Funding for startups

Ex-Employees Take Aim at Accordion

Like many telecom equipment startups, Accordion Networks Inc. has spent the last few months fighting for survival. It seems to have emerged intact, but not unscathed. Some of the measures it took have left a raft of bitter ex-employees behind and may land the company in court.

Accordion faces a California judge later this month who must decide whether to send the company to arbitration with a number of its former employees, who say Accordion management made promises it couldn't keep.

"Accordion survived on the backs of dedicated employees who were cheated out of back wages when Accordion finally got its funding," wrote Donna Fallin, an ex-Accordion staffer, in an email to Light Reading last week. She and others say Accordion strung employees along with promises that the sizeable pay cuts they took would be made up to them when the company got its next funding round.

She says she tried to get those promises in writing, but was put off by management. Then, instead of fulfilling its promises when new funding did come in, Accordion put Fallin and about 20 others out of work.

Accordion says it never promised its employees any back wages. When funding materialized, the company says, the executive team pleaded unsuccessfully with investors for a sizeable bonus to compensate workers who'd hung in there.

"No promises were made. We said we'd make a good faith effort to offer employees a discretionary bonus when funding came in, and we did that," says Michael Underwood, the startup's VP of finance. "It is true that the bonus we wound up giving was small... But if we hadn't tried this approach and asked employees to take cuts, we would have been out of business. A dead body's no good to anyone."

Accordion makes a service-aware switch designed to interact with metro carrier services from the basements of customer buildings. It competes against the likes of Xebeo Communications Inc. as well as a slew of larger players (see A New Optical Taxonomy, Page 10). When the telecom downturn hit, it didn't take long for the new company, started with high hopes in the summer of 1999, to feel the pain.

The company got about $22 million by May 2001. Maybe that's what compelled Telecommunications Magazine to choose it as one of its Hot Startups of 2001 (see http://www.telecommagazine.com/default.asp?journalid=3&func=articles&page=0106t5&year=2001&month=6&doct=cover%20story).

The heat didn't last long. Accordion was hemorrhaging cash. Accordion asked its 80-odd employees to move from salaried to hourly wages and take a 5 percent pay cut. In June, there was another cut of 25 percent. A sizeable layoff was also completed, bringing the headcount to about 40 by the end of the summer 2001.

During this period, employees say they met with management almost weekly and were encouraged to stick it out. "The main message was to keep working, keep working," says Jerold Blair, a former materials manager. "They promised back pay. They said funding was coming, and we knew there were field trials of the systems. We bought the story."

Blair says Accordion's CEO, Gautam Chanda -- a cofounder of Mayan Networks Inc. who also worked at 3Com Corp. (Nasdaq: COMS), Premisys, Intel Corp. (Nasdaq: INTC), and ITT), repeatedly told the staff they'd be compensated. "He often said, 'I will make you whole,' " Blair maintains.

Another ex-employee, Vandi Cooyar, who worked in accounting, says he was "absolutely" and "repeatedly" promised back pay when funding came in. "Put yourself in our position. No one would stick around for minimum wage."

Underwood says that far from promising employees back pay, he repeatedly made it clear to them the there could only be a discretionary bonus appeal, with no guarantees. "I went into excruciating detail." The Accordion team had contacted a labor lawyer to explore the options and did what they were told to do, he maintains.

Meanwhile, he says, Chanda was jumping through hoops to raise new funding and renegotiate the company's debt. He and his team also went to hourly wages and took pay cuts with the rest of the company. "I've refinanced my home twice to pay my bills. I'm making two-thirds of what I used to," Underwood says.

Chanda, who was traveling, was unavailable for comment today.

When $8 million in funding arrived early in December 2001, the employees thought they were home free. But the day after Christmas, most of them were laid off. There was no back pay, and many got their final wages at a rate of $6.25 per hour.

"They needed to show headcount to get their funding," maintains Vandi Cooyar. When that was completed, he says, the management proceeded to lay off people who had stuck with the company for six months at reduced wages.

Accordion management says it had no choice. At least half the new funding, the company says, was needed to pay debts that had accrued in previous months -- despite a renegotiation in which major creditors agreed to take a $150,000 payout instead of $6 million.

In the end, despite the best efforts of management to get a bonus for the loyal employees, Underwood says all Accordion's board could muster was a "few thousand" dollars, spread across the 40 or so who remained, half of whom were terminated at year end.

The cuts and terminations were lamentable but necessary to the company's survival, Underwood says. "I am sorry. But is it better to be dead or to have fought for your life?" he muses philosophically.

Underwood says stock options in Accordion, many of which went unexercised, will eventually be valuable. The company is on its way to better things, he asserts. There are new contracts with businesses in the hospitality industry. There's a new Ethernet-over-Sonet connectivity option coming within 60 days or so. And at the upcoming Supercomm 2002 tradeshow in Atlanta, Accordion will share a booth with BitRage Inc., which makes wireless access gear. Demos will link the two companies' access wares.

Former Accordion employees aren't buying it. Twenty-two of them are ready to file suit against the company, and they've enlisted the support of the state labor relations board.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com For more information on Supercomm 2002, please visit: Supercomm Special

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