The late-1990s mania for equity in start-ups led to a trail of lawsuits and allegations for InfoSpace and its charismatic founder, Naveen Jain

In early 2000 InfoSpace was riding the dot-com tsunami. Having gone public a little more than a year earlier, the company had since seen its stock price soar into the triple digits, giving the whole enterprise a market capitalization of more than $20 billion. Naveen Jain, the company's founder, broadcast its sense of boundless optimism that spring when he sought to hire Arun Sarin as his CEO. Sarin wasn't just another dot-com poseur in a black designer T-shirt. He was the number two man at Vodafone AirTouch; 20,000 people reported to him.

But that hardly kept Jain from buttonholing Sarin five minutes before Sarin was to address a roomful of investors, analysts, and journalists on the subject of Vodafone's Internet strategy. "Naveen, now's not a good time," said Sarin. An hour later, as Sarin came off the stage, Jain was right there. "I want to talk to you," he told Sarin.

Jain badgered Sarin until he agreed to fill the CEO spot at InfoSpace. Landing a big name like Sarin was really nothing new for Jain. He was a man with an inveterate swagger. "I think most people think of me as an arrogant asshole, and that's the perception I want. It says, 'Don't mess with me or you'll get crushed,' " Jain says.

That's what the ever voluble Jain, all five feet six of him, told Upside two years ago as he was busy assuring anyone who would listen that InfoSpace would become the first company ever to achieve a stock-market capitalization of $1 trillion.

InfoSpace, which is based in Bellevue, Wash., would become such a colossus by selling content and services for high-traffic Web sites and Internet-enabled devices. Its applications would allow its customers to deliver consumer and commercial services, such as online phone directories, maps, games, and stock quotes. By April 2000, when Jain reeled in Sarin, InfoSpace was on its way. It had forged relationships with more than 1,500 Internet portal sites and 60 content providers. It had deals with more than 20 wireless carriers. Noting that soon there would be more than a billion cell phones and non-PC devices worldwide, Jain justified InfoSpace's massive promise in an interview with eCompany Now this way: "The [wireless] carriers will pay InfoSpace $1 to $3 per month for each subscriber. You can do the math. That's a shitload of money."

In looking back on the dot-com crash, it's easy to see that, like most bubbles, the Internet one was filled with ample quantities of hot air -- and that CEOs like Naveen Jain contributed their fair share. What powered InfoSpace was the rampant charisma of its founder, a man who fancied himself as his company's "chief strategist." Speaking to eCompany Now in December 2000, Jain observed, "I believe willpower can get you through anything."

It certainly got Jain, who had emigrated from his native India in 1979, to this country. And it got him to Microsoft in 1989, where in the next seven years he rose to be a group manager of Microsoft MSN.

"Aggressive" and "dynamic" is how Allyson Rodgers, an analyst with Wells Fargo Van Kasper, describes Jain. And those personal qualities, she adds, rub off on those around him. "People inside the company are absolutely dedicated to him. He's always there, always in the hallways," Rodgers says. Indeed, Jain is the kind of wired, ever-in-touch leader who thinks nothing of putting in 20-hour workdays. And he is likely one of the few men in the Western world ever to go on vacation with his family and be so bored that he racked up a $1,000 phone bill.

Jain's charisma and energy, meanwhile, happened to dovetail with another phenomenon of the late 1990s -- the mania for equity. Stock options had become the strange and bloated currency of the dot-com realm, turning many financial neophytes into true believers. At InfoSpace, equity was a powerful recruiting tool. At its peak InfoSpace stock levitated at $138.50 a share, making InfoSpace options very valuable indeed.

"Don't mess with me or you'll get crushed" was the image that InfoSpace founder Naveen Jain wanted to project, he told Upside magazine.

