Startup

by S. Jerrold Kaplan

  Randy saw his opening. He might not have been in a position to negotiate with EO, but he could surely negotiate with KP. “John, if you’re so damn anxious to close this deal at four to one, all you have to do is make us whole.”

  John was livid. Unbeknownst to Randy, he was fully prepared to recommend to the investors that they cut the common stockholders in on the deal, but he bristled at the prospect that it might now look as though he were caving in to Randy’s pressure. “Don’t you dare try to negotiate with me!”

  Randy knew that in John’s agitated state, the best thing to do was to stare him down. He walked right over and put his face within an inch of John’s. They both stood there, with eyes wide, for several seconds. Then John decided to put common sense ahead of ego. He turned his back to Randy and said, “The average percentage of common in our IPOs is 18 percent. That should give you about the same amount as you’re entitled to get at two to one. Now, I’ve got work to do. Let’s talk again later.”

  Randy seemed satisfied with this and sat back down.

  I later learned from Dave Kinser that he, Rossmann, and Atkinson were in the other room while this drama unfolded, evaluating the chances that Campbell might actually shut the company down. Rossmann thought it was out of the question. Kinser believed otherwise, and told a story about the time he and Bill went to the Super Bowl in New Orleans. Bill had two extra tickets that he planned on scalping at the gate. But when they got there, it turned out that prices were dropping by the minute. As they walked along the line of buyers, Bill refused all offers because they were below what he thought was fair—the face value of the tickets. Two kids with no money were standing at the end of the line, hoping somehow to get in. Bill ended up giving them his extra tickets for free rather than take less than what he felt they were worth.

  Randy and Bill returned to the conference room, where the others were already seated. “It’s two to one or nothing,” Bill announced, still in an agitated state. He started gathering up his papers. “Take it or leave it. Call us with your final decision.”

  Bill started to calm down once he and Randy were in his car. “Why do you think John seemed more concerned with getting the deal done than with getting the best price?”

  Randy thought for a minute, then it struck him. “I believe KP owns about the same percentage of both GO and EO. That makes them indifferent to the price.”

  “How’s that?” Bill asked.

  “Think about it. Right now I think they own about nine percent of GO and EO. They get paid for their GO stock with EO stock. That means when the deal is made and the companies are merged, they still own the same thing, about nine percent of everything.” (Randy’s logic was correct, but he didn’t realize that KP had sold half of its nine percent share of EO to AT&T in July.)

  Bill was worried. “This is a bad scene. John’s office is right next to Lacroute’s, and God knows what he’s going to say to him. He wouldn’t knowingly screw us, but he just might inadvertently undermine our negotiating position. We’ve got to find a polite way to get him out of the loop.”

  “Really, it’s OK, you can go ahead and open it up.”

  The maintenance man at the Foster City Holiday Inn stared at his supervisor in disbelief. He had fully expected the night manager to call the cops, not yield to some lunatic’s demand. He had seen some pretty bizarre stuff while working nights at the hotel, but never before had a guest insisted that he open the Sports Bar at seven o’clock on a Thursday morning. The guy didn’t look like a boozer or anything—he was neatly dressed in slacks and a sport jacket. But if he was that desperate for an eye opener, why not just raid the minibar in the privacy of his own room?

  But Mike Homer had other things in mind. Jumping behind the bar, he located the equipment that controlled the rooftop satellite dish. When he flipped on the power, the four giant projection screens flickered to life. Within minutes, he had reset the transponder code to the number written on a small piece of paper that he fished from his breast pocket.

  By now, I had joined him behind the bar. “Got it,” Mike said, pointing to one of the screens. A test pattern showed a countdown to a closed-circuit transmission that would start in forty-three minutes.

  “Are you sure this is legal?” I asked. He paused briefly, then shrugged.

