When David Weld and his four partners quit Microsoft to form Cognisoft (see the last “Millionerds“), they were doing something that is quite common in Silicon Valley. Every day some geek with a gleam in his eye quits Oracle or Sun or Hewlett-Packard to start his own company. You can barely call it initiative: An entrepreneur in Silicon Valley is doing only what the Valley is telling him to do. If he shows even the faintest hint of promise, he is immediately offered cheap office space, free legal and accounting services, millions of venture-capital dollars, and résumés from a dozen other people just like him who want to leave their large corporations. In the Valley, the riskiest career move is to remain loyal to one company. “I see nine years at one place on a résumé,” says Eric Ver Ploeg, “and I say, ‘What’s wrong with this guy? Is he a bureaucrat or something?’ “
But these guys left Microsoft. Why this should be more difficult than leaving Sun or Oracle is one of the mysteries of corporate culture. A restless 26-year-old at Oracle with $300,000 in unvested stock options is an entrepreneur in the making. A restless 26-year-old at Microsoft with $300,000 in unvested stock options is a prisoner. People who leave Microsoft usually maintain–and often actually believe–that they intend to retire.
David Weld, Ken Schneider, Tony Liano, Sean Nolan, and Jeff Pettiross were all still in their 20s or early 30s, and all of them had hundreds of thousands of dollars in unvested Microsoft stock options. Yet they decided that they were better off selling software on their own than they were selling it for Microsoft. “Until last year I didn’t have the stones to leave my options behind,” says Liano. His mind was changed not so much by one event as by the sense that 1) Microsoft’s share price could not continue to rise as quickly as it had in the past and 2) even if it did, the company had grown too big to reward him fully for his entrepreneurial skills.
“Here’s one example,” he says. “I was working in the direct-marketing department. They sent out millions of these little cards. I found out that you could shrink the cards by 3 or 4 inches and save 12 cents per card. It saved the company millions of dollars. And you know, people didn’t even look up from their desks.”
Don’t jump to the wrong conclusion. Microsoft shrank the cards. Instantly. But the company had grown to the point where a great idea from Tony Liano had no measurable effect on the value of Tony Liano’s stock options. And it had grown too big for one employee’s stock options to produce a really huge fortune–hundreds of millions of dollars–which is what it takes to be certified a winner in the Miracle Economy. To Weld and company, Microsoft was suddenly looking fat and slow. Not as fat and slow as IBM, perhaps, but too fat and slow for them.
Microsoft, like many companies, requires employees to sign an agreement that when they leave the company, they will not compete against it for some period of time or entice other employees to leave as well. The five didn’t let either part of the agreement spoil their plans. They were setting out to form a software company and, as one of them puts it, “you can’t make software without competing with Microsoft.” They knew also that they were likely to hire other Microsoft employees to help them do it.
They conspired even before they left. They agreed on a polite fiction to tell their bosses–they were leaving not to create and sell software but to be consultants–and then resigned on the same day, April Fool’s Day, 1996. Beforehand, just to be safe, they cleared out their offices. “We did that in case they got angry and threw us out,” says Liano. “That must have looked a little suspicious. You know, like, ‘Hey, Tony, what happened to your radio?’ But they really had no idea it was coming.”
Microsoft’s initial reaction was one part hurt, one part apathy, two parts envy. “When we told them we were leaving,” says one of the deserters, “some people were a little upset, but mostly they were envious. No one believed the stuff about consulting. They all wished they had the nerve to leave and start a company. One of the managers who was assigned to talk us out of it asked us instead if he could invest in us.”
They set themselves up in a small house down the road from their former employer and called their new company Cognisoft. The software they designed, called IntelliServ (see the last column for an inadequate description of what exactly IntelliServ does), had a market of many hundreds of millions of dollars a year that they believed was theirs for the taking. For a brief shining moment, it looked as if they might make those hundreds of millions of dollars.
And here is where the story takes a strange turn. Contemplating these prospects, they suddenly felt small and defenseless next to … Microsoft. The world is littered with companies much bigger than Cognisoft that had been crushed by larger companies. Who are we, they asked themselves, to take on Microsoft?
Slowly, they inched away from their greed and toward their fear. One day they found that they had stolen their last Microsoft employee. He arrived with an explicit message from the company, which had tolerated previous raids: Any more, and we get angry. Another day they woke up and realized that they were ashamed to let customers see their offices. They had taken for granted the aura of plausibility that Microsoft confers on new ventures. “Basically,” says Weld, “after we left Microsoft, we thought we were Microsoft. The longer we ran, the more aware we became that we were just five guys in a shack who could be destroyed at any time.”
T he final blow to their dreams of market domination came when they went looking for better office space. “We found a place we liked,” says Weld, “and were about to lease it. Then we opened one of the closets.” Inside they found promotional material left behind by the previous tenant: another once-promising small high-tech company that had been driven out of business by the giants. It wasn’t a new office, it was a grave. “That’s when we looked at each other,” says Weld, “and said, ‘Time to sell out!’ “
The whole process had taken a mere eight months. In January 1997 they sold themselves for $10 million in cash to a company called Verity. Even then Weld thought that if they had been willing to press on alone, they might have made themselves hundreds of millions instead of just millions. The market for IntelliServ hadn’t changed so much as their perception of it had. In eight months outside the Microsoft womb, they had lost a lot of their taste for risk. It turned out that they didn’t have the stones to take the one-in-a-thousand chance of making a large fortune. They didn’t even have the stones to accept stock in Verity–the usual method of payment in these transactions. And they were probably right. Any startup, even a software startup, is far more likely to fail than to succeed; leaving Microsoft to form one is an act of madness brought on by a too-literal reading of business magazines. And from the moment Verity bought them out, the Verity share price collapsed.
Like many stories in the Miracle Economy, this one has a surprising moral. Weld makes a strong case that he is richer and happier now than he was when he worked at Microsoft. But Liano has sat down with his spreadsheet and calculated that he (and probably also Nolan and Pettiross) is no better off than he would have been if he had simply remained with Microsoft. He is a millionaire now; but he would have been a millionaire if he had merely sat tight and let his options vest. “It was a wash,” Liano says. “Except at Cognisoft, there was a lot more stress and a lot more risk.”
The fifth member of the group was Ken Schneider. Schneider, as the second in command at Cognisoft, held the second-largest stake. Like Weld, he claims he is both richer and happier than he would have been if he had remained at Microsoft. But after Cognisoft vanished, he found himself at a loose end. Two months after he collected his seven-figure paycheck from the sale of Cognisoft, he reapplied to Microsoft and was taken back in. “For me, starting a company was like getting a card punched,” he says, with something resembling a sigh of relief. “But I don’t see how in the foreseeable future I will go out and start another company. Really there is no greater company to work for than Microsoft.”