And Jain was the prime beneficiary. At one point he owned as much as 47% of InfoSpace's stock. But he has been accused of using the stock not so much as a reward -- something to be spread around -- but as bait. That, at least, is what a number of lawsuits filed in recent years against either InfoSpace or InfoSpace and Jain together allege. The plaintiffs in those suits claim that they were taken in by a classic bait-and-switch scheme, contending that Jain made lavish promises of equity to lure key personnel to InfoSpace. The plaintiffs charge that once Jain had availed himself of their expertise and industry contacts, he fired them or broke off business relationships with them, leaving them empty-handed.

Despite repeated attempts by Inc . to get Jain's and InfoSpace's side of the story, Jain declined to be interviewed for this article -- as did the InfoSpace board members. An InfoSpace spokesperson did reply that the company's lawyers had advised against any public comment on past or pending litigation, other than saying it was InfoSpace's policy to defend itself vigorously against such lawsuits.

Even many of the financial analysts -- theoretically neutral observers -- who cover the company declined to be interviewed. And past and present plaintiffs, shunning publicity or bound by their legal settlements from talking to the press, also declined to be interviewed.

Thus the reporting for this story is based largely on various legal documents, including the sworn depositions of Jain and of plaintiffs who have filed suits against InfoSpace or InfoSpace and Jain together.

Mary Shea, an Oakland, Calif., lawyer specializing in employment litigation, including options litigation, says that charismatic leaders are not uncommon in the Internet world. She says that in the Internet economy there is a faction of "overzealous companies" and "true believers who made employment offers they couldn't back up." The result was that many employees "trusted these often very charismatic leaders" whose zeal outstripped -- and even supplanted -- their business acumen. Shea speculates that in the three California counties that form the heart of Silicon Valley and the Internet economy -- Santa Clara, San Francisco, and San Mateo -- there are at least 100 options-related lawsuits pending, and that more are on the way.

"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.

"Everything was "long-term" with Naveen. I can't tell you how many times i heard that from him," Lucky told Inc.

As Hoffer was starting at InfoSpace, according to his deposition in Plunkett's case, Jain told him he was going to hire Plunkett -- but on a temporary basis. Hoffer recalled in that deposition that Jain had told him that hiring Plunkett "wasn't going to dilute anybody's equity in the company, because he had no intention of keeping Mr. Plunkett around." Hoffer was concerned and asked, "Naveen, what's going to keep you from doing exactly the same thing to me?" Jain's reply, according to Hoffer: "Don't worry, young man, friends don't screw friends."

According to Plunkett, Jain told him a different tale. Plunkett says that Jain told him that he had gotten Hoffer to join InfoSpace by offering him 20% of the company. "I almost fell off my chair," Plunkett recalled in his deposition, telling Jain that that was too much of the company to give up to one person. Jain then replied, as Plunkett recalled it: "Don't worry....he has no paper; he has no proof. We're not going to give him that. He's already quit his job; he's broke....I think he's got a baby, I think he just bought a house....We'll get him down."

Plunkett said Jain turned on Plunkett and fired him the day after that conversation. Jain allegedly fired Hoffer about two months after that.

Jain, meanwhile, had made yet another key hire, Mark Kaleem, whom he brought in as his vice-president of strategic business development in early June 1996. Kaleem claims that Jain offered him options to buy 500,000 shares of InfoSpace. But when Kaleem sought to exercise his options, Jain rejoined, according to Kaleem's deposition testimony, "Oh, Mark, you don't need to exercise. You can exercise it anytime...why are you worried about that?"

Kaleem said that he told Jain he had a heart condition and he wanted to take some of the stock and put it into trust accounts for his children. Kaleem then prepared an option agreement and asked Jain to sign it. In his deposition, Kaleem recalled Jain's response: "He was livid. He refused to sign it."

By September 1997, Jain had fired Kaleem. In his deposition, Kaleem said that when he asked why he was being terminated, Jain told him: "We have to move, move along. We can't afford to have -- coordinate offices." According to Kaleem, he was working out of a one-room office in Campbell, Calif., with a monthly rent of $250.

Kaleem then asked Jain about his stock options.

Kaleem claims that Jain responded, "You don't understand. You have nothing."

