Fairchild Semiconductor Founding
Arthur Rock / Eugene Kleiner · 1957
"Eight scientists who walked out on Shockley could build a silicon-device company if anyone would back them; about 35 corporations were approached and every one passed."
Eight engineers quit Shockley Semiconductor Laboratory in 1957 because its founder, Nobel laureate William Shockley, was abrasive and paranoid to the point of being nearly unmanageable. They wanted to start their own company but had no personal capital and no existing playbook for funding something like this — banks didn't lend to unproven engineers with no product, and there was no venture capital industry yet to call. Arthur Rock, then a young banker, spent weeks pitching roughly 35 existing corporations to back the group as a new subsidiary. All 35 passed. Fairchild Camera and Instrument finally agreed, fronting the capital in exchange for the right to buy the whole new company outright later if it succeeded.
The mechanism Rock improvised — a corporate parent funds an independent new entity, gets an option to acquire it later rather than just buying stock upfront, and the founding engineers keep day-to-day control and equity in the meantime — is structurally the ancestor of the modern VC term sheet (investor capital in exchange for a claim on future value, founders retain operating control). Fairchild Camera and Instrument put in $1.38 million for the right to buy the whole company for $3 million within eight years, which it later exercised. That single deal proved something no one had proven before: that engineers with no assets except expertise and a grudge against a bad boss could be financed as a standalone company, not just hired as employees elsewhere.
What made the Fairchild deal structurally different from a normal stock purchase, and why did that matter?
Read more about the topic
The explanation above is written with AI assistance. These are the originals — go to them to check it.
- American Experience: Silicon Valley (PBS documentary)PBS, 2013
- How a deal with 8 'traitors' would help build Intel, Apple — and Silicon ValleyNPR — The Indicator
A Proposal to American Research and Development
"A small team could sell profitable digital circuit modules first and interactive computers later, at a moment when investors were sure computers were a money-losing business."