  Slowly the room started to fill with product managers, programmers, salespeople, even administrative assistants. Since word got around that Mike had intercepted the downlink code Apple Computer was using to broadcast its Newton sales training to regional offices, and that he had persuaded the hotel staff to open up the bar, many people from GO decided to show up. By eight A.M., when the broadcast was scheduled to begin, fully half the company was packed into the room, which still smelled of stale beer from the last Giants game.

  “There’s a two-cup minimum on the coffee,” Mike joked. “And no, the bar’s not open.” He stood up on the small bandstand to brief everyone about what to expect. “Apple normally previews important new products to their field people a few days before the public announcement, so they can be ready to answer questions. What you’re about to see is a live broadcast from their studios in Cupertino.”

  With little fanfare, a brief introductory video of the Newton spilled into the room, covertly siphoned off from the flood of electrons bouncing off a geosynchronous satellite 22,500 miles above the earth. Then Peter Hirshberg, the director of enterprise marketing of Apple, appeared holding a Newton, and launched into a demonstration. Notebooks flew open around the room when he began a detailed review of the processor, memory, battery, and input-output subsystems of the unit, which lay dissected on a table in front of him. He gave tips on how to get the best handwriting-recognition results, explained how to identify appropriate customers, and discussed some of the key uses that Apple envisioned for the new product. Next, an engineer talked about the variety of applications currently under development, both inside and outside Apple. The show finished up with a panel of engineers and marketing executives who answered questions phoned in from the audience, and a warning not to expect the product to ship in any quantity for some time.

  The mood in the bar was one of relief. Newton was good, as expected, but it fell far short of the all-powerful image created by Apple’s formidable hype machine. Even in this short demo, it was evident that the marketing managers’ lack of real customer experience had caused them to repeat some of the mistakes of the earliest version of Penpoint. The enemy had shown its face, and it was human after all.

  Mike gave a quick summary of the key points, then exhorted the group to get back to work. Instead, people spontaneously started pounding the tables, chanting “Pen-point! Pen-point! Pen-point!” Through the neon signs hanging in the window facing the hotel lobby, I noticed a group of Japanese businessmen getting off the elevator. They shook their heads in dismay at the rowdy Americans packed into a bar having a drink before going to work.

  Following the abortive negotiations at Kleiner Perkins, a waiting game began. Bill speculated that the other side might be working on a new proposal, but Randy thought it was mainly an attempt to run us out of cash. Day after day, Randy, Bill, Robert, and I would stand vigil by our phones, hoping for a scrap of good news, a ray of hope, a brainstorm that would break the impasse. But none came. For years we had to run faster and faster just to keep up, and now it seemed that the earth had suddenly slowed to a crawl.

  Overtaken by boredom, we would look for excuses to visit one another’s offices. First Randy would come over to mine, sit on my threadbare futon, and toss around an inflatable world globe I had received as a promotional gift. Then we would go see if Robert had made any plans for lunch. For the first time ever, Bill began whittling down the piles of newspapers and magazines that grew unchecked by his desk.

  Despite our best efforts to remain upbeat, paralysis seeped through the company like a corporeal disease. The nightly software builds took longer and longer, until they stretched well into the next day. My office, always the last refuge for customer
and ISV problems, fielded an increasing number of complaints of lost messages and slow responses, as though the staff were going senile. Interoffice mail deliveries—that frayed, dog-eared pile of reusable yellow envelopes riddled with holes—slowed to a snail’s pace. The flow of messages on the electronic bulletin boards, always a good measure of the company’s mood, weakened like a fading pulse.

  Finally Bill called me into his office. Hoping for some breakthrough, I nearly bowled over a group of product testers standing in the hallway who were reading the OSHA notices tacked up next to the vending machines. Bill gave me a moment to catch my breath. “Jerry, I’ve got a big problem I need your help with.”

  “Sure, anything.”

  “Months ago, I agreed to speak at Advanced Micro Devices’ annual sales meeting in Hawaii this week. This is a really big deal for them, and I just can’t bag it at the last minute like this. You can get a flight out Wednesday afternoon and be back here by Thursday evening. Nothing’s likely to happen while you’re gone.”

