-Caveat Lector-
"Journalists who spend any time inside high tech companies
must sign nondisclosure agreements. Usually the company won't
grant access until it can see what the journalist has written --
a lapse in logic, considering the fact that he can't write
anything without first having some access. The nondisclosure
agreement states that the journalist will receive or witness
unspecified confidential information that he or she can not
reveal. Some time later, the company's lawyers will invariably
invoke the NDA and try to retroactively retract access, or claim
certain elements of what the journalist has written to be
confidential. It is for this reason that the real mechanics of
the Valley aren't being told.
"Every key employee in Silicon Valley must sign a legal
document called the Assignment of Invention. This little
three-pager states that one's employer is the outright owner of
all concepts and ideas that spark in the mind of the signer
during the term of employment.
"Venture capitalists are never on the published lists of the
high tech industry's highest-income earners, because they never
admit how much money they make, and it is almost impossible to
track their portfolios. What they do make is 20 percent of the
profits on their funds, plus a 2.5 percent annual management fee
that is taken off the top, regardless of the fund performance.
"That fee was originally intended just to cover minimal
expenses, but because so many investors want to get their money
into high-tech now, it's really easy to raise funds in excess of
$500 million. The fee on that is a heck of a lot of money for
those allowed to live like kings even if their investments aren't
paying off. It's a situation ripe for disaster."
SECRETS OF SILICON VALLEY
The road to Internet millions is pitted with mines -- including
secrecy, double-dealing, and disinformation. An information age
journalist unravels some of Silicon Valley's best-kept secrets.
Po Bronson
San Francisco By Guardian
June 30, 1999
The dot com industry has an image problem. And in trying to
control its image, it's only making the problem worse.
I speak from the experience of having hung out, for the
better part of the last four years, in the workplaces of Silicon
Valley, during that time being on the receiving end of so many
phone calls from members of the national media who think they
know what's going on out here. I hear both sides, and I sense a
great disconnect.
The prevailing public notion regarding Internet
entrepreneurs is that they have come upon their paper wealth so
easily that they don't really deserve it -- that they are the
beneficiaries of the blind luck of being in the right place at
the right time during the mass movement online. Scorn and
jealousy directed at the haves by the have-nots is now pervasive.
Soon jokes about Internet millionaires will be as common as jokes
about lawyers.
But caught up in the swirl of their industry, applauded at
conferences and quoted by journalists and flattered by
photographers, the Internet entrepreneurs are as yet unable to
sense the growing vibe.
So far, the public relations machine working in the Valley
has defused this resentment by letting the world know that "hey,
these are just regular guys, just like you." And by and large
that's really true -- they are just regular guys and girls. When
one spends lots of time with them in person, there's nothing to
hate. Almost every photograph of an Internet entrepreneur
underscores this point: they're wearing khakis or blue jeans,
denim shirts or T-shirts, riding their mountain bikes or carrying
their surfboard or diving for a Frisbee in a game of ultimate.
Perversely, this very down-to-earthness is beginning to
cause a backlash. That so many newly minted millionaires do come
across as regular guys and girls -- as not much smarter than you
-- is exactly what fuels jealousy, because it creates the
impression that anyone could have done it, if they'd just jumped
into the game during that historical sweet spot of 1996-98.
There's one remedy to this situation: If the Dot Commers
want to avoid being resented as much as greedy investment bankers
were during the late '80s, they'd better tell the truth -- they'd
better let their real history be known and stop hiding all the
nitty-gritty (often ugly) details that might inform people how
easy it wasn't. The anecdotes about the 90-hour workweeks aren't
enough anymore.
If the national audience had an even remotely accurate
picture of what it's taken to succeed -- of how many naysayers
had to be proved wrong and how many crises had to be managed --
they would respect the Internet entrepreneur, and cheer.
The dirty laundry
If one didn't know better, one might take a sweeping look at
the tremendous amount of media coverage given to high technology
and assume that Silicon Valley runs like an open book, perfectly
willing to be the media darling.
In fact, the machinery of work is, in general, as much of a
tightly kept secret as our society has these days. There's just
too much money at stake. And in the world of business, nowhere
is there more money at stake than here. Internet companies live
in fear of shareholder lawsuits, live in fear of pissing off the
industry's 800-ton gorillas, and live in fear of the SEC. Every
journalist who covers the industry knows it: to write about this
world requires crawling through a legal minefield.
Here, then, is my laundry list: the least-told episodes of
the Silicon Valley rags-to-riches story -- the details the Valley
hides, to its own detriment.
