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(The views expressed here are those of the author. AssureConsulting.com takes no responsibility for them. The article was first published in http://www.waxy.org/random/arsdigita and was written by the CEO of the company before the settlement.)
ArsDigita: From Start-Up to Bust-Up
March 2001: The Final Shove
March 2001 was a dark time from our shareholder perspective. Some of our greatest assets were pushed out the door. David Rodriguez, for example, a man who had worked like a monster and delivered huge projects to happy clients. Did he refuse to implement abstract URL on the World Bank knowledge management system until I nagged him via email from Australia? Yes. Did he say that ACS 4.0 was unusable? Yes. Did he tell Allen "You talk like a press release"? Yes. These things disqualify dvr from diplomatic service. But as shareholders we didn't like to see someone who had personally delivered more than $1 million in revenue while costing us perhaps $200,000 being pushed out the door. To a non-owner manager, it might make sense to get rid of someone who'd offended you with a harsh word. You're still going to get more than a third of a million dollars in base plus bonus, even if the shareholders take a beating. But as an owner-CEO I would let an employee vent his spleen at me, secure in the knowledge that at the end of the day this guy was building the value of my shares.
Our co-founder Aurelius Prochazka was also axed in the March 2001 massacre. Have Jin and I had to clean up some of his code in the past? Yes. Was Aure rather discouraged and unproductive in the past few months as ArsDigita's financial and market position slid and he reflected on the fact that unqualified people were managing the firm? Yes. Was Aure too quick to criticize highly paid executives whose intellectual abilities fell short of the standards he absorbed at Caltech? Yes. But what kind of a company can you have when you fire someone who is (a) a founder, one of the people who built a $20 million profitable enterprise on capital of $10,000, (b) someone who'd previously built a successful business and sold it, and (c) responsible for the innovative ideas and interface behind some of the ACS's most interesting modules (e.g., file storage)? Aure's PhD is in engineering and not in charm. But if shareholder value were related to average employee charm, Microsoft shareholders would be rather poor indeed.
So what were the shareholders doing in March 2001? Planning some research projects at MIT and Orange/France Telecom. Giving some one-day courses in Thailand and India. Revamping our Software Engineering for Internet Applications course at MIT (recently accepted by the faculty into the core curriculum and renumbered 6.171). In short, getting on with our lives and personal technical goals, working full-time for other companies. We cried if we thought about ArsDigita's financial performance but mostly we tried not to think about it.
Sing, O goddess, the anger of Achilles son of Peleus, that brought countless ills upon the Achaeans. Many a brave soul did it send hurrying down to Hades, and many a hero did it yield a prey to dogs and vultures, for so were the counsels of Jove fulfilled from the day on which the son of Atreus, king of men, and great Achilles, first fell out with one another.
-- Iliad, Book I
Peter Bloom, the General Atlantic employee representing their interest on our board, was not crying in March 2001. He was angry, as he had been for many months. Though Agamemnon had not taken his prize girl Briseis to replace the daughter of the priest Chryses, Bloom's anger was not less than that of the great son of Peleus. My habit of pointing out that he'd accomplish more if he picked more important opponents (e.g., Microsoft and Oracle rather than a 37-year-old living in a 2-bedroom apartment in Cambridge) did not cool him down. What really sent him over the edge, as far as I can tell, was when I related my response to a member of the Harvard faculty who asked me what it was like to watch venture capitalists and professional managers run ArsDigita (I replied "like watching a group of nursery school children who've stolen a Boeing 747 and are now flipping all the switches trying to get it to take off").
Peter Bloom sent me an email message on March 28, 2001: "Since you are so troubled by the direction that the company has taken, you can choose to resign from the board before our next meeting. This is your decision to make, but it is a course of action open to you to avoid the public humiliation and significant professional impairment of being removed as Chairman from a board of directors. ... The actions you have taken and the written communication you have directed at individuals has now gotten you in very serious trouble and you need to turn to someone you trust for counsel. I sincerely hope that your trusted confidants will tell you the truth about the impending consequences of your recent communications and accusations before you irreparably impair your reputation and financial future."
Shortly after I received the email message, I stopped by ArsDigita HQ to pick up Alex from Eve. My card key no longer opened the door.
When a company with $10 billion in assets threatens "irreparable impairment of one's financial future" it is time to see a lawyer. So, thanks to Peter's initiative, I trundled down to see Sam Mawn-Mahlau and Paul Mahoney at Edwards and Angell. They prepared a "shareholder's consent" that would change the company by-laws so that, until ArsDigita went public, the CEO and president would be directly elected by the shareholders. The next item on the list was the election of Philip Greenspun as CEO. Another item in this shareholder's consent was to elect two existing vice-presidents of the firm, Tracy Adams and Eve Andersson, to the board. The stockholder's agreement said that the three insiders on the Board had to be "senior executives" so we promoted them to "Executive Vice President" just to be safe.
The effect of this shareholder consent was to trim the venture capitalists back to what they'd bargained for, i.e., two board seats plus veto power over major transactions.