  I was suddenly overcome with an irrational dread that the calm would break the moment I left. “I couldn’t do that,” I replied.

  “Don’t be silly. After all, how much can things change in a few hours?”

  Given that nothing had changed for the past two weeks, he had a point. “You’ll call me right away if anything happens?”

  “Absolutely.”

  I couldn’t imagine why my premonition was so strong, until my mother happened to call my office on Wednesday, just as I was supposed to leave. “You better get going,” she said. “You don’t want to miss the flight the way you did the evening your father died.” She had nailed it exactly. I was living a replay of that horrible night.

  When I arrived in Honolulu, the air was filled with the smell of sweet tropical flowers. Advanced Micro Devices had sent a limousine to take me straight to the rehearsals. The company was staging a week-long extravaganza—a pep rally for their sales force. The next afternoon, after I had given my speech and just before heading back to the airport, I called Robert from a pay phone near the bellman’s stand in my hotel, to see what was up.

  “You mean you haven’t heard?” he said. “Surely everybody’s been trying to reach you.”

  “What? What?”

  “Just after you left, Bill got a call from Atkinson. They went to dinner with Rossmann and he presented a new proposal.”

  “What was it?”

  “Completely bogus. It was mainly a bunch of warrants instead of stock. They’re offering two million shares of common, and warrants to buy twenty million more shares at two dollars a share, exercisable within three years.”

  “Warrants! At that price, they’re virtually worthless!”

  “Randy’s analysis puts it at thirty to one. He thinks the proposal is worth about three percent of the merged companies. Rossmann wants us to give GO to him. Randy was right: this whole time they’ve been waiting for us to run out of cash.”

  My limo driver had already loaded my bags and was standing by the curb, trying to look patient. “Look,” I said. “I’ve got to run. Tell Bill I’ll call him from the airport.”

  As soon as I was checked in at the gate, I phoned in. Both the estaff and the senior managers were meeting together. I asked the receptionist to ring the phone in the conference room. Randy picked up the call. “I’ll put you on the speaker phone,” he said.

  “Jerry, are you there?” It was Bill’s voice.

  “Yeah, go ahead.”

  “I just briefed the staff about the negotiations with EO. Randy, Robert, and I are about to head over to KP for the final discussion. We’re also trying to finish up the cut list. The human resources and accounting staffs are going to stay here as long as it takes to prepare the paperwork for the people we have to lay off. This way, we can give everyone their last checks tomorrow. The only question is whether we will cut eighty people or close down completely. We’re still a few heads short.”

  “Can I say something?” I said.

  “Go ahead.”

  As I spoke, the scene in front of my eyes seemed to dim. It was as if my soul were flowing through the phone line to the room I could picture so clearly thousands of miles away. “I just want each and every one of you to know what an honor it’s been for me to work with you, and how painful it is for me not to be there to deliver the news in person along with Bill.” I took a deep breath. “Debbie B, are you there?”

  “Yes, I am.”

  “How many heads are we short on the cut list?”

  “Two, maybe three.”

  I knew what we had to do, and even from that distance, I knew that Robert knew as well. Despite our close spiritual connection with the company, we were now expendable. “Robert?”

  “I’m here.”

  “I think our time has come.”

  “Yep. Let’s do it.”

  “Debbie, please put Robert and me on the cut list. No special treatment. Accrued vacation plus two weeks.”

  There was a long silence on the other end of the line. Then the head of documentation spoke up, one of the earliest hires. “Jerry, this is John Zussman.”

  “Hi, John.”

  “I’m on the cut list too. This situation really sucks, but I just want you to know that GO was a great company and an incredible ride, and I’m grateful to you and Robert for the chance to take it.” A number of people around the table murmured their agreement, then Danny Shader yelled out, “Call me when you start your next company!”

