Vivek Wadhwa, chairman and founder of Relativity Technologies, agreed to answer a series of questions from Local Tech Wire regarding his legal dispute with his firm.
The questions were submitted over the weekend. Wadhwa responded on Monday.
Neither the questions nor the answers have been edited. If changes were made, a parenthesis is included.
While being critical of your investors, you have remained very positive about the company. Please explain.
If the company wasn’t extremely valuable and didn’t have tremendous potential, the investors would not be battling so hard to maximize their ownership of it. We would not have survived the bursting of the technology bubble. And the company would not be adding premier customers. We would not have had a customer like Wachovia lead a $6.5M investment. The technology is nothing short of revolutionary. The partnerships we have built over the years and success we have delivered to our customers are the dream of every technology company.
Relativity has always had the potential of being a hundred million dollar company. Yes, we took a big blow when the bubble burst in 2000/early 2001, but we were one of the few to actually turn an operating profit in Q4 of 2001 with close to triple digit percentage growth rates. We had rebuilt our tremendous momentum, when I decided to take a much needed break in March of 2002. Then I had a heart attack, and came back to what seemed like the Twilight Zone. In the following months, instead of focusing my remaining energy on the business, I had to fight the venture capitalists that I used to regard as good friends. They wanted to appoint Steve Nelson, the younger brother of Board member, Tom Nelson as Chairman. Then they tried installing him as CEO. They tried to force us to accept $2M of new financing from them on terms that were very advantageous to them but bad for us.
Even after losing this battle and having to resign from the Board, the same venture capitalists invested millions more in the company after I recruited Steve Maysonave. You don’t make this type of investment in a company unless it is an exceptional investment. This was probably the jewel in the crown for the investment firms.
Do you still believe in the long-term success of Relativity and the viability of its products and strategy?
Relativity is the technology leader in a very sizeable emerging market. Its products are mature and solid, its marketing strategy is sound. The only thing lacking has been the focus on building the business and selling to customers vs. selling to Venture Capitalists and raising more capital.
You agreed to surrender some two thirds of your ownership share in order to secure financing. Was this a great sacrifice of your part? How much would you estimate in valuation?
(I)t’s not about my stock and valuation, and it’s not about my sacrifices. It is about the sacrifice and dedication of all the people that have worked so hard to build the company and the technology over the years. We had hired the best technologists from all over the world, and they labored endlessly to craft the technology. Our consulting staff worked day and night to help our customers succeed and to help perfect our products and methods. Our Sales and Marketing people put tremendous effort into understanding the needs of our customers, and perfecting the message and delivery. Even the secretaries would go beyond the call of duty.
When the company was in trouble, nearly every employee agreed to defer salaries. Some offered to work for free. Our managers invested parts of their life savings to finance the company and get it through its days of difficulty. And the company survived. We also preserved the investment of our Venture Capitalists. I doubt they have many companies in their portfolio in which the managers have invested their own money to save the company and preserve their venture capital investments.
So at the end of all this, when the founder and CEO had just had a massive heart attack, and was in intensive care, to have the Venture Capitalists decide that they needed to renegotiate the financing on terms that would give them a majority of the stock, was a little difficult for all of us to handle. This wasn’t exactly the “thank you” that we expected.
Did the surrendering of this equity make it more imperative that you be able to recoup the deferred salary and loans to the company?
There was a lot that happened between the time I won the first battle, and this recent financing. My lawsuit documents some of the relevant facts. Eventually, the venture capitalists gained majority ownership and control of the company and started calling all the shots. The company had focused extensive energy on raising capital at the cost of building a business. The new CEO admitted that fund raising had taken over half of his time over a period of months, and caused him to severely miss every single revenue target that he had set in every quarter to date. It came to the point that the company had to accept whatever terms it was offered, or could not pay a hefty tax burden or make payroll.
The Venture Capitalists had already decided to use their positions on the Board to cause the approval of this financing. They had agreed to swap stock from different series of financings with each other so that they would benefit more equally, and were ready to close on a financing that would have issued 2.7 Billion new shares of stock, and effectively dilute the common stock by 100%. They had also offered the CEO and his team a deal to issue them new stock for 21.5% of the company.
They offered me one chance to approve a deal that would preserve some of the value of Common stock. The dilution would be about 80% vs. 100%. In addition, Noro Moseley and Wakefield Group in their capacities as investors wrote a letter to me threatening legal action against me for having documented the detailed minutes of a previous board meeting, and for opposing this financing.
I had no option but to accept the deal offered. In addition to the dilution protection, they committed to pay me my outstanding Note, interest and deferred salary and to issue me some additional stock that amounted to a fraction of 1%.
What were your issues with raising more money?
The question I asked repeatedly was why the company was so focused on raising financing vs. selling to customers. I consistently argued that the company was better off building a $30M company that preserved value for all shareholders, vs. a $100M company that provided returns for a select few.
