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Funding for startups

Did Founders Profit on Zhone Loans?

File this tidbit under: "It's good to be the king."

When the merger between Zhone Technologies Inc. and Tellium Inc. was finalized today (see Zhone Gets a Symbol (and Layoffs)), Zhone's founders, Mory Ejabat and Jeanette Symons may have collected on some high-interest short-term loans they made to their own company.

Ejabat and Symons loaned Zhone a total of $4 million between July and August 2003, according to Zhone's SEC filings. The loans were made presumably to help the company's cash position. In the end, though, the loans could have ended up helping Symons and Ejabat's cash position, too.

Each loan carried an interest rate of 12 percent a year, at a time when short-term rates are at historic lows. The loans were to mature on either December 31 or on the day that Zhone closed its merger with Tellium, whichever came first. The way the loan was structured, Ejabat and Symons both participated in the first $2 million installment and Symons loaned the second $2 million.

It's not clear exactly how much Symons and Ejabat made on interest from the loans. Assuming the 12 percent annual interest was paid for the period they held the loan -- about 4 months -- they could have earned about $160,000 in interest between them. The information on how much interest they have been paid on the loans has not yet been disclosed.

Zhone declined to comment beyond what was already disclosed in the SEC filings.

— Phil Harvey, Senior Editor, Light Reading

fw23 12/4/2012 | 11:14:21 PM
re: Did Founders Profit on Zhone Loans? >I don't think building a company is
>ever smooth sailing... At the time, everything >seems like a major hurdle... However, over time, >the history changes itself and in hindsight, it >was all smooth sailing.

There is wonderful irony in the phrase "history
changes itself".


>When I look at a lot of the people that I work >with or run into in business, there are just too >many differences between myself and them to >consider them role models

I can think of a few:

- Lucreza Borgia
- Jiang Qing (Mao's wife)
- Lynette "Squeaky" Fromme


>I think the best business advice I ever received >was probably to LISTEN -Sounds stupid - but as >we grow a company, it is really easy to begin to >believe that you know best... The most important >thing to remember is that all sorts of people >and other companies know more about what they do >than you do... Gotta listen to everyone....

That one kind of speaks for itself.



whyiswhy 12/4/2012 | 11:14:42 PM
re: Did Founders Profit on Zhone Loans? Thurston:

Slow down, the Professor will have to increase your blood pressure meds again dear. You know he hates processing that fruit bat piss for Potassium, and when Gilligan upsets the colony, they poop on everything.

I never said the US was unstable, but I did say the end goals of Democracy and Capitalism are not intrinsically compatible.

Democracy is for Sale.

OK, so hard money results in hard time, but soft money provides soft times for politicians. When was the last time you saw a serious effort to ban soft money, and how far did it get?

So is your thesis is that because we punish petty graft, and we allow and encourage mega-graft, that makes the US better...or somehow stable? And we can spend $80B patching up Iraq so Halliburton can benefit?

And the other choice is send our engineering and manufacturing jobs overseas, or allow illegals in to take them?

Trickle down...like bat piss?

-Why
opticalwatcher 12/4/2012 | 11:14:43 PM
re: Did Founders Profit on Zhone Loans? I have to follow-up my last post. That shows that you shouldn't rush a post when you get excited. (Not to mention the grammer errors). I'd just read an article about VCs ripping off the shareholders (AND founders). In this case these guys were definitely crooks.

The Zhone founders are in a more hazy area. Certainly if you lend your own company money you are taking a risk. The ethics is in the details here.

Sorry for the rush post--I don't know the details here and don't think these guys are crooks.
opticalwatcher 12/4/2012 | 11:14:43 PM
re: Did Founders Profit on Zhone Loans? Even Adam Smith wrote that Capitalism doesn't work without ethics, and some kind of enforcement when the ethics goes awry. The 'Greed is good' statement in the movie "Wall Street" was meant to be sarcastic irony, yet everyone has taken it as a rallying cry. This is NOT what Capitalism is all about. This is anarchy, and everywhere it has been tried it has failed miserably. The US, Europe, and Japan have succeeded because they have avoided this anarchy.

