Dot-Com Workers Watch Net Gains Fade
Last week’s technology stock dive, marked by a plunge in the tech-dominated Nasdaq composite index of 9.7% Friday and 25% for the week, has spread anguish far and wide. Many investors this weekend are assessing the damage to their portfolios, pondering what to do next.
But perhaps nowhere is the consternation more direct and pervasive than among the workers of the nation’s technology companies, particularly money-losing “dot-com” concerns whose once bright futures are withering as their stock prices have collapsed as much as 80% or 90% in recent weeks. Their vast paper fortunes toppling in the market retreat, many young engineering and software wizards find themselves thinking of the possibilities of working for less-exciting, established companies that they viewed with disdain just weeks ago.
Intel, the world’s largest microprocessor maker and one of Silicon Valley’s blue-chip firms, experienced a surge of success in a tough labor market in March as the dot-com market malaise took shape--landing 1,400 new employees, up from 800 the previous month.
Although the company could not pinpoint the reason for the change, engineers and other technical professionals may be shying away from working for risky dot-com start-ups.
Other established blue-chip technology firms, such as Hewlett-Packard, are developing an increasingly entrepreneurial bent--encouraging innovation and spinning off subsidiaries to offer employees “upside” prospects on the stock market. HP has seen an increase of 25% to 30% in new hires since the fall.
Then consider the career path of Freddy Nager, a 32-year-old Harvard graduate and Web-design guru, who last fall joined Iz.com, a Los Angeles online entertainment start-up. The firm lured him with 5,000 stock options that he could elect to purchase at a mere 51 cents a share. If it scored big after selling stock to the public--as the founders confidently predicted and as many dot-coms have done--Nager would soon be a wealthy man.
But that initial public stock offering, or IPO, never materialized. In March, five workaholic months after he joined Iz.com, the company was bought out by Popmail.com, which promptly laid Nager off. As severance, the new owners let him keep only 1,000 of those stock options--now worth a grand total of about $1,400.
“Not exactly the early retirement they promised me,” he said. Nager moved on to a job at Nexgenix, a 9-year-old technology provider that actually predates the Web, saying that he’s learned his lesson with start-ups--a hard-knock education many others in the industry are gaining as well.
“When friends of mine go out and interview with pre-IPO companies, they always hear talk about options, but their eyes glaze over,” Nager said.
While dot-com employees are hardly flooding back to old economy companies, recruitment experts say that high-risk, high-reward Internet jobs are losing some of their luster.
Many of those companies became overnight sensations, acquiring top talent with stock option plans that promised overnight riches. Top executives might obtain as much as 10% of a fledgling firm, which could some day be worth 1,000 times their salary. Even secretaries at big technology winners have been known to become millionaires.
According to Richard Carlson, an economist at Spectrum Economics in Palo Alto, about 20% to 30% of stock in most Silicon Valley companies is held by employees.
Stock options are typically granted when workers are hired, though many companies award additional options as performance incentives. Those shares usually vest--become possible to sell--gradually over a one- to five-year period. For private companies, the value of options is theoretical because they can’t be traded until the company sells shares to the public.
Options Only Valuable if Stock Goes Up
But for a public company, employees can trade vested options at the price of shares on the open market. Of course, the options are valuable only if the stock rises after the options were granted. So if an option is granted at $1 a share and the stock later trades at $25, the employee could earn an instant astronomical profit.
No well-established, public company can offer anything close to such sudden wealth.
In the face of the recent Nasdaq slump, however, more and more stock options are “underwater”--industry parlance for shares trading at lower prices than the option price available to employees. In other words, those options have become worthless.
“The classic example is [leading Web retailer] Amazon.com, which for the first time has options coming due that are underwater for a whole lot of their employees,” said Edward Lawler, a business professor at USC and author of “Rewarding Excellence: Pay Strategies for the New Economy.”
Amazon’s stock closed at $46.78, down $1.13, on Nasdaq on Friday, down from its 52-week high of $113. “Amazon is at significant risk right now in terms of losing employees,” Lawler added, though smaller Internet firms face similar dangers.