Charisma Redux
If there is one truism about charismatic leaders, it's that there is always another -- veiled -- side to them. There's a well of energy and will that fuels the enthusiasm they offer for public consumption.

Perhaps what is most noteworthy -- and breathtaking -- about charismatic leaders is their sheer brazenness. In another complaint filed against Jain and InfoSpace, yet another plaintiff, John Richards, alleges that Jain persuaded Richards to sell his company, Yellow Pages on the Internet LLC, to InfoSpace. In return, Richards alleges, Jain assured him that he would receive more stock options than anyone else in the company.

And yet, in his lawsuit, Richards claims that at the time of his hiring as a vice-president, at least six other InfoSpace employees had higher option grants, as did two hires brought in after Richards's arrival at InfoSpace.

Bill Lucky, whose company has also sued InfoSpace and Jain, says that he ran into that sort of doublespeak as well. "Everything was 'long-term' with Naveen. I can't tell you how many times I heard that from him," Lucky told Inc. in an interview.

As a vice-president for international sales at Switchboard, the first company to market a free national directory of U.S. residential information on the Internet, Lucky had extensive contacts with the largest Internet companies in Canada. Lucky claims he approached Jain and proposed a joint venture (50%-50%) between a new company he was starting, Infofind, and Jain's. It would ultimately be called InfoSpaceCanada.

Lucky claims, however, that within weeks Jain wanted to alter the split to 51%-49%. Lucky had already left his job at Switchboard. He says he relented, but only with Jain's assurances. "He kept on saying that the only types of relationships he makes are long-term and that we would go for years and years," Lucky recalls of Jain. Soon after, according to Lucky, Jain wanted to amend the deal further by entering into a "marketing- and-sales agreement," whereby Infofind would receive 30% of all revenues. Again Jain allegedly soothed Lucky's qualms with repeated talk about their "long-term" relationship. Lucky then set about signing up major accounts, such as AOL Canada, Bell Canada, and MSN Canada, that would take "private label" content from InfoSpace.

The "long term," as it turned out, was nine months. Lucky claims that was how long it was before Jain terminated the marketing-and-sales agreement. He also alleges that Jain hired Lucky's sole employee and had begun dealing directly -- behind Lucky's back -- with the contacts Lucky himself had cultivated. Contending that he came away with nothing from the "long-term" relationship, Lucky decided to sue.

Although Jain declined to comment on the lawsuits, some light can be shed on his position in these cases by reading the depositions he gave in several of them. When pressed on the equity issue, Jain asserted more than once that option agreements between him and key personnel implied a "cliff" vesting feature, whereby no options vest during the first year of employment. "No single [share] gets vested until they have been an employee of the company for one year," Jain stated in one deposition.

In addition to claiming that the options were not vested until a full year of employment had passed, Jain also dismissed the contributions the plaintiffs claimed to have made to his company, asserting that many of the plaintiffs did not bring any special contacts that he, himself, didn't already -- or couldn't -- cultivate. "I had, in fact, not only contact but personal relationships with most of the CEOs of the portals at that time," said Jain in a deposition. When asked, for example, if one plaintiff, Robert Hoffer, generated any business for InfoSpace, Jain replied: "Nothing of significance."

"I think these companies are scared. So many companies used stock options so they didn't have to pay people as much in salary," suggests one San Diego financial planner. "Now the whole thing has been reversed, and they don't want to face the fallout from that situation."

Whether the dispute among the parties had grown heated before InfoSpace went public, in December 1998, is unclear. But one thing is certain: once the company had a market value, the options were worth something -- arguably a bonanza for those who had received and held on to them. At the same time, the company publicly acknowledged that the question of options was likely a sticky one. Among the most interesting disclosures in the company's amended SEC filing was a minor note that made the following admission: "The company's procedures with respect to the manner of granting options to new employees were not clearly documented." The company further recognized in its filing that the lack of clear documentation made InfoSpace vulnerable to potential claims. Jain, therefore, "agreed to place into escrow 1,000,000 shares of common stock beneficially owned by him to indemnify the company. ..."