These guys are crooks and I hope they go to jail.
ThurstonHowell3rd 12/4/2012 | 11:14:44 PM
re: Did Founders Profit on Zhone Loans? "Capitalism seeks the least equity for the masses, and Democracy seeks the greatest equity for the masses. "

What does that mean? So the result of the most successful, wealthy, prosperous country of the modern age (i.e. the United States) is fundementally unstable?

No... I think you're wrong... the US does not need a cultural revolution... but you do need to step away from the keyboard...

Bottom line is Mory was always an opportunist... his claim to fame will be that he knew when to buy and sell Cascade and how to wear John Sidgmore's rear-end as a hat...
whyiswhy 12/4/2012 | 11:14:51 PM
re: Did Founders Profit on Zhone Loans? Capitalism and Democracy are fundamental opposites and do not form an intrinsically stable combination.

Capitalism seeks the least equity for the masses, and Democracy seeks the greatest equity for the masses. The problem with Democracy is it can be bought a person at a time. The problem with capital is it is fungible, if it is allowed to be.

Does the US need a cultural revolution (of sorts)?

-Why
go_to_the_light 12/4/2012 | 11:14:51 PM
re: Did Founders Profit on Zhone Loans?
Cheated like a fox... LIKE A FOX!
manoflalambda 12/4/2012 | 11:14:51 PM
re: Did Founders Profit on Zhone Loans? green:
thought the details are sligtly different, the story has a interesting parallel to how the common share holders got hosed at Nishan systems

http://www.siliconvalley.com/m...


green et al,

I read this as well... One of the VCs involved, Lightspeed, aren't they associated with Lightreading? Or is it just similar names...

Salute,
Manoflalambda
ThurstonHowell3rd 12/4/2012 | 11:14:52 PM
re: Did Founders Profit on Zhone Loans? Mory "my favorite Persian" Ejabat and Janette "Of course I know what I'm talking about" Simmons... GEEEE That's a news flash...

Its this dynamic duo that still has LU wondering outloud ... "I paid 23 BILLION for ASND and I got what???" and who could forget that hot hit of the 56k modem wars the MAX TNT... "Anyone got a match???"

Yea... these two having an original thought... now that would be news... these two screwing investors and employees alike... well that's just SOP... Alameda way baby...

Now where in the hell is Gilligan with that drink??
green 12/4/2012 | 11:14:52 PM
re: Did Founders Profit on Zhone Loans? thought the details are sligtly different, the story has a interesting parallel to how the common share holders got hosed at Nishan systems

http://www.siliconvalley.com/m...
whyiswhy 12/4/2012 | 11:14:58 PM
re: Did Founders Profit on Zhone Loans? Let's see: they knew the deal was pending, so the risk was high? Does not add up. BTW, the going rate for bridge loans can be much higher than 12%, but can also be lower. It's nearly impossible to say from outside what was a fair rate.

It is clear they SHOULD have transacted the deal through an outside entity to avoid the appearance of conflict.***

But hey, shame makes the game lame, right guys?

-Why

*** the typical thing would be a private kickback deal under the table, but then you have to share...
firstmile 12/4/2012 | 11:14:59 PM
re: Did Founders Profit on Zhone Loans? Phil,
This issue is now beaten to death, but here is another club for the clubbing.
The issue is also with your lead in to the story..."high-interest loans".
As others have said, this is the going rate for the loans. If you call up SVB and ask them for a bridge the rate will be 12% (not news). Also, they were probably able to save some legal fees and close the loan in a faster fashion.
If things don't work out at LR there is always
http://www.weeklyworldnews.com... :-)
...first
DoTheMath 12/4/2012 | 11:15:01 PM
re: Did Founders Profit on Zhone Loans? Mory:
Have you heard of the term "conflict of interest?" This deal smells and Light Reading naturally wants to write about it.

The Tellium deal stinks to high heavens, with all the loan forgiving for Tellium execs and the cash infusion to an utterly failing company (i.e yours). I hope the original Tellium shareholders get their day in court on this one.

