Return to the Little Kingdom

by Michael Moritz

  For his part Markkula explained that Scott’s dismissal was “a matter of management style. Scotty’s management style is very dictatorial and was really good for the company in its early development and I had hoped he would modify his style with the growth of the company.” When Scott departed he took with him the thread of discipline that had run through the company, what amounted to an eagerness to make tough decisions, and a rough relish for strapping Jobs into a corporate straitjacket.

  A shallow glee spread among the whisperers at Apple—who never came close to understanding the scale of Scott’s achievement. The scope of the change was concealed from outsiders by a vacuous memo that talked about a reshuffle. Markkula assumed Scott’s duties as president while Jobs took Markkula’s place as chairman. Scott was left with Jobs’s vacated title of vice-chairman. “What we have decided to do,” the memo announced, “is to rotate the responsibilities of those at the top of the organization, to capitalize in a fresh way on the capabilities and energies of each.” The memo was so bland and the change so discreet that the venture capitalist and director Arthur Rock even complimented the vice-president of communications on the way matters were handled. After Scott was asked to resign, Jobs and some others tried to make amends by asking him whether he would mastermind Apple’s change to a larger management-information system, and for a few weeks the cosmetic changes remained. Scott even made a presentation on the proposals for a new computer system, but he finally buckled and dispatched a final angry letter that announced his displeasure with “hypocrisy, yes-men, foolhardy plans, a ‘cover your ass’ attitude and empire builders.”

  But for Scott the parting was devastating. In his darkest moments, he contemplated trying to assert that his authority had been wrongfully usurped and dreamed about returning to Apple and firing every vice-president. Rod Holt recognized the degree of Scott’s attachment to Apple. “Scotty had his whole life associated with Apple Computer. He didn’t have anywhere else to go. Scotty was always working. It didn’t leave him any margin for emotional distress, a drinking bout, or a hangover.”

  Even though he owned the fifth largest chunk of the company, Scott stayed at his ranch house a few minutes’ drive from Apple, with the shades drawn. For a time he didn’t answer his telephone. When people called he said he felt fine though he didn’t bother to reply to some of the notes of sympathy that arrived. For months afterward when talk turned to Apple Scott’s face looked glum and he became morose and listless. About the only time his spirits perked up was when he showed that he could still remember all the parts numbers of the Apple II. But mostly Scott slept late, fed his cats, sprawled on an enormous couch, and watched television on a screen that dropped down from the ceiling of his living room. He played the organ, listened to Wagner, fielded telephone calls from his stockbroker, and made occasional trips to a nearby garbage dump to launch model plastic rockets into the sky. “Apple,” he kept saying at the time, “was my baby.”

  Among the people who knew Scott well, there was a mixture of embarrassment, distress, shame, and fury. Markkula took a few people aside and confided that firing Scott was the hardest thing he had done in his life but that Apple couldn’t weather his personal problems.

  Jobs probably understood better than anybody else the extent of Scott’s humiliation. For months Jobs nursed a bleak, private, guilty fear, “I was always afraid that I’d get a call to say that Scotty had committed suicide.”

  THE PLATINUM CREDIT CARD

  Wealth complicates life. At Apple riches arrived more quickly, with a greater force, and in larger quantities than anybody had contemplated. The sums involved were so disconcerting and extraordinary that they meant nothing when measured against hamburgers, sodas, walkie-talkie radios, and the other everyday yardsticks of El Camino Real. One obvious comparison was with great American fortunes but the term itself had become frowzy. In the last quarter of the twentieth century Apple’s founders and a few top managers became, in the malleable lingo of Silicon Valley, “zillionaires”—a perverse comment on inflation as much as language—and their portfolios assumed a distinctly Arabian flavor. They became young tycoons armed with a brute wealth that, at least on paper, was a match for most that had been made in the preceding one hundred years. Theirs were true fortunes which, on the occasions when the stock market treated Apple with reverence, came to dwarf the visible assets of the Prince of Wales, shade the tangible riches of the Catholic Church and make most of the captains of American industry look like paupers.