  “Yeah, yeah!” A cheer went up around the table, followed by a long round of applause.

  I looked up, only to notice that the door to the jetway was closed. “Oh, shit! I’ve got to run. I’ll call you back from the airplane.”

  Bill said into the speaker phone, “Call us in half an hour over at KP and we’ll conference you in.”

  I dashed to the gate and pounded on the door. Luckily, an attendant was just inside. “Hold it, one more,” he yelled to his counterpart at the other end of the jetway. “Can’t cut it much closer than that,” he said as I ducked under the half-closed hatch.

  Once settled into my seat, I looked around for a phone. None on the wall in the front of the cabin. None in the seat back in front of me. None in the armrest. “Where the hell’s the phone?” I shouted to the flight attendant.

  The attendant walked over to my seat. “We just bought this equipment from Pan Am. I think it’s the only 747 in the fleet that doesn’t have Airphone service.”

  I was hosed. Trapped in a slender metal tube hurling across the Pacific Ocean at six hundred miles an hour, I was going absolutely nowhere for the next five hours. Meanwhile, the fate of the company, the jobs of my friends, and possibly the future of the pen-computing industry were being decided in a conference room thousands of miles away.

  When Randy, Bill, and Robert arrived at Kleiner Perkins around seven forty-five P.M., they went immediately to John Doerr’s office, where he arranged a conference call with David Liddle, who was at home, and Vinod Khosla, who was vacationing with his family in India. Rossmann and Atkinson were camped out in the cavernous partners’ conference room, dug in for a long night of back and forth. Bernie Lacroute, who had a dinner meeting, wasn’t expected back until after ten.

  Bill began by reviewing what he had told his people back at the office. “This afternoon, I instructed the staff to prepare two alternatives: one where we would be acquired by EO, focus on the Hobbit, and cut down from two hundred to one hundred twenty people, and the other was that we would close the doors and pay all two hundred people severance.” His blunt statement set the tone for the next two hours of discussion.

  Next, John reviewed the proposal that he and Lacroute had worked up on his whiteboard earlier in the day. John had managed to make some headway over the previous night’s term sheet: the exercise price of the warrants had dropped from two dollars to one, which was a substantial improvement. But as far as Bill was concerned, it was still too low even to consider. “No fucking warrants, Jo
hn. Do you understand me?”

  David was more politic. “Warrants are a stab in the heart of the deal that Ruthann proposed,” he said over the phone.

  Although Bill had given John permission to discuss the matter with Lacroute, he was instantly depressed by the results, despite the progress. He sat in the corner staring at his feet, muttering and shaking his head. As John continued his review, Randy used the time to work himself into a controlled state of righteous indignation, like a sumo wrestler preparing for a match.

  Vinod, fresh from a good night’s sleep and a big Indian breakfast, had the clearest head. “The problem is that we have to convince them we’re serious about shutting down the company without actually doing it.”

  Randy had an idea. “We can go ahead and lay off the eighty people tomorrow, and if we don’t have an acceptable offer in hand by then, prepay everyone else three weeks’ salary, explain what’s happening, and send them on their way. The longer EO waits to make a real offer, the more people will have found new jobs.”

  Robert approved. “Kind of like lighting a fuse on a bomb. They know just when it’s going to explode.”

  To John’s dismay, everyone was in favor of this strategy. As the discussion wound around in circles for the next few hours, it became clear that he was the only one willing to use the current proposal as a starting point. Realizing that he had lost control of the situation, he began pacing and talking to himself out loud. “I can’t believe this. It is so naive to talk about these kinds of tactics. Those guys are just going to walk out on us and we’ll lose everything!” The others ignored him, continuing the conversation. But the frustration got to be too much for him. “That’s it. Fine. If you’re determined to destroy two hundred jobs tonight, I’m resigning from the board!” John announced. To everyone’s surprise, he stormed out of the room—right onto his terrace.