The Price Of Loyalty: Color Employees Missed Out On Apple Millions

Business Insider

Some employees of failed startup Color have it even worse than we initially believed.

Leaving a steady job to join a startup is always a gamble, but Color employees were in a particularly dramatic situation.

That's because many of them had previously worked with Color founder Bill Nguyen at Lala, an online-music startup he sold to Apple in 2009, for which he was paid a fortune in Apple stock.

Apple shut down Lala's service and put its engineers to work on iTunes.

Apparently counting on Nguyen to pull a similar feat, many of them left Apple after about a year, following him to Color in early 2011.

When they left Apple, they left behind what turned out to be very lucrative stock awards.

Aubrey Johnson, formerly a designer at Color, has broken silence on the saga of Nguyen's startups . Based on Johnson's account, and other interviews with insiders, we now have a far better picture of what went down.

According to Johnson, by late 2009, Lala had struggled to build a business. (Other insiders feel Lala was more successful.) But Lala had indisputably proven adept at one crucial thing: getting listings from its online music store to appear prominently in Google search results. That made it very interesting to Google and Apple.

And Nokia as well. The Finnish phone maker made a lowball offer of $11 million, Johnson claimed, which would have left Lala employees with almost nothing, since the company had raised $35 million from Bain Capital Ventures, Ignition Partners, Warner Music, and others.

Nguyen parlayed that offer into talks with Google.  Google made a lowball offer, too. But Google's interest was enough to get a meeting with Apple.

By Johnson's account, Steve Jobs made a take-it-or-leave-it offer by writing a number down on a piece of paper, which Nguyen accepted with a nod.

That number: $80 million for the company, the majority of which likely went to investors, and another $80 million in retention bonuses for Lala's engineering team.

Johnson notes that Apple's stock price at the time of the Lala deal was $196.48. 

But not all of Lala's employees stuck around to vest all of their stock. In March 2011, Apple traded at around $350, which would spell a nice profit. Who would have expected Apple, already hugely valuable, to double from there?

By their actions, it seems that some ex-Lala employees were willing to bet that Nguyen could do even better for them than Steve Jobs.

Any stock awards issued in December 2009 would have more than tripled in value when Apple hit a peak above $700 last summer. That $80 million, in aggregate, swelled to a notional $300 million. Even today, it's around $200 million.

Color initially raised $14 million in a round led by Bain Capital Ventures, Nguyen's previous backer. But Sequoia rushed to invest at the very last minute , boosting its financing from a planned $14 million round to $41 million.

Color reportedly sold to Apple for $7 million, a number Johnson repeats without explicitly confirming it in his blog post. It's not clear if that figure includes retention bonuses for the employees Apple brought on — some of whom were making a round trip back to Cupertino.

The winners in this deal seem to be the Lala employees who stayed at Apple: They continued to vest millions of dollars in Apple stock, they skipped Color's startup drama, and they retained steady jobs at the world's most successful company.

Those who joined Color, out of loyalty to Nguyen, hopes for a second roll of the dice, or a combination of both, paid a heavy price.

Then again, at least some of them are working at Apple again.

A Sequoia representative declined to comment when we inquired previously about the Color sale. No one from Color could be reached, as we understand that the company dissolved last year. Apple has not commented on the Color deal.



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