  At the beginning of 1977, when Jobs, Wozniak, and Markkula had tried to place a value on the parts in the garage and the design of the Apple II, they valued the rump of the partnership at $5,309. A year later when the three venture-capital firms acquired some stock Apple was valued at $3 million. On New Year’s Eve, 1980, almost three weeks after its shares were first publicly traded, the stock market gave Apple a value of $1,788 billion which was more than Chase Manhattan Bank, Ford Motor Company, and Merrill Lynch Pierce Fenner and Smith, over four times as much as Lockheed, and about twice as much as the combined market value of United Airlines, American Airlines, and Pan American World Airways.

  During the first eighteen months of Apple’s existence, monetary issues were obscured, thanks to a combination of circumstance and design. The sheer pressure of work provided enough distractions to fill a day while the financial maneuvers of a small private company offered far less opportunity for prying eyes than the visible transactions of a public company. Under California law all private stock transactions were subject to Apple’s seal of approval—a procedure that ensured some discretion. Newly hired hands talked with Scott and Markkula about the possibility of buying stock but the details usually remained confidential. Markkula, in particular, kept a firm grip on the stock, politely telling the occasional outsider who inquired about the possibility of making an investment that the shares were for employees.

  But gradually word of private sales, whispers of an engineer who had taken a second mortgage to buy more shares, rumors of stock splits, talk of changes in capital-gains tax rates, and discussions of the advantages of trusts crept into daily conversations at Apple until they became one of the staples of life. Rick Auricchio, a programmer who eventually left the company, said: “I learned as much about stock and taxes at Apple as I did about computers.” Money was an uncomfortable topic that tripped a wide range of emotion.

  Distribution of stock, or options to buy stock, became an intractable dilemma that led, in the eyes of Rod Holt, “to a reasonable amount of perfectly justified hostility.” During the first couple of years the distribution of the discreet gray envelopes that contained stock options were accompanied by all sorts of warnings that the contents shouldn’t be treated too seriously. In the early days a few of the recepients were disappointed when they were given a couple of hundred options rather than a pay raise. But the cold force of arithmetic eventually removed any disappointment. For after three hefty stock splits, every share distributed before April 1979 was equivalent to 32 shares on the day that Apple went public, which meant that anybody who owned 1,420 of what were known as “founders’ shares” and kept them until the morning of December 12, 1980, was then worth, on paper, $1 million.

  Options to buy stock were assigned to most of the weightier newcomers on the basis of their past accomplishments and the possibility of what they might do for Apple. Some of the cannier recruits turned their job interviews into bargaining sessions and waited to shake hands until the promise of options had reached what they felt was an appropriate level. Others, more innocent in the ways of the corporate world, took a salary and a cubicle. For Apple the pool of options was a powerful recruitment tool and the options that were distributed from time to time were enormous incentives. Scott took particular delight in dangling the prospect of riches in front of people who weren’t convinced that Apple was a worthwhile proposition. He was hard pressed to squelch his chuckles when he informed waverers, “We are making a massive change in people’s life-styles.”r />
  When word of some of the arrangements seeped out, bitterness mounted. Fate and chance imbalance certainly played a part. Those hired within a few days of each other, but on opposite sides of a stock split, wound up with substantially different sums. However, some of the differences resulted from careful calculation. While Apple’s salaried employees were given options to buy stock, the hourly employees were not. This, predictably enough, caused friction. In the laboratories, for example, engineers received stock while the technicians who worked at their elbows didn’t. Some became convinced that they were the victims of injustice and even those who prospered, like Bruce Tognazzini, were aware of inequities. “The amount of stock that people were given had nothing to do with their ability to work. It had everything to do with their ability to get stock.” Rod Holt was, at times, hard pressed to conceal his anger. “The fact that a turkey who is worth a million and a half doesn’t deserve to have an office in the building is a quirk of fate.”

