VCs to Revive Firstwave

Embattled startup Firstwave Secure Intelligent Optical Networks Inc. is close to getting a new lease on life, as venture capitalists prepare to save the optical switch maker's technology and hire back many of the company's engineers and other employees, according to a source with close ties to the company.

For about six weeks ComVentures, Sevin Rosen Funds, and a gaggle of lawyers have been working with Firstwave's sole backer, Raza Foundries, to form a new company that would take over Firstwave's assets and liabilities, the source says. Unlike the old Firstwave, however, Raza Foundries would not have an active role in the new company, the source says.

The transaction's details, such as how much money each venture capital firm will invest in the new startup, are still being hammered out. But the VCs insist that nothing will go forward until "there's a fair resolution for everybody" regarding Firstwave's imbroglio with its former employees, the source says.

The New Jersey Department of Labor (NJ DOL) is said to have put pressure on Firstwave to settle its wage claims in a meeting last month. Firstwave's managers were given until April 20 to settle more than 50 complaints that the company still owes its employees hundreds of thousands of dollars in unpaid wages and unused vacation time, according to sources close to the situation (see Firstwave's Lost Pay and Headcount: Snow Day). If Firstwave doesn't resolve the complaints, it could face legal action, the sources say.

This isn't the first time Firstwave's investors and directors have tried to reach an exit strategy. Two sources close to Firstwave confirm that it once offered itself up to several companies -- including Calient Networks Inc. -- as a potential acquisition.

An NJ DOL spokesman says the agency can't comment on Firstwave's complaints. Firstwave CEO Donald Basile wouldn't comment on the company's restart or its dealings with the NJ DOL.

Separately, a recent look at Firstwave's only publicly announced customer contract shows that the all-optical switch maker's deal with the Naval Research Laboratory (NRL) wasn't nearly as large as the company let on.

This new information comes from the NRL's response to a Freedom of Information Act request made by Light Reading regarding the $29 million deal Firstwave announced back in August 2002 (see Firstwave Gets Naval Deal). In a 27-page reply, the NRL provided a copies of Firstwave's contract; vouchers detailing what Firstwave had been paid; and a lengthy schedule of all kinds of supplies and services that could be added to the contract as Firstwave's work with the NRL progressed.

After reviewing the NRL documents with sources close to the deal, it appears the amount of Firstwave's NRL contract was actually $7.6 million. Firstwave arrived at $29 million by considering the contract's ceiling -- the amount that the contract could swell to over time if the NRL could identify additional funds for the project and if numerous other conditions were met. Despite the size of the deal, however, documents show that Firstwave was only permitted to bill the government $200,000 at a time, and only if the government authorized the invoice.

Firstwave board member and current CEO Donald Basile, who spoke with Light Reading briefly on Thursday morning, says he can't comment on how the NRL contract was publicly positioned by his predecessor, John Taylor. "I assumed the role of interim CEO [on October 25, 2002] only after the company had exhausted financing opportunities and John Taylor resigned," he says. "My mandate has been limited to winding down the company, seeking payment for amounts owed to the company, and seeking a buyer for its assets."

Basile says Firstwave furloughed its employees and ceased operations one day after he took the reins. "It should be noted that Firstwave has delivered and the government has certified and accepted several Firstwave second-generation all-optical switches. It was the anticipation of the board of directors that this equipment would be paid for by the NRL under its contract with Firstwave."

In a memo to employees on Feb. 6, Basile held that the reimbursement of "any unpaid wages and paid time off" would be contingent on receipt of monies due from the NRL contact.

"Unfortunately, and rather inexplicably, the contract negotiations during the tenure of the former CEO did not expressly provide for this payment," he continues. "So my statement to the employees was based on an ongoing effort to obtain payment for the more than $6 million that Firstwave believes it is owed by the NRL for equipment delivered and services rendered."

Bottom line: Basile is blaming Taylor for Firstwave's predicament. During his brief chat with Light Reading, he wouldn't deviate from his prepared remarks. And, interestingly, he says the NRL still owes more than $6 million to Firstwave and has only paid $200,000 on its contract to date.

Taylor couldn't be located for comment. A request for comment was made to the NRL on Thursday morning.

Stay tuned.

— Phil Harvey, Senior Editor, Light Reading

optimight2002 12/5/2012 | 12:15:18 AM
re: VCs to Revive Firstwave Dr. Don Basile is lying. He was the interim CEO of the Company from 2001 onwards. He was the one who hired John Taylor and was retained by the Company as the COO.
Subsequently, he stayed involved in the affairs of Firstwave. Eventually when nothing worked for this terrible venture, John Taylor was fired and Don Basile went from being a COO to the CEO again.
Dr. Basile was always involved in the daily affairs of Firstwave.
overthehill 12/5/2012 | 12:15:04 AM
re: VCs to Revive Firstwave start up die, dying...everywhere

So what Don is trying to cover himself.
It was his job, so as Tylor, even Raza.

You are not the only one who lost in this game.
BeeDeeBoo 12/5/2012 | 12:14:54 AM
re: VCs to Revive Firstwave Overthehill,

That's not the issue. I agree with you that alot of startups die all the time. The issue is the employees were told to work by the executives for months knowing there was no money to pay them. Many laws (labor and criminal) have been broken and the NJ and US Dept. of labor is envolved to help settle it.
After all, this is not a sweat shop in some third world country!

hj 12/5/2012 | 12:14:49 AM
re: VCs to Revive Firstwave No it is (was) a sweat shop in a first (second?) world country.
After all, this is not a sweat shop in some third world country!
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