Story about early Microsoft employee company ownership

Factual Questions
1

I’ve heard that, soon after Microsoft started, Gates and Allen offered shares to employees as part of their compensation in return for lower salaries. The way the story goes, splitting the ownership was a win/win because it allowed Microsoft to hire a lot of bright, dedicated employees without paying them a lot because Gates “sold them on the vision”. In return, the employees who stuck around all became millionaires when the company grew tremendously and then went public.

How much of the story is true?

I’ve done some online research but I couldn’t come up anything that directly confirms the story.

2

Both Microsoft and Apple rewarded their early employees with stocks and then stock options. That’s not uncommon for the reason you hint at…for a small startup, it’s much cheaper to give out stock than cash.

3

Wikipedia says this about Microsoft’s IPO:

4

Yes it happened, and Bill Gates took a lot of flack because he was well known to only hire Harvard grads. So lost in the story was many of these “poor” people who became millionaires through stock options, were actually well off to start out with.

The trouble with offering stock options are many have strings attached. Such as you have to hold on to it for awhile, you can’t use it as collateral against a loan, you have to give the company first option to buy it back (which is often less than the open market) and the list goes on.

But it’s not so unusual, people who get in “on the ground floor” usually do well for themselves.

Basically it’s called “getting your break,” like in show business. One stupid walk in role leads to becoming a major player, of course it doesn’t happen all that often, but since we only hear about those, it seems commonplace

But supposing MS had lost out to Apple, those people that earned half salary plus stock would look stupid now.

5

The ones I know that started in 1988 were paid lower than market for a long time but the stock options have allowed them to retire.

6

There was the story in the early days of the internet bubble, about longer term employees with the FYIV attitude.

“Fuck You, I’m Vested” which meant they had their stock pretty much guaranteed now, and were only biding their time until they cashed in and became filthy rich… if they didn’t wait too long ;D

7

The original microsoft team from 1978.
http://www.codinghorror.com/blog/archives/000363.html

Not everyone got lucky. Microsoft moved from New Mexico to Bellevue, Washington. Gates was unwilling to pay the cost to relocate his employees. I don’t have a cite but I’ve read it several places. The ones left behind were S.O.L.

8

Although it’s possible, plausible, probable, and even very likely that the story is true, I’m wondering about the specifics.

For example, when did Gates and Allen first offer some form of ownership to the employees?
What did the offer consist of? I’m sure that it was more than just a spoken promise.
Was the offer optional or was it a condition of employment?
How many employees participated in the first offer?
What specifically motivated those employees to work for less money than they could get elsewhere?

Thanks.

9

If you’re looking for specific details of every job offer and bonus made by Microsoft, you’re going to be waiting a while.

This is very simple. Potential employee is offered a job, the compensation package consists of a base salary of X, with bonus potential of Y on Z intervals, and options to buy into the company stock at typically a much lower than market price.

Very often in these cases (Microsoft being only the most famous of them) a “bonus” is paid out in stock options. Basically, you are awarded with the ability to buy N stock at M price. Generally speaking, you aren’t allowed to do much of anything with that stock for a period of years - likely five or so. Time goes on, your stock ‘vests’ and at that point you can do what you want with it.

The reason an employee would choose to do this is obvious, I would think. They feel that the investment in their career and company is worth it and feel it likely that the company will be successful and profitable.

As for “confirming the story”, let me tell you that I live in and around Redmond, WA. I have family and friends that work there, or worked there before they were millionaires. It’s very definitely true (so much so that I wonder how this was ever in doubt).

10

I can give one example (my son’s). He started working for MS in March, 1990. The pay he was offered was disappointingly low (around $37K). He asked the recruiter if that could be raised. No, but she suggested he ask for more options as a signing bonus. Stupidly, he didn’t bother. When he left almost exactly ten years later (April, 2000) he walked away with about $5M. He had cashed quite a few options (when he bought a car, got married, bought a house) and he told me that had not cashed any he would have had $17M. He also said that the stock had risen by a factor of 72 in that ten years (the price was more of less the same, but repeated splits meant that one share in 1990 had become 72 shares in 2000). When he went back in late 2003, there were no more options. He got a pretty good salary (it was around $140K) and bonuses are now in the form of actual stock. Which is good, since options are worth something only if the share price keeps going up, which MS shares have not been in this decade.