Our shareholder vote happened to occur on the same day that CNET carried a story about how ArsDigita would henceforth abandon its open-source strategy in favor of traditional licensed software and how Philip Greenspun, the "former chairman", had left the company. The next morning, April 6, a courier arrived at 80 Prospect Street (ArsDigita HQ) with a letter for Allen notifying him that he'd been demoted from "President and CEO" to "President". I telephoned Allen to assure him that I didn't want to make any major personnel changes immediately, that I'd be happy to consider the entire last year as water under the bridge and work with him under our original agreement (I'd keep responsibility for engineering, education, and evangelism; Allen would build the rest of the business). I said that I wanted to spend the next few weeks just coming up to speed on the status of the product, the customers, and the company. Allen told me just what I wanted to hear and I was encouraged by the idea of working through him.
April 2001: Allen and the Venture Capitalists File Suit
On April 11, 2001, the following lawsuit was filed in Delaware chancery court:
| Allen Shaheen, Ernest ) | Civil Action No. 18821 |
| Blackwelder, General Atlantic ) |
| Partners 64, L.P., a Delaware ) |
| limited partnership, Greylock ) |
| X LIMITED PARTNERSHIP, a ) |
| Delaware limited partnership and ARSDIGITA CORPORATION,
a Delaware corporation, ) |
| Plaintiffs, ) |
| v. ) |
| PHILIP GREENSPUN, Eve A. ) |
| ANDERSSON AND TRACY E. ADAMS ) |
| Defendants. ) |
As you see from the caption of the case, the lawsuit was filed by Allen, Ern, the VCs, and the corporation itself. We were quite confused by the form of the case, given that this is fundamentally a dispute between two groups of shareholders (the VCs versus the founders). So we'd not expected the corporation itself to have any interest in the case one way or the other.
A conversation with ArsDigita Corporation's corporate counsel, Jay Hachigian from Gunderson, shed some light on the matter. It seems that Allen dipped his hands into the company checking account and scooped out a quarter million dollars to pay the venture capitalists' attorneys in this matter. Jay cautioned the group that this was perhaps not the best idea but they apparently went ahead anyway. Thus we now have the spectacle of a group of shareholders trying to increase the level of accountability of a management team who has, in their view, been doing a bad job. That group of shareholders is being sued by the managers who want to avoid accountability. The lawsuit is being funded with the defendants' own money!
The crux of the plaintiffs' case is that Jin and I signed various agreements promising to do various things, e.g., always vote for a Greylock and General Atlantic representative on the board. The closing documents for our financing formed a stack about the size of a Manhattan Yellow Pages. Supposedly somewhere within this stack it is said that the Board of Directors of ArsDigita won't amend the corporate by-laws without the consent of the venture capitalist members. Nowhere does it prohibit the shareholders from doing this, however. Greylock and General Atlantic would like to read this interpretation into the documents. If memory serves, those documents were drafted by Paul, Weiss (paulweiss.com), General Atlantic's lawyers. So under standard legal doctrines, ambiguity ought to be construed against them. Of course, I'm not a lawyer and nobody can say what another human being, in this case a Delaware judge, is going to do. I personally think it would be a bit shocking for the judge to rule in favor of Greylock and General Atlantic. The effect of such a ruling would be to make the shareholders' voting rights worthless, i.e., the judge would be saying that the VC firms could exercise absolute power forever as if they'd bought the voting rights on our Common shares at the time of the investment.
So, that's the story. Keep in mind that most of what is in this document may well be irrelevant to the outcome of the lawsuit. A court generally does not want to decide which group of people is likely to make better business decisions. A court looks at issues such as "What rights do the owners of a majority of the shares of a company have to control its direction?" or "Can the venture capitalists add extra restrictions, a year later, to an agreement that they made and that is reflected in documents drafted by their own lawyers?"
It will take a couple of months to take everyone's deposition and get through discovery. Then we'll have a trial, maybe in June 2001, in front of a judge in Delaware. The judge might decide the case based on just a few documents, in which case all of the discovery will have been a waste of time.
Why I wrote this
Generally people try to say as little as possible during litigation. However, I've been getting progressively more and more annoyed listening to other folks' characterizations of the lawsuit. ArsDigita management was running around the building telling folks that "Philip sued the company", something that was plainly false. Allen was telling people "the venture capitalists have a very strong case" (how come he needed to pay a retainer of $250,000 of the shareholders' money to defeat a couple of individuals if the venture capitalists have such a strong case?). Reporters were making it sound like this was a dispute about ego and control. In a way that was true; Allen, Chip, and Peter did not like being characterized as fools whose ignorance was costing the company $millions. But as far as Jin and I were concerned, the reporters' spin was not true. We'd have been delighted to be passive shareholders in a successful profitable company. What we didn't like was being passive shareholders in a company bleeding cash.
There were some simple practical motivations for writing this article. One of the beauties of the Web is that it can save one from having to repeat oneself. On any normal day, I get 50 email messages from readers of photo.net and philip.greenspun.com asking various questions. A few times every week, a reporter will email or telephone to ask a question. After Greylock and General Atlantic filed suit, the stream of questions about photography and computer science was supplemented by a flood of questions about the lawsuit. If I hadn't written this article I might have gotten RSI in my wrists simply from typing "no comment" 200 times every day.
Finally, there are customers who've adopted ArsDigita Community System to consider and friends that we recruited to work at ArsDigita, the company that made a profit every month. These folks have a right to a better explanation than they're going to get from a 500-word newspaper story or a corporate press release. The company's birth and growth were public, chronicled in Chapter 2 of Philip and Alex's Guide to Web Publishing. The folks who were kind enough to pay attention and support us are entitled to know how the rest of the story unfolds.
© Philip Greenspun
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