The investors that held board seats kept encouraging the company to raise more capital, even when they knew it was taking away from building the business and the company was getting increasingly desperate. This went on for months because it is very hard to raise money these days. Management asked for, and was offered the same level of stock that they currently held, no matter what the new stock price or the level of dilution for other shareholders. So I had to fight a lone battle for the interests of all shareholders other than the ones that happened to hold board seats.
How much of your salary did you agree to defer, and for how long a period of time? Was this a substantial sacrifice on your part?
I deferred nearly all of my salary when the bank balance started getting low. On top of that I kept writing checks to make payroll, and to help employees with their personal needs through 2001 and 2002. My wife would also spend hundreds, sometimes thousands of dollars for nice things for our employees. We always kept the office well stocked with food, for example. She would buy holiday gifts for every employee and their children. We took the vast majority of the money we had saved over the last 20 years, and invested it in our employees. The investment paid off, we preserved most of their jobs, and the company survived.
This was a big sacrifice and right now, we are fighting this lawsuit with savings we had set aside for our children’s education. Talking about sacrifice, both of my sons insisted that they would earn their own money to get through College. They would work harder for scholarships, and do what they needed to, but they wouldn’t let the family compromise on principles.
How much money did you put into the company as part of management’s investment?
I converted about $280K including interest into Series E stock. Our employees, and close friends invested an additional $1M. This was put in ahead of the venture capitalists in 2001. This is in addition to the money that the company currently owes me.
When you surrendered the CEO position and became a paid advisor to the CEO, did this require a considerable drop in income?
My salary went down to less than half, but I was working part-time.
You have said the money that you are due represents much of your life savings. Please explain the risk you and your family face.
The irony right now is that I am using the remnants of my life savings to recoup the rest of my life savings. The money they are spending is from the equity of the company I had built with the help of many good people. The investors got the company to pay their legal bills after the last financing. And somehow, management also got paid hefty bonuses.
Do you still wish to settle the matter our of court?
I had tried very hard to settle this. This discussion went on for months. I did everything I possibly could to keep this out of the public view. Rather than trying to negotiate in good faith, they filed a Summons against me in court while we were negotiating. They made allegations in this public document that I had breached my fiduciary duty.
The Relativity CEO has been quoted in the press saying that they did owe me the money and were in a position to pay me, but wanted to pay in installments vs. as a lump sum. The fact is that he has been working closely with the investors and they have not made a realistic offer. They were trying to couple the payment of money they admit they owe me for my deferred compensation and the promissory note to things they are clearly not entitled to have – like my silence and my release of claims against the investors on behalf of shareholders.
I have worked very hard to build a squeaky clean reputation, of integrity, ethics, good family and moral values, and as one who gives back to the community. Forbes.com once named me a “Leader of Tomorrow”, and Fortune Magazine labeled my company as one of the 25 “coolest” companies in the world. Do you know what award I am most proud of, and what I have displayed prominently in my home office? An award from the CED for Community Service. I had co-founded TiE and spent a considerable amount of time, energy and money to help fledgling entrepreneurs and to give back to the community. Ask anyone in the community about the reputation I have built. Few will disagree with me.
Now they have made some very hurtful allegations about me and my business ethics. They say I have breached my fiduciary duty, harmed the company’s reputation, and acted in my own self interests. How can you settle this out of court? Will this get me my reputation back? Now I need to have a jury determine who is right.
Do you intend to remain as chairman?
I have every intent of staying as board member and Chairman. The investors have the votes to remove me as Chairman, but can’t remove me as a board member. In their last settlement proposal to me, they made my resignation from both posts a condition to getting any of my money back, and even if I accepted this, they would pay me over 2 years and have the right to stop payments if I ever spoke to the press about Relativity or its investors.
Will you remain a stockholder, or do you intend to sell your remaining shares?
I would invest in my company’s employees any day. As far as investing in a company controlled by these Venture Capital firms, that is a different matter. I don’t have the option of selling my stock anyway.
You have been adamant in your determination to protect shareholders. Do these include current and former employees of Relativity? How much have their shares been diluted by the financing rounds?
All of us are in the same boat, except for those that were issued new stock.
What has this experience been like for you personally?
It has been a very difficult experience. My family and friends have been 100% behind me, and that has helped a lot. One of the reasons I am being so vocal is that my experience is similar to that of many struggling entrepreneurs. Few are in a position to fight like I did, and few dare to speak up. If you ever asked my wife how she felt, she would be less diplomatic. It wasn’t easy for her being by my side and not sleeping for 3 Â½ days straight after my heart attack, while I battled death. Then to come back to deal with venture capitalists who to her seemed to be taking advantage of my situation.
Have you received a copy of the Relativity papers in this matter? Are your lawyers pursing discovery? Are those of Relativity?
Interestingly, the press received both copies of their lawsuit and discovery documents before I did. Relativity employees started calling the press to set up interviews and to send them copies of these documents even before their lawyers contacted my lawyers. In the legal world, there are proper protocols and business ethics. I am not sure that this behavior falls into those categories.
I have been trying to catch up with them. Between the company and the venture capitalists, they have multiple teams of lawyers, and marketing departments. Here it is just me and my very competent law firm, Brooks Pierce.