Basically what you did is to steal Tellium from its former shareholders, and in the bargain gave them a worthless stake in your worthless business. Proof: if that deal is so good for original Tellium ex-shareholders, why don't you (personally) put in new money in Zhone at the valuation you are getting out of the poor suffering Tellium shareholders?
sevenbrooks 12/4/2012 | 11:15:01 PM
re: Did Founders Profit on Zhone Loans?
The loans are high, IF you believed in the company then:

a - take a low interest rate loan to show faith

or

b - take an equity stake to show faith

Either option was available. 12% could have been gotten from a credit card.

seven
inauniversefarfaraway 12/4/2012 | 11:15:02 PM
re: Did Founders Profit on Zhone Loans? Dear Morye,

A touch defensive perhaps?

12% is very advantageous, (even) with their balance sheet, it would not have been a stretch to beat that, especially given current rates.

Your comparison to the QQQ is hardly fair, as it does not account for risk. They might have gotten 20% with 20/20 foresight, but they had a sure thing with this "vehicle".

Pork barreling at it's best.

far'y
morye 12/4/2012 | 11:15:02 PM
re: Did Founders Profit on Zhone Loans? The SEC filings are all correct, however, in your previous article you were using total current assets and comparing with cash levels with previous quarters as if there was a big mystery regarding this merger or Zhone's accounting. Total current assets contains accout receivable and inventory. Account receivable is offset by account payable, thus your comparative figures were meaningless.

Now regarding the loan, first of all 12% interest is not that high. The fact of the matter is whoever they would have to borrow the 4 million from would have charged interest. Given the circumstances, I doubt they could have gotten anything lower given the fact the company was depeneding on the merger to go through. So the opportunity cost of the loan to the company was net even to positive. Now if you can find a lower priced loan please calculate the net gain for Mory based on that not the total interest paid.

Your 160k figure on 4 months interest is probably more like 120k that would make 60k for Mory and 60k for Janette. If in the same time frame they had bought the QQQ they would gotten 20% easily that would make it 200k a piece.
DCITDave 12/4/2012 | 11:15:04 PM
re: Did Founders Profit on Zhone Loans? morye --

re: "This the second article that you have written with convoluted facts and figures."

What figures were convoluted? Are the SEC filings are wrong?

re: "Those loans were given prior to the merger, at a time that the merger was an uncertainty and naturally carried a higher risk and thus higher interest rate, which by no means is unreasonable."

That's perfectly understandable -- high risk does require a high interest rate. It's a shame no one could talk about the topic with any authority when we phoned.

Anyway, executive dollars going to and from companies is always of interest to our readers, so it's quite normal for us to write about it.

ph
morye 12/4/2012 | 11:15:05 PM
re: Did Founders Profit on Zhone Loans? This the second article that you have written with convoluted facts and figures. Those loans were given prior to the merger, at a time that the merger was an uncertainty and naturally carried a higher risk and thus higher interest rate, which by no means is unreasonable.
BobbyMax 12/4/2012 | 11:15:05 PM
re: Did Founders Profit on Zhone Loans? In spite severe disruptions in the lives of the US engineers, they have not learnt the threats on theie lives and careers perpetuated by the large tech companies and thousands of start-ups. They have realized that only menial jobs are lefy for them and their children. The life of these engineers would never be the same. The greedy management of the US companies have perpetrated the biggest hoax and lives in the young life of our engineers. The CES of these companies rwegularly lie to the engineers while exporting jobs to India and China.

The upper tier management employees have become extremely rich than any other times in the US history.

No body realized how Mr. Ebjat, President and CEO, of Zhones had cheated Lucent for a sum of 24 Bilion of dollars. Lucent became so sik that is lying on the death bed with no recovery in site.

Zhones, given its history of loses, would never have gone public. In addition to going public, it stole over $150 million dollars in cache from Tellium. Insider trading and cheating are almost every day occurence. The US account audit companies is a big joke of the the century.
techoriginol 12/4/2012 | 11:15:08 PM
re: Did Founders Profit on Zhone Loans? I pity those kids. If Mory and Jeanette can treat their employees, product lines, and investors like turds, while they persue their insatiable appetites to fatten their wallets then I pity those toddlers. Can you fire the kids if they don't deliver? After all what kind of return on investment or short term profit can the toddlers bring. What kind of morals do these people have? What kind of morale can the employees at Zhone have knowing that they are (1) displosable and (2) that they are affectively a skeleton crew just barely maintaining a line of dead or soon to be destroyed products. I guess many of these employees are hoping to cash in on their ZHNE stock options.

