"People are brought on board with lavish promises, and everyone is going in believing they are going to do well," says one outside lawyer.
Meanwhile, optimism bordering on the delusional further tests the relationship between dot-coms and their recruits. "When people are typically hired, they are told nothing but glowing things about the company," suggests San Diego lawyer David Perkins. "People are brought on board with lavish promises, and everyone is going in believing they are going to do well." Few people, in other words, are advised that options have a downside, that they could be worthless or even cost an employee money when it comes to paying taxes.
But that contrasts sharply with what outside investors are told. They enjoy far more protection from charismatic leaders than employees do. Public filings, mandated by the Securities and Exchange Commission, clearly spell out risks to the would-be investor. But how often, asks Perkins, are those same risks disclosed to the option-rich employee who is a de facto investor in the company? "Is the typical employee afforded all -- or any -- of the SEC-mandated protections afforded the typical investor?" he wonders.
On paper their option packages may have seemed stunning, but employees would likely now argue that they were ultimately without control -- ending up at the mercy of management and the market's valuation of the company they joined. And that's what several of the InfoSpace lawsuits assert.
The Early Promise
At the dawn of the e-commerce age, way back in the mid 1990s, people with the right stuff were hot commodities. If you could bring together the handful of people who knew a niche, you could all but corner the market in it. One such person was G. Kent Plunkett, who was the director of business development for Pro CD Inc., a company based in Danvers, Mass., that built and wholesaled a national-phone-directory database.
Electronic yellow- and white-pages directories were in demand among Internet heavyweights such as America Online and Yahoo, which were looking for popular, usable content that would attract traffic to their sites. That, in turn, would draw advertisers.
The Internet directory "space" was a small world back then, and Plunkett's value lay in his knowledge of the fledgling market and his industry contacts. Plunkett was a man who could open doors at major portal companies such as Yahoo and Excite.
At the dawn of the e-commerce age, way back in the mid 1990s, people with the right stuff were hot commodities.
In early 1996, Plunkett and Naveen Jain met on a sales call, soon after Jain had left Microsoft. Jain was in the process of founding InfoSpace, which he intended to be a packager of directories, a technological middleman that would adapt that content to the new medium of the Internet.
According to Plunkett's depositions in several of the cases brought against InfoSpace or InfoSpace and Jain, Jain offered Plunkett a job during their first conversation, which ostensibly was a meeting for other purposes. Plunkett said that after a number of conversations with Jain, he accepted a position as vice-president of marketing and finance. He contends that he took the job because Jain offered him a huge equity package -- options on 2 million shares of InfoSpace, about 10% of the company -- at a penny each. Plunkett maintains that Jain told him that a quarter million of those shares would vest immediately, and the balance would vest over the next four years. Plunkett quickly set about writing a business plan for InfoSpace and introducing Jain to his industry contacts.
What Plunkett says happened next was something right out of Kafka. According to him, less than two months later, when he moved to Seattle to begin working full-time for InfoSpace, Jain wanted to change the deal. Jain allegedly offered to increase Plunkett's salary but, in turn, wanted to reduce his equity to between 1% and 2% of the company. Plunkett claims that when he balked, Jain fired him. Plunkett had been in Seattle all of a week.
Disenchantment in the New Economy
Kent Plunkett's tale of woe might have amounted to an isolated dispatch from dot-coms' dark side if not for the fact that at least five other plaintiffs have brought suits making similar charges. The suits allege that Jain lured talented people to InfoSpace with the promise of lucrative equity stakes, exploited their knowledge, and then discarded them once he had what he needed.
Tim Kay, for example, was a Caltech computer scientist who had written a program for one of the first search engines for Internet white pages. Kay commented on his case against InfoSpace through his lawyer, David Levin, who maintains that Kay's relationship with the company began when Jain offered him a job as InfoSpace's technology chief. According to Levin, Kay declined the offer but agreed to serve as a consultant. Levin says Kay and Jain then agreed that for each hour he worked, Kay would receive an option to buy 150 InfoSpace shares at 10¢ a share.
Levin says Kay worked 190 hours for InfoSpace before Kay and Jain got into a dispute over the technological direction of the company. According to Levin, in December 1996 Kay asked Jain for the stock he says the company owed him, nearly 29,000 shares. "Naveen told Tim to pound sand," says Levin. Kay severed his relationship with InfoSpace; only later when the company had gone public and actually had a market value would he file a suit.
Robert Hoffer, Kay's brother-in-law, who had been hired by Jain in April 1996, had introduced Kay to Jain. As Hoffer (who also ultimately filed his own lawsuit against InfoSpace) recalled in a deposition in Plunkett's suit, Jain learned in his first meeting with Hoffer that Hoffer had good contacts at Yahoo. After that, Hoffer claimed in his deposition, Jain began to call him constantly during the business day. "He was relentless," Hoffer recounted.
Hoffer said Jain hired him because he had expertise in Internet directories and extensive contacts in the industry. He said Jain won him over by offering him 250,000 shares of InfoSpace and then assuring him that no other hire at InfoSpace would have more equity. But Hoffer claimed that Jain balked when Hoffer asked to see a table of how exactly equity was apportioned.
