Summer Interns Taking Stock in Net Start-Ups

Susan Moe’s summer paycheck was one of the smallest in her UC Irvine MBA class, but she could end up with the biggest payoff.

Instead of taking straight salary at a consulting firm, an investment bank or a Fortune 500 company, she went to work for an Internet start-up that paid her mostly in company stock.

“I had two other offers, and the stock was the deciding difference,” she said.

If Moe is lucky, she could become the next Scott Pinizotto. Three summers ago, while studying for his MBA at UC Berkeley, Pinizotto worked for Spinner.com, a Silicon Valley company that plays music over the Internet. He received stock instead of a salary. When America Online bought the company in June, his 12,000 shares were worth more than $300,000, about $750 an hour for a summer job.

“From our class, I’d say I had the highest-paid summer internship,” Pinizotto said. “I think a lot of my MBA friends wish they had seen what I saw in the Internet at the time and wish they had taken a chance.”

High-tech companies have long dangled stock options and their potential of great riches as the magnet to attract employees. The pitch? You may work 100-hour weeks, but if the company goes public, you’ll be a millionaire, just like those at Netscape or Broadcom or Priceline.com.

But stock-as-salary has become so widespread in high-tech start-ups--and made so many people rich--that an increasing number of graduate students in business administration are receiving shares as part of their summer paychecks.

While options that vest gradually over four years have become commonplace in the high-tech world--as long as the worker stays with the company--the MBA students’ version usually vests much earlier. No being tied to the company for the big payoff. The summer ends and the stock is yours.

“It’s amazing,” said Fran Noble, associate director of Stanford’s MBA career management center. “It’s a wonderful situation.”

Because of the potential payoff with start-ups, some students are turning down astonishing summer offers from the consulting companies and investment banks that traditionally have scooped up the top students from MBA programs.

Although the summer job phenomenon is still too new to force the more traditional companies to bump up their offers, increasing numbers of firms are adding stock options to packages presented to graduating MBAs.

“They’re going to have to find some kind of long-term valuation for their employees,” said Jill Rupple, director of recruitment for Diamond Technology Partners, a consulting firm that helps the largest traditional marketers move onto the Internet. “They need to find a way to keep valued employees and make them part of the organization, and equity is part of that.”

At UCLA’s Anderson School of Business, an informal survey this fall found 15 of 325 students received stock last summer, nearly all of them from Internet companies. The Internet sector is exploding so quickly that until this year, the school didn’t even track the number of graduating students entering the field.

“What we say to kids,” said Elaine Hagan, associate director of the Price Center for Entrepreneurial Studies at UCLA, “is if they’re given a choice, if they believe in the company, take the options. If not, take the cash.”

Bosses like the deal, too, because it’s a way for them to find the risk-taking employees who form the backbone of a company walking a tightrope.

“If they’re not interested in [receiving a portion of their salary in stock], they’ve pretty well said, ‘I’m not an entrepreneur,’ and I need an entrepreneur,” said Mason Conner, CEO and president of VillageFax.com in Tustin, the business-to-business fax services company where Moe worked. “It’s a mind-set. It’s a breed.”

The summer stock deals also help these upstart firms conserve money at a stage when they are pressed for cash. “A small company doesn’t have deep pockets, and so they’re looking for a way to attract the best talent,” said Randy Williams, director of MBA career services at the UCI School of Management.

But taking stock in a start-up instead of salary is far from a sure thing. The company that once looked like the next Microsoft might disappear in a couple of years, turning those stock certificates into scratch paper and leaving the MBA muttering about student loans that need to be paid.

“You’re forgoing current income for a maybe,” Hagan said.

‘You Know How Fast Internet Time Is’

It isn’t just a company’s dynamic business plan that could determine whether the student becomes rich, either, but factors beyond anyone’s control, such as the economy. If the stock market takes a dive, their equity could be worthless.

Despite the ups and downs of the market, the students who took the stock are undeterred. After all, they’re playing in the high-flying IPO market, where new companies may double or triple in price the day they go public. Or, like UC Berkeley’s Pinizotto, they might hit it big when their start-up is gobbled up by a larger company.

Hagan suggests MBA students do their homework before working for stock, checking on the backgrounds of the executives and the successes of the venture capitalists.

Wharton School student Chris Utgaard nearly learned about the dark side. He turned down a summer job with Diamond Technology Partners at $4,000 a week to work for a start-up for a small salary and an ownership stake. But the anticipated funding for the venture never came through, and he knew he had to find something else.

“That would have been a total loser,” he said. “That was looking bleak when I decided to leave.”

Utgaard scrambled and found a job with CarsDirect.com, a Sherman Oaks company that sells new cars online. His pay? Salary and stock options.

Jeff Smith also bet on stock. He was attending MIT’s Sloan School of Business when he was offered a stint last summer at a well-known consulting firm for $8,500 a month, with a $5,000 bonus. “When you’re sitting on $60,000 to $70,000 in debt [in student loans],” he said, “it’s attractive.”

But he turned down the offer to take a job at AdventureSeek.com, an Internet travel site in San Francisco, for about $1,500 a month and stock.

“The base was enough to pay my rent for two months and keep me fed,” Smith said. “The reason I took it was for the experience and the potential upside.”

When the summer ended, he postponed school. “AdventureSeek is in the right place at the right time,” he said. “You know how fast Internet time is. If you miss an opportunity now, it might not be there in six months.”

UCLA’s Josh Li turned down an offer to work this summer at technology giant Hewlett-Packard. Instead, he took less money and 200 shares of stock to work at WishClick, an online gift registry service in Silicon Valley.

Phil Van Horn, the recruiter who brought Li to WishClick, said he encourages his clients to offer stock.

“It’s in recognition that this is how we play the game,” he said, “so let’s do it even at this level.”

Most of these companies are in the very early stages of even being start-ups. They have few employees, little bureaucracy and big dreams. The CEO is not a remote figure who stays closeted with other executives but might be the person you regularly eat lunch with. Li, for example, was the 10th person hired at WishClick.

For that reason, these summer workers are given far more responsibility and influence than they would in full-time jobs at more established firms.

Jason Salfen, another MIT business student, helped write the business plan for eDentalStore over the summer. He didn’t return to school either, instead taking a job with the start-up as director of business development.

“If the tech boom dies, this opportunity is lost,” he said. “No one knows when the gravy train ends.”

UCLA student Michael Cohan also felt the warp speed of the Internet world when he decided to take only stock in Backupnet International, an Australian data transmission company trying to launch in the U.S. Like many MBA students, he had worked for several years after receiving his undergraduate degree and had saved enough money to live on.

“It’s unlimited upside potential versus having a limited cash payout,” he said. “How would I feel if I wrote a dynamite business plan, the company became the next Yahoo, the [stock] price skyrocketed and I’d have gotten just a salary?”

The potential riches of summer work have led to one result that the business schools are not too happy about: More students are agonizing over returning to school after their first year.

“We’ve always had students attracted by what they were doing over the summer, but there’s a sense, whether money or the challenge, that these companies are moving so fast that by the time they come back by the end of the second year, the world will have changed,” said James Baron, a Stanford University professor of organizational behavior and human resources.

More established tech companies are offering their summer MBA students stock options that vest after four years if they agree to return after they receive their degrees.

That’s not what someone like Moe is looking for. When she began negotiating with Conner, she wanted her entire salary in stock. She finally decided to take a third in cash to pay the taxes. But she still takes home about eight shares an hour.