These are two people that have done nothing but bring on destruction. Companies have been destroyed, product lines eliminated, employees fired, and hundreds of millions of dollars in venture capital destroyed. It's lie a reverse "Midas touch". Everything they touch turns to crap. Do we really need companies like Zhone? Maybe India could better use such a company.

This is my humble opinion.
sevenbrooks 12/4/2012 | 11:15:10 PM
re: Did Founders Profit on Zhone Loans?
There is an issue here.

An alternative way to have gotten $4M into the company was to take an equity position for the $4M. That way Zhone would not have had to pay back the $4M and M/J could have had more upside.

There are the usual risk problems with this (i.e. if the company folds they lose their money). However, they can't really pitch that in the open. Also, they would likely be unhappy with the valuation of the stock as it would have to be valued at the last round (unless they were going to highly dilute the other shareholders). One can imagine that they are not too happy about that either.

So no matter how you look at it, shareholders should have issues with this transaction.

seven
router_tester 12/4/2012 | 11:15:11 PM
re: Did Founders Profit on Zhone Loans? > No, I'm not invested nor working for the company.

> ps. I heard that Jeanette mellowed after adopting a couple toddlers. I suspect she outdid them in temper tantrums. I wonder who is raising whom?

But you sure heard some interesting stories :-)
Lets see if they get lucky this time.
WiserNow 12/4/2012 | 11:15:14 PM
re: Did Founders Profit on Zhone Loans? Mory and Jeanette made a high stakes gamble that the bridge loan could help them close the Tellium deal. Without that deal, they would probably have lost most of their initial investment and the remaining Zhone employees would have lost their jobs.

The other investors would also have lost, but Zhone's initial investment was mostly bubble-hype cash, from the likes of Rich McGinn and the late Dave Boast.

So, Zhone is a throwback to the bubble. It will be fun to see the next chapter. Mory and Jeanette are players -- and it is fun to watch their game.

No, I'm not invested nor working for the company.

ps. I heard that Jeanette mellowed after adopting a couple toddlers. I suspect she outdid them in temper tantrums. I wonder who is raising whom?
zipple 12/4/2012 | 11:15:17 PM
re: Did Founders Profit on Zhone Loans? > This is a non issue.

It depends on your definition of "issue". For instance, did they take actions as CEO/CTO that caused the financially dire circumstances requiring a bridge loan?

A situation where a CEO appears to benefit personally from prior bad decision-making sets an interesting precedent for a company.

Perhaps there is a good explanation, it would be useful for the stockholders to hear it.
fw23 12/4/2012 | 11:15:17 PM
re: Did Founders Profit on Zhone Loans? >This is a non issue. This is perfectly ethical >and legal. It is essentially a bridge loan and >given the circumstances, highly risky. 12% is >about the going rate. I earn 12% on loans with >less risk.

>Yes the did profit. Yes they should, it was a >risky bet....

Your logic would work but for the fact that
Morey and Janet are highly placed insiders in
a private company and exercise a great deal
of control over the company. They have
risk exposure in Zhone way beyond the bridge
loans.

It would have been better ethically if they
had done the loans interest free. The amount
of money (the interest) they made is nothing
as far as either of them are concerned. But
it could have kept one more person on the payroll
for another year potentially.

They were loaning the money, not as bankers
looking at risk from the outside, but as insiders
with huge existing investment exposure. They
were loaning the money to protect their
personal stake in Zhone.

But after all they have done, even mentioning
the word ethics in connection with Morey and
Jennette is wasted effort.

I would personally not be suprised if Jennette
is into cannabalism by now. Human Flesh and
spilled blood even years ago were the only
thing that seemed to give her any satisfaction.





xip42 12/4/2012 | 11:15:17 PM
re: Did Founders Profit on Zhone Loans? This is a non issue. This is perfectly ethical and legal. It is essentially a bridge loan and given the circumstances, highly risky. 12% is about the going rate. I earn 12% on loans with less risk.

Yes the did profit. Yes they should, it was a risky bet....

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