Losing the Startup Gamble
Sam McManis, Chronicle Staff Writer
12/10/1999
The San Francisco Chronicle
FINAL
Page B1
(Copyright 1999)
It's lunchtime at South Park, that splash of green in the heart of Multimedia Gulch where young high-tech high rollers hang out when not building their dot-com empires.
Mike and Pierre, two late-20s Web masters at an e-commerce startup, dig their Doc Martins into the sand and rummage in their brown bags for their sandwiches. They are, naturally, musing on stock options -- the coin of the Internet realm.
"I got burned at this other (startup)," Mike says. "They had a reverse split and reissued my stock at a quarter of the worth. It decreased to the point it wasn't worth much. You take that chance."
Pierre nods.
"Yeah, but I still would never work at a place where I didn't have options," Pierre says, "where you're not, you know, a part owner of the business."
"Definitely," Mike says.
Perhaps these two software engineers might want to go to Redwood City and consult with Michael Suever, 41, a veteran of three failed Internet startup ventures who finally has opted for the relative security of employment at Cisco Systems.
"I have enough worthless stock options around to wallpaper two outhouses," Suever said. "I guess I've gotten really cynical about it. Or, maybe just realistic."
Suever is not alone. In fact, he's part of the silent majority of high-tech workers whose dreams of vast stock- option wealth waned when their startups fizzled.
According to Internet Week magazine, only 220 of the thousands of Internet companies are publicly traded. Numerous surveys have shown that 70 percent of startups don't even make it to an IPO, and Ernst & Young reports that slightly fewer than 50 percent of Silicon Valley companies ever show a profit.
"It's a huge gamble," said Erik Cederblom, an executive recruiter from San Rafael. "For every company that gets started, only about 1 in 10 gets funded or reaches an IPO. Of those, not that many make people lots of money off options. But, still, all we hear about is dot-coms going from zero to megabucks overnight."
If workers are fortunate enough to land at the right firm at the right time, they do, in fact, reach the megabuck level. Cisco Systems has estimated that it has minted 2,000 millionaires among its 19,000 employees. Netscape, Intel and eBay also have been high-profile stock- option success stories for workers.
Suever's wife, Naomi Chavez, was a winner in the options sweepstakes, having joined Intel early enough to get many options at bargain prices.
"It was good timing," she said.
More typical is Kim Statz of Petaluma, who in 1992 was the fifth person hired at a nascent software firm specializing in e-mail. She worked for well below the base salary most operations managers make. The hours were long, the conditions sometimes dreary. The company, she said, started out of the founder's living room before eventually moving to San Rafael.
But Statz had stock options -- thousands of them -- equal to 1 percent of the company.
"I was working there until 2 in the morning," Statz said. "We all did. All we were thinking was going IPO and, of course, we all had dollar signs in our eyes. It seemed a really good risk to take. In fact, back then, I didn't think it was a risk."
In 1996, just as the company was nearing its IPO, the founder sold the business to a larger hardware firm.
"The founder walked away with about $15 million, but we didn't get much. Basically, it was like a severence package -- cash and stock in the other company. But that new company's stock price was always around $5 (per share), so it wasn't a windfall for all that work we put into it."
Still, Statz says she is not soured on the idea of stock options, since acquaintances of hers have hit it big.
"It's just knowing what company to be at at the right time," she said.
Suever, the three-time options loser, used to believe that, too.
Fourteen years ago, Suever moved to the Bay Area to work for Hewlett-Packard as a software engineer specializing in video servers and digital cable equipment. He was 27 then, hadn't heard of stock options and wasn't offered any.
"When I started in this business, there was a whole different attitude," Suever said. "There was loyalty to a company. I was really comfortable at HP."
But Suever was ambitious. He had plans. While working at HP, he earned an MBA in marketing. And, in the mid-90s, when HP decided to stop pursuing the video server field, Suever thought it was time to plunge into a startup.
By this time, he definitely knew what stock options were.
DiviCom , a pre-IPO digital video networking company, offered Suever the two things he wanted most -- about 20,000 stock options and a career in marketing. He had barely been there six months when the company was acquired by C-Cube Microsystems, which proceeded to pull a reverse stock split in which seven DiviCom options equaled one C-Cube option.
"I stayed two years and made a grand total of $20,000 (in options profit), after taxes," Suever said. "But when I think about it, I lost in the long run. Because when I left HP for DiviCom , I gave up $10,000 in HP contributions to my 401(k). And I lost my HP vacation time."
But Suever wanted another chance at stock-option gold. In 1997, he took another cut in base pay and went to Optivision Inc., a Palo Alto provider of image compression hardware and software.
"It was a real risk, because the company wasn't profitable and it had less than 100 employees," Suever said. "But my wife's success at Intel gave me the freedom to take the risk."
Suever survived several rounds of layoffs at Optivision, saw that the company had no prospects for an IPO and decided to leave.
Earlier this year, he found a more promising spot as a product manager for N-Cube, a provider of interactive servers and digital video management solutions. Options awaited Suever again, but this time he had a more realistic view of his chances for great wealth.
"I was only there three months when Cisco called me for a digital video job I was seeking," Suever said. "I couldn't really turn it down. It was a job written right off my resume."
The job at Cisco doesn't afford Suever a stock-option windfall. But it does provide a few stock options and other perks, such as child care for his son, stability and a chance to carpool to work with his wife, who now works as a leadership training manager at Cisco.
"I'm maybe too old now to go after the options gamble," Suever said.
Bill Lessard, 37, also needed to get burned a few times before wising up to the options gamble. Lessard worked for seven companies in seven years before chucking it all to start his own Web site for worker complaints and co-authoring a book with Steve Baldwin called "NetSlaves: True Tales of Working on the Web."
Lessard believes naive young engineers are exploited by entrepreneurs who use options as a way to pay poorly.
"These kids hear all about the Microsoft millionaires and they figure they'll get it, too, no problem," Lessard said. "It's just a carrot-on-a-stick thing. We get complaints on our Web site all the time about kids getting eaten up by entrepreneurs, and the media is complicit. It makes IPOs sexy. The CEO has taken the place of the rock star, with CNBC replacing MTV. Then you see these Net slaves literally sleeping on cots in their cubicles and working their butts off for options when, in the final analysis, they'd be better off with 401(k)s."
To work at a pre-IPO company, Suever says, you have to be young and have tremendous drive, stamina and a single-minded approach to the task at hand. "It was something fun to experiment with when I was younger," he said. "But I just can't do that anymore."
Not all 40-year-olds are as stock-option wary as Suever and Lessard.
Romain Agostini, 40, quit his position as the network administrator at Stanford University's Linear Accelerator Center after 10 years to become a business development engineer with ClickNet Software in San Jose.
"It's a risk-reward thing for me," Agostini said. "I'm taking the chance that, down the road, stock options might make me rich. But you put up with longer hours and the hectic environment. I miss the excellent benefits and salary at Stanford -- and the vacation time, too. But this company might go public next year if things go well. I may be older than your usual Silicon Valley job-hopper, but can't old guys be one of the few who get rich, too?"
PHOTO; Caption: (1) Kim Statz, who lost a lot of time and money when her stock options lost value, watched her 14-month-old son, Ryan., Brant Ward/The Chronicle
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