Meanwhile, the risks associated with dot-coms have been amplified by gold-rush-style greed on the part of some founders who have effectively cheated employees out of options just as the golden ring comes in sight, said Carlson. He frequently serves as an expert witness in a fast-growing docket of lawsuits involving such allegations.
Fed by media hype, workers at dot-com firms dream of IPO riches but slowly begin to realize that “most Internet careers are nasty, brutish and short,” said Bill Lessard, co-author of “NetSlaves, True Tales of Working the Web.”
Jason Buehler, 30, a Los Angeles marketing executive, thought he had reached business nirvana a year ago when he left a secure position at the Japanese consumer-electronics titan Pioneer to become the fifth employee of a new dot-com. He was guaranteed a 5% share of the company, an $80,000 base salary and commissions of 5% of gross profits for all sales he made.
But when the company began to approach its IPO, “all of a sudden things started to change,” Buehler said. The promised stock has never been delivered and the company is now short on cash, he said. It has never paid any sales commissions and has trouble meeting payroll. But in the unkindest cut, the firm unilaterally rewrote his contract, offering a tiny fraction of the promised shares.
People “just get greedy and change the ballgame in the middle of the process,” he said ruefully. “A lot of these companies are promising the world but delivering nothing.”
While he tries to extricate himself from his employer without losing all he thinks he has coming to him, Buehler has sworn off dot-coms in favor of starting Cerge, a Los Angeles-based technical services company.
When Nasdaq stocks nose-dive, the opportunities for fledgling dot-com companies to sell their stock to the public--and to use stock options as a lure for talent--dries up. “The new companies get caught not just in a cash death spiral, but a talent death spiral,” said Carlson.
That could be good news for established companies seeking to staunch the flow of talent to start-ups or to lure ambitious experts into the corporate fold.
The established companies have won over some new recruits recently by beating the dot-coms at their own game, such as creating spin-off companies in which the parent retains partial ownership, offering the prospect of both stability and market riches, said Robert W. Bellano, a high-tech recruiter with Cfour Partners in Santa Monica.
Computer maker Hewlett-Packard plans to spin off its Agilent division, which makes testing and measurement devices. The company has also been developing Web services as a means of distinguishing itself from other hardware makers.
“A year ago or two years ago, [applicants] would have seen us as stodgy, slow to change,” said Mike Nichols, HP’s director of staffing. But the company now competes by positioning itself as “a dot-com company with a profit,” not to mention humane working hours and an ample budget for support staff, rare qualities in a start-up environment.
Leslie Berliant, general manager of Etalent, a Los Angeles headhunter, noticed an increased flow of candidates to more established companies beginning a few months ago.
Many job-seekers now ask her to perform due-diligence to ensure that a dot-com has credible prospects before accepting an interview.
And new-economy firms with depressed stock prices could face deep trouble if the market doesn’t recover soon. Managers will not easily be able to take countermeasures to retain key employees, such as re-pricing stock options to increase their value, Lawler said.
And they will have an increasingly hard time coming up with greater cash compensation to keep employees on board.
Still, the Internet fortunes made over the last few years mean that many technology professionals who made small fortunes can always try another dot-com without undue risk.
And young people with strong skills can also afford to gamble.
Malinee Churanakoses, a 26-year-old Web producer, left a large ad firm last June to work with Etoys, the online Santa Monica toy firm. She has seen her stock options turn into wallpaper as the once high-flying e-tailer’s stock has plummeted from $86 last fall to $4.75 Friday.
But Churanakoses plans to stick with Etoys.
“I wasn’t really hungry for the whole get-rich-quick scheme,” she said, and is happily developing new skills and gaining invaluable experience early in her career.
But so hopeful an outlook may be hard to maintain if the Nasdaq drops below 3000, which would require a further loss less than the nearly 10% it suffered on Friday, experts say.
That could lead to a serious credit squeeze for small companies, lower compensation rates and an exodus to more stable firms.
“It’s possible that we are at the end of the golden era for dot-com start-ups,” USC’s Lawler said. “It’s so much built on expected wealth and optimism, and optimism of that kind can be very fragile.”
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Times staff writer Nancy Rivera Brooks in Los Angeles contributed to this story.
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A TEST FOR INVESTORS
Analysis and commentary on the tumble of the Dow Jones and Nasdaq markets. C1