1. The official origin story of most ideas is pure myth,
thanks to a legal document every key employee in the Valley
signs, called the Assignment of Invention. This little
three-pager states that one's employer is the outright owner of
all concepts and ideas that spark in the mind of the signer
during the term of employment. Almost every start-up is begot
from an idea that was conceived at one's last job, but nobody can
admit it. So origin stories are usually some version of "I
thought of it while I was on vacation on a sailboat in the middle
of the ocean."
2. One of the great things about the Valley is that this
Assignment of Invention contract is rarely enforced. Employees
who want to leave a company are allowed to do so as long as they
sign a nine-page boilerplate non-compete agreement during their
exit interview, which states that they will not recruit other
employees to their start-up. Of course, this contract, like the
aforementioned Assignment of Invention, is usually violated and
rarely enforced, but the threat of enforcement leads most
entrepreneurs to lose sleep for months. I have hung around any
number of start-ups that operate in what's called "stealth mode,"
not because they don't want competitors to know their idea but
because they have employees working there who are in direct
violation of their non-competes.
3. I've never met an idea that is so original it deserves to
be considered "invented" by a single entrepreneur, anyway. We
are all influenced by our environment, and ideas tend to invent
themselves -- the next logical thing sparks simultaneously in the
minds of would-be entrepreneurs everywhere. By the time any
start-up launches, there are at least a dozen competitors right
on its tail, half of whom give up for fear of being too far
behind. They join the three dozen others who could never corral
funding. Succeeding is not a matter of having the idea but of
executing it faster and with fewer mistakes than those unknown
competitors who are surely out there.
4. Venture capitalists are still among the most tight-lipped
players in the Valley. They are never on the published lists of
the industry's highest-income earners, because they never admit
how much money they make, and it is almost impossible to track
their portfolios. What they do make is 20 percent of the profits
on their funds, plus a 2.5 percent annual management fee that is
taken off the top, regardless of the fund performance. That
management fee was originally intended just to cover minimal
expenses, and when they were raising funds of $20 million, it
did. Yet because so many investors want to get their money into
the Valley now, it's really easy to raise funds in excess of $500
million. The management fee on that is a heck of a lot of
walking-around money for the partners, who can live like kings
even if their investments aren't paying off. It's a situation
ripe for disaster.
5. Venture capitalists protect their investments by
encouraging their flock of start-ups to partner with one another.
For instance, the company in the flock that provides a system for
managing customer e-mail can license this to all the other
start-ups in the flock. This is benignly called "codevelopment."
But so often those start-ups would prefer to partner with someone
else -- with, for instance, the industry leader in customer
e-mail management. Some venture capital firms are extremely
strict and will bully their flock into these codevelopment deals.
I have seen the bullying firsthand many times, and on very few
occasions have I seen a start-up defy the will of an angry V.C.
6. Venture capital partnerships have a method of voting on
whether or not to invest in a start-up: For small partnerships, a
unanimous "yes" vote is necessary. For those with more
than about three partners, there's a variety of scoring systems
that average out the relative conviction of the various partner
votes. But few venture capital firms will let us know what their
scoring method is -- not because they consider it a trade secret
but because they don't want all their start-ups to find out and
beg to know what their score was. Like how parents will never let
on which of their children is their favorite.
7. Every venture capital firm has a few highly visible
marquee partners and a few duds. The marquee partners tend to
attract more qualified start-ups than they can possibly sit on
the board of, so in this game of musical chairs there are always
some start-ups that find out, only after term sheets are signed,
that they've been stuck with the dud.
8. When a venture capitalist starts to lose faith in a
start-up's CEO, the venture capitalist may go behind the back of
the CEO and try to recruit a replacement. If it doesn't come to
fruition, this betrayal will never be revealed.
9. In the early months of nearly every start-up's life, key
employees threaten to quit. Usually it is for petty reasons, and
they do it merely because they can -- they know they have the
leverage: if they leave, the company won't survive. Once the
company grows to a critical mass and is able to withstand the
hit, these threats from whiners always stop.
10. The amount of options divvied out to major founders when
a company goes public is called the prospectus. It's a matter of
public record. But the real infighting and the secrecy is around
how much stock is held by the vice presidents and directors. Each
of them holds from .5 to 2 percent of the company, and if they
found out what one another owned, half would resign at the
perceived slight.
11. When a company fails, usually the firing of employees is
done en masse. The employees' silence about what went on in that
meeting is bought with the severance package -- no silence, no
severance.
12. Internet sites have an "uptime" of 95 to 99 percent.
Those few bouts of downtime are always blamed on installations of
back-end software upgrades. This ready excuse has become
acceptable due to its constant repetition, and the real causes
are rarely learned.