Incidentally, he never said a word about being forced to sell the options to MS at a lower price. I really doubt that that could have been legal. On the other hand, options received at a given time vested only gradually. I think they fully vested in 18 months. As mentioned about, FYIFV (fuck you, I’m fully vested) T-shirts were seen on the MS campus (although in many trips to the campus to get software at employee prices, I never saw one).

11

Thanks **Hari **for your specific information.

I see now that the key points in my OP were not obvious.

There are many, many pieces of information about Microsoft, and there’s a lot that I know about the history of the company. But, I’m wondering specifically about company ownership for the employess before Microsoft went public in 1986.

Yes, we know that the company started small and became huge, and, yes, many employees became rich along the way. But the previous sentence can apply to many companies.

I’m wondering specifically about pre-1986 Microsoft when there was no public market for the buying and selling of Microsoft shares, and especially during the Albuquerque years (from 1975 to 1978) and the early Bellevue years after Ballmer joined in 1980.

Employees who took shares then instead of higher salaries would have to have had a good reason to believe that those shares would someday be marketable, or have some condition that the shares could be sold back to the company for cash. What “story” did those early Microsoft employees buy and how did Gates and Allen sell them on it? Or did Microsoft not offer shares until shortly before the IPO in 1986?

Again, of course, non-publicly traded companies do offer shares to employees, but I’m wondering specifically about how and when Microsoft’s shares were offered.

At a deeper level, I’m wondering whether the offering of shares was a key factor in Microsoft’s subsequent success, or was it peripheral, or, in some ways, counterproductive. But, I doubt that it can ever determined.

Also, I think that the answers to my questions are probably in a biography of Gates, Allen, or one of those early employees but I haven’t found any specific reference yet.

12

Do you have a cite for that? I Googled, but couldn’t find anything.

13

That claim doesn’t even make sense. Maybe for marketing people but as far as I know Harvard has never been known as a computer science or hard technology powerhouse.

14

I meant to address the question of Harvard grads. As commented that makes no sense, whatever. MIT might have been more to the point. My son certainly did go to Harvard. And his best friend from first grade to years at MS went to Waterloo, which was (my son tells me) the number one surce of MS employees. The reason was that Waterloo has a co-op program and many Waterloo graduates–including my son’s friend–had done one or two six month co-op internships there and had a track record that gave them a leg-up. That probably didn’t last into this decade because visas became harder to come by.

15

Offering of shares is standard in a start-up. Or at least very common. AFAIK, Microsoft is not at all unusual. The only unusual part is how much those shares grew. I don’t think you can tie any lessons about Microsoft’s success back to this since it was close to standard practice. It’s like asking for specific details about Microsoft’s security badges – whether you get the info or not, the inference you’re drawing is very questionable because everyone used essentially the same process.

16

Of the eleven people in the famous 1978 photograph:

Bill Gates obviously went to Harvard (didn’t graduate).
Paul Allen went to Washington State (didn’t graduate)
Bob O’Rear went to the University of Texas-El Paso.
Bob Greenberg went to Harvard
Gordon Letwin went to Purdue (didn’t graduate)
Steve Wood went to Stanford
Bob Wallace went to first Brown and then the University of Washington
I don’t know where Maria Wood, Andrea Lewis, Jim Lane, or Marc McDonald went to college, if they did.

17

My cousin went to work for MS in 1984ish (and still works there) and is not now and has never been a Harvard grad. She attended the Indian Institute of Science and MIT.

18

Well, it seems that the Harvard connection (or lack of it) is more interesting than my questions.

So, I’ll settle for an answer to just one question:

In what year did Gates and Allen first offer Microsoft employees some form of ownership in the company?