Ten months later, when InfoSpace sold additional shares to the public, Jain increased that sum to 2 million.

Those precautions proved necessary, as lawsuits were indeed in the works.

In February 1999 Mark Kaleem settled his case for a reported $4.5 million. Later that year, according to the Richards complaint, InfoSpace allowed Tim Kay to buy 16,536 shares of its stock for 10¢ each. In March 2000, Kent Plunkett settled for a reported $10.5 million. Last January, Robert Hoffer reportedly settled for an undisclosed sum. The Lucky and Richards suits are still pending. Lawyers for the plaintiffs declined to comment on specific details of the settlements, citing confidentiality provisions in the settlement agreements.

Kathleen Covey is a San Diego financial planner who offers financial education courses on stock options. She says that companies like InfoSpace are now in a ticklish situation. They need to better educate employees about options, but doing so in the wake of a market collapse might raise thorny questions about why they haven't done so previously.

"There are a lot of issues employees don't understand," Covey asserts. Why? "Because they haven't been educated." Whose responsibility is that? "I think the companies'," she continues. "They should take an active role in educating employees about these benefits if they are going to offer them."

In fact, Covey says, that education process should be going on now with the market washed out. "There's a huge need for it," she notes. But it isn't happening. "I think these companies are scared. So many companies used stock options so they didn't have to pay people as much in salary. Now the whole thing has been reversed, and they don't want to face the fallout from that situation."

During the past 18 months InfoSpace stock fell from a high of $138.50 a share to a low of $1.56. (It was at $4.60 at press time.) But that descent hardly seems to have slowed Naveen Jain in his company-building enthusiasm. After hiring Arun Sarin from Vodafone, in April 2000, Jain engineered the merger of InfoSpace with Go2Net, one of the Internet's leading networks, paying for the acquisition in stock. Analysts had mixed feelings about the deal, though many favored it.

Allyson Rodgers, the Wells Fargo Van Kasper analyst, calls Go2Net "a good fit" with Jain's company. Go2Net gave InfoSpace entrÉe to the broadband market. In addition, she says, Go2Net founder Russell Horowitz, who himself had made a few smart acquisitions, was seen as a savvy and seasoned manager.

"It's clearly an unsettling thing when senior management leaves like that," says one analyst.

But the enthusiasm proved short-lived. Horowitz stepped down within four months -- and, in fact, unloaded much of his company stock. Moreover, on the same day last January that Horowitz's departure was announced, it was also announced that Sarin, who had lasted eight months, and InfoSpace's new chief financial officer, Rand Rosenberg, would be stepping down or leaving the company altogether. That amounted "to a big red flag," says WR Hambrecht analyst Peter Friedland. "It's clearly an unsettling thing when senior management leaves like that." Several analysts downgraded the stock the next day, and it lost half its value two weeks later.

Moreover, both Friedland and Rodgers are puzzled over how InfoSpace dealt with the Go2Net acquisition. "InfoSpace bought the company -- and then they decided it was no longer a viable business," says Friedland. "They dramatically scaled it down." He now labels InfoSpace "a wait-and-see story."

In early February of this year InfoSpace forecast that its revenues for 2001 would total about $200 million, a third less than the $300 million Wall Street was expecting. (Moreover, InfoSpace had previously told analysts it expected $360 million in sales.) It then said it would cut 250 employees from its staff of 1,200.

Back in March 2000, when Internet stocks had started to weaken, Leslie Walker of interviewed Jain. She asked him why InfoSpace's stock had declined sharply in the weeks prior to the interview. Jain waved off the suggestion that there was something fundamentally wrong with the company, replying that InfoSpace's market value would one day exceed that of Microsoft, Intel, and Cisco combined. "If you are an investor, would you want to miss out on such a great opportunity?" he asked. "How would you answer ... your grandchildren?"

Interestingly enough, in the next three months Jain would sell $80 million worth of his stock at prices far above today's depressed level. That, perhaps, is what Naveen Jain will tell his grandchildren.

Edward O. Welles is a senior feature writer at Inc.

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