13. When going public, companies choose their investment
banker primarily by which of the firms willing to take them
public has the most prominent and influential research stock
analyst. The investment bank usually makes many assurances that
the company will have red-phone direct access to that analyst in
the future. But most firms end up talking to the analyst's
assistant.
14. The second biggest factor in choosing an investment
banker is how aggressive the bank is willing to be in setting the
initial offering price. Are they willing to sell it at $18 and
raise that much more capital for the company, or will they get
scared and play it safe and go out at $10? These ongoing
negotiations are extremely heated, but you will never read about
them, because lawyers are afraid that if the stock ever tanks,
shareholders will argue that the stock was sold at too high a
price.
15. Employees in a company on the road to going public are
kept in the dark about the offering process. So, they make a
rough guess that each option they hold will be worth at least $10
and then work out the math of their paper fortune. Quite
commonly, though, the company will perform what's called a
"reverse split" -- and each employee's number of shares is cut in
half. This creates a perverted atmosphere of workers disgruntled
because they are not nearly as rich as they thought they would
be.
16. One of the factors that bottlenecks the process of going
public is that the Securities and Exchange Commission is having a
hard time keeping its employee-examiners, who are being hired
away to work as in-house counsels at firms going public. They're
all crossing over. Another factor is new government regulations
that all documents must be in "Plain English," meaning clear of
legal mumbo jumbo. The SEC is rejecting boilerplate, vague
prospectuses that don't spell out, simply and clearly, how the
company intends to make money. This is something that most firms
have a hard time doing, in any form of English.
17. Because of Section 5 of the Securities Act, the
prospectus is the only document that can be left behind by firms
that are going through their "road show." The road show is three
weeks of flying around the country pitching the company's virtues
to institutional investors. Because of Section 5, no reporter can
write about what goes on in those meetings, because the
reporter's resulting story would be considered a second document
and become the source of shareholder lawsuits.
18. In this industry, any entrepreneur who goes public (and
any entrepreneur who sells his or her business for several
hundred million dollars) can only get to that point by spurning
many overtures to be acquired along the way. A start-up that
shows any inkling of success is immediately pinged with interest
from established players trying to get the entrepreneurs to sell
out. The pinging never stops. Often one must ignore it, despite
the clamor within the company to take the easy money and go live
on a beach. One of the pains entrepreneurs suffer is that they
can never disclose that these negotiations ever occurred, because
both sides are sworn to secrecy by a nondisclosure agreement.
The entrepreneur who looks, to the public, as if he or she "sold
out" for an easy several hundred million can never mention the
many times he or she refused to sell out for less.
19. Journalists who spend any extended period of time inside
companies must also sign nondisclosure agreements. Usually the
company doesn't want to grant access until it can see what the
journalist has written, a lapse in logic, considering the fact
that the journalist can't write anything without first having
some access. The nondisclosure agreement states that the
journalist will receive or witness unspecified confidential
information that he or she can not reveal. Some time later, the
company's lawyers will invariably invoke the NDA and try to
retroactively retract access, or claim certain elements of the
story, such as those listed above, to be confidential. It is for
this reason that the real mechanics of the Valley aren't being
told.
Access denied
Every entrepreneur sees herself or himself in the role of
the tortured hero. Every entrepreneur has a deep instinctual need
to be heard -- it's this very instinct that drives each of them
to build a product and then a company. But at some point along
that road, the amount of money at stake overwhelms the need to be
heard, and the true story of that tortured road gets censored.
The hero's journey, as approved by the legal department, comes
out sounding like Prince Valiant, when the truth is more like Don
Quixote.
More Internet companies will go public this spring and
summer than in the previous two years combined. They become
anonymous in their multiplicity, so easy to stereotype because of
a lack of differentiation. Unless their truths get told, they
will become the haves we most love to hate. I've been through the
process many times now, and I've never found it to be easy or the
result of dumb luck. Every time, I've seen cold, lonely nights,
boxed into a corner or intimidated by bullies. I've seen fear and
panic. I've seen meltdowns of confidence in the face of the
living hell of radical uncertainty. I've seen the human element
insert itself despite all attempts to stick to the grand plan of
rationalism.
And every time, I've seen those very real obstacles overcome
-- I've been lucky enough to witness a very human heroism that is
moving and inspiring. The Dot Com era is fighting for its soul.
The spirit is there, but the industry's just not letting it show.
[Po Bronson is the author of the novels Bombadiers and The First
$20 Million Is the Hardest. His latest book, The Nudist on the
Late Shift and Other True Tales of Silicon Valley, a nonfiction
look at Silicon Valley, has just been published.]
Copyright (c) 1999 San Francisco Bay Guardian
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