  Daniel Kottke remained a technician and wasn’t given any shares before the company went public. Holt offered to make some amends by giving Kottke some of his own shares and proposed to Jobs, “How about we each chip in? You give him some stock and I’ll match it.” Jobs replied, “Great! I’ll give him zero.” Jobs, always more emotionally attached to Apple than Kottke, was torn. Part of him mourned the loss of a friendship but he also deeply resented Kottke’s lack of visible appreciation. “Daniel generally tends to overrate his contributions. He just did a lot of work that we could have hired anybody to do and he learned an awful lot.”

  Bill Fernandez, the first person hired by Apple, was also disappointed, and though he later rejoined Apple, he quit in 1978. “I felt I was doing all the donkeywork and that I was going to be a technician forever. It didn’t seem that I would get stock. I didn’t think the company was loyal to me.” Elmer Baum, who had lent Jobs and Wozniak some money while they were making the Apple Is, was informed that the company couldn’t sell him stock. Chris Espinosa, by then a student at the University of California at Berkeley, also came up empty-handed. “We missed out on the American dream because we were too nice to grab a part of it. Kottke was too nice. Fernandez was too Buddhist and I was too young. Don Bruener was screwed twice. He was in manufacturing and also a college student. We all realized to some degree that we weren’t heavy enough. We weren’t obnoxious enough to make ourselves millionaires.”

  The size of stock distributions was distorted by gossip and scuttlebutt. A few bragged about the size of their holdings while others were embarrassed and tried to exercise their options discreetly. When freshly recruited middle managers discovered their subordinates were far wealthier, the jealousy wasn’t easily concealed. Similarly Sherry Livingston found that other secretaries, who were paid by the hour, made her life increasingly uncomfortable after they discovered she owned some shares. One clerk who handled the paperwork for the stock options became so distraught at the size of the sums involved that she left the company.

  Though Markkula fended off people who made it their business to speculate in private companies, it was certainly far easier for well-connected outsiders to obtain shares than it was for diligent workers. Knowing the right people, lunching with the proper crowd, placing the appropriate telephone calls, all paid off. The occasional privately arranged stock sale reflected the importance of personal contacts and the claustrophobic sense of community. The venture-capital firms that managed to get their hands on stock had usually done business together, were used to tipping each other off about hot deals, and were at pains to repay past favors.

  The few individuals who acquired Apple stock before the company went public also had the proper pals. At the beginning of 1979, for example, Wozniak sold some stock to the Egyptian-born financier Fayez Sarofim, who had been a friend of Arthur Rock’s since the early fifties when both had attended the Harvard Business School. Sarofim managed a portfolio worth well over $1 billion from an unmarked Houston office suite that was draped in modern art. Wozniak also sold stock to Richard Kramlich, a partner in Rock’s venture-capital firm, and to Ann Bowers, the wife of the vice-chairman of Intel who became head of Apple’s human resources department.

  In the summer of 1979, when Apple raised $7,273,801 in what the venture capital community colloquially calls a mezzanine financing, connections once again paid off. Among the sixteen buyers who bought shares at $10.50 apiece were some of the best-known venture-capital firms in the country, including New York’s LF Rothschild, Unterberg, Towbin, and the Brentwood Capital Corporation which was based in Southern California. One name on the list stood out: Xerox Corporation bought 100,000 shares though the company agreed not to buy more than 5 percent of Apple. The deal helped Apple gain access to Xerox’s research laboratories though Scott recalled, “We were careful they didn’t get a peek at our advance products,” and, on later occasions, the Xerox representative was not invited to meetings where sensitive topics were discussed. Yet the biggest buyer was Arthur Rock’s friend Fayez Sarofim, who bought 128,600 shares. Both Markkula and Jobs sold slightly over $1 million worth of stock.

  During the following twelve months Arthur Rock kept a close eye on the vagaries of the new issues market and it was he, above all others, whose opinion and advice determined when Apple should brave the perils of a public stock offering.

  Though most had recognized that Apple would eventually go public, the decision to abandon the relative tranquillity afforded private companies was made suddenly and unexpectedly. Among Apple’s top managers, there was some reluctance to head a public company. Jobs, for a time, was enchanted with the notion of emulating the enormous, privately held San Francisco construction company Bechtel. He liked the idea of not releasing information that might help competitors, of running a multinational company without having to endure pressure from stockholders, and of avoiding taunts from the gadflies who make a pastime of appearing at annual meetings. Along with his colleagues, Jobs was aware of the distractions created by due-diligence procedures, the legal work involved in preparing the stock prospectus, and the drain of lengthy tours to explain the strengths of the company to bankers and investors in major American and European cities.

  Michael Scott wanted Apple to grow into a large enterprise without help from outsiders and roundly cursed his betes noires: lawyers who hampered his freedom to maneuver, federal bureaucrats who would swamp him with documents, and journalists who would do nothing but turn his thoughts to pap.

  Aside from personal preferences, there were compelling reasons for Apple to go public. The market for new stock issues, which had been torpid in the years following the 1973-1974 recession, regained some of its spirit during 1980. Some of that reflected the 1978 cut in the maximum long-term capital-gains tax rate from 49 percent to 28 percent which had led to an enormous increase in the amount of money flowing into venture-capital funds. And though Apple was in business before the tax cut, other companies that were beginning to emerge from obscurity owed at least part of their existence to venture-capital funds. Inside Apple, surveys also projected that the number of shareholders—thanks to the distribution of stock options—would soon top five hundred at which point all companies under the 1934 Securities and Exchange Act are required to file public reports. But most of all Apple was in the fortunate position of not really needing a large injection of money.

  All Apple’s founders and managers were aware that a public stock issue was an essential part of growing up. They heard, depending on the inclination of the speaker, the stock issue compared to a twenty-first birthday, the arrival of an heir, the betrothal of a daughter, or a bar mitzvah. So at a board meeting in August 1980, when Arthur Rock argued that a public offering was an obstacle that would have to be negotiated at some time or another, Apple’s directors decided to heed his advice. The timing, rather than the news itself, took people by surprise. Apple’s freshly hired vice-president of communications, Fred Hoar, had to draft a press statement before he was even given a desk. Meanwhile, Regis McKenna was as
ked to cancel advertisements that were running in The Wall Street Journal to prevent any accusations from the Securities and Exchange Commission that the stock was being touted.

  The strength of Apple’s bargaining position was reflected in the number of investment bankers who came knocking on the door trying to sell the virtues of their firms. Apple’s stock offering promised to be one of the largest in years and the prospect of the commissions was enough to make even the most staid investment banker drool. The visitors left thickly padded brochures boosting the merits of having their firms estimate the value of Apple, and there was plenty of talk about “ongoing relationships,” “aftermarket support,” and “retail networks.”

  Among the callers were officers from the San Francisco investment and underwriting firm Hambrecht and Quist, which for about a decade had specialized in investing in young companies and underwriting technology issues. The men from Hambrecht and Quist had to make about ten visits and give presentations to Apple’s top managers and its financial and legal staffs before finally winning the business. To balance Hambrecht and Quist’s reputation among the freer spirits of the investment community, Apple arranged for the issue to be co-sponsored by the more stolid New York banking house of Morgan Stanley. When Morgan Stanley decided to seek the Apple business and, more important, when it accepted equal billing with an upstart investment firm, it gave tacit notice that longstanding allegiances had given way to new. Almost immediately Morgan Stanley dropped its connections with IBM and started to be more aggressive in its quest for business from young companies.

  An odd sort of relationship developed between West and East and between Apple’s managers and the financiers. Jobs complained that the bankers weren’t giving Apple enough attention, and Michael Scott, in particular, took every opportunity to goad the men with their monogrammed shirts and tiepins. When Apple’s managers were invited to attend a briefing made to some investors by Genentech, a South San Francisco biotechnology firm that was also preparing to go public, Scott turned up wearing jeans and a cowboy hat and was sent out to buy a tie. At another meeting with the bankers he dressed himself and a couple of others in baseball caps, black armbands, and T-shirts stenciled with the slogan THE APPLE GANG. For their part some of the bankers found it hard to believe that Scott was the president of the company they had so eagerly embraced.