professor at Columbia University's Teachers College and the other did not own any Blackboard stock before the IPO, company reports show. Shareholder activists argue that it is hard for a director who owns no stock to represent public investors.

Blackboard spokesman Dan Baum said it is company policy, based on Securities and Exchange Commission regulations, for managers to decline to comment during the "quiet period" immediately before and after an IPO. The venture capitalists and independent directors on the board also declined to comment, he said.

The usual reason for young companies to have an IPO is to raise capital to finance growth. But one-third of the 5.5 million shares offered by Blackboard at the IPO were sold by employees, venture capitalists and others who obtained stock before the company went public.

Blackboard itself raised $47.5 million and the other sellers collected roughly $24 million. It was extremely unusual before the tech boom for early investors to sell stock in an IPO because it could be seen as a sign that they were itching to cash in. In the late 1990s, the practice became more common but was still controversial.

Even during the IPO mania, though, it was unusual to see another transaction such as one disclosed in the Blackboard stock-offering documents: Pittinsky and Chasen each sold more than $1 million worth of their stock just before the company filed to go public.

In February, less than three weeks before the first draft of the IPO prospectus was filed with the Securities and Exchange Commission, each founder sold 117,975 shares to a group of their venture capitalists and other investors at $9.66 each.

It was a good deal for both buyers and sellers. The sellers collected a little less than $1.14 million each. The buyers recorded a 65 percent paper profit four months later when Blackboard went public at $14. At Friday's price of $20.25 a share, they've doubled their money.

For high-tech entrepreneurs, Pittinsky and Chasen hold relatively small amounts of their company's stock, just 600,000 shares apiece, worth about $12 million each, according to SEC documents. To get the company off the ground, they had had to give venture capital investors most of the shares.

With the founders holding less than 6 percent of the stock between them, Blackboard really is controlled by the venture-capital investors who have financed the company. The big holders, with half the stock among them, are Oak Hill Capital Partners of Texas with 13.5 percent, New Jersey investor Harry Edelson with 11.4 percent, Internet Capital Group, a publicly traded Pennsylvania venture firm with 12 percent, Washington's Carlyle Group with 7.6 percent and Novak Biddle Venture Partners, one of the biggest local venture capital firms, with 5.6 percent. Oak Hill, Internet Capital and Novak Biddle have seats on the board.

None of those big investors cashed in any of their stock in the IPO, but their 12.5 million shares will begin to become eligible for sale six months from now with the expiration of lockup agreements that prohibit them from selling sooner.

At the same time, lockups will begin to expire on about 2.75 million shares owned by smaller investors, including America Online Inc., Microsoft Corp. and George Washington University. Those three and some other investors with smaller holdings sold 1.85 million shares in the IPO.

When all the stocks, options, warrants and other holdings available for future sale are added up, they come to more than 20 million shares. That is almost five times as much stock as is trading now. If that many additional shares come on the market, it could radically alter the supply-and-demand equation that determines the price of a stock. Often during the tech bubble, the expiration of lockups were a turning point for hot stocks, which began to sink once insiders were allowed to sell.

It would probably be best for small shareholders if the big insiders keep their stock. But the incentive for venture capital investors is to sell as quickly as possible for the best possible return.

And the venture capitalists are in the driver's seat. Oak Hill, Internet Capital and Novak Biddle have three of the seven seats on the board and other venture investors have the right to name two more members.

Chasen and Pittinsky have seats and there are two outside directors from the world of education: Frank R. Gatti, chief financial officer of Educational Testing Services, the company that runs the SAT, and well-known educator Arthur E. Levine, president of Teachers College at Columbia University in New York.

Pittinsky is one of Levine's students. Pittinsky lives part of the time in New York and is working on a Ph.D. in education at Columbia. For his service as a director, Levine got options to buy 40,000 shares of Blackboard stock at $17.55 a share. At Friday's closing price, Levine could make more than $100,000 by cashing in his options, which he can do in August.

A Teachers College spokesman said the school does not consider it a conflict of interest for Levine to receive stock options from one of his students, noting that Pittinsky enrolled in graduate school after Levine joined the board of Blackboard.

Jerry Knight's e-mail address is

Blackboard Chairman Matthew S. Pittinsky holds relatively little stock in his company. Most is